Chartered Wealth Manager Designation Course

MONEY LAUNDERING, TERRORIST FINANCING,

FORFEITURE AND COMPLIANCE

BY

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ROBERT J. MUNRO AND J. RICHARD DUKE

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Table of Contents

________________________________________________
Chapter 1:

Research Guidance On Money Laundering

and Compliance..

Chapter 2:

Introduction to Money Laundering:

Definitions, Stages, Players, Magnitude
and Significance.

Chapter 3:

Methods, Trends and Typologies of Money

Laundering.

Chapter 4:

Comparisons of Anti-Money Laundering Regimes

Of Key Nations and Offshore Financial Centers.

Chapter 5:

International and Regional Configurations Against

Money Laundering

Chapter 6:

Terrorist Financing: Law, Policy, and Strategies.

Chapter 7:

The United States Law of Money Laundering

and Forfeiture..

Chapter 8:

The USA Patriot Act

Chapter 9:

Compliance: Introduction, Reporting and

Record-Keeping..

Chapter 10:

Advanced Topics in Compliance..

Appendices: Bank Secrecy Act (BSA),

Internal Revenue Code section 6050I
AML statutes
FATF Forty Recommendations

CHAPTER 1: RESEARCH GUIDANCE ON AML AND COMPLIANCE

U.S. Web Sites

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1.
American Bankers Association, http://www.aba.com: this particular site offers
suggestions regarding compliance on behalf of financial institutions. 1120 Connecticut Avenue,
NW, Washington, DC 20036. Phone #: 1-800-bankers.
2.
Bank Secrecy Act, http://cfr.law.cornell.edu/cfr/cfr.php?title=31&type=part&value=103:
site contains information regarding specified legislation regarding the Bank Secrecy Act.
3.
Central Intelligence Agency (CIA), http://www.cia.gov: Official website for the Central
Intelligence Agency. The website contains several useful links for researching financial crimes,
and the role that the CIA plays in combating such crimes.
4.
Department of States International Narcotic Control Strategy Reports (INCSR),
http://www.state.gov/g/inl/rls/nrcrpt: U.S. Department of States official website. On the lefthand column of the site, a visitor can choose from multiple INCSR reports from previous years
as issued by the Bureau of International Narcotics and Law Enforcement Affairs.
5.
Drug Enforcement Administration (DEA), http://www.dea.gov: Official website for the
U.S. Drug Enforcement Administration. The DEA combats money laundering by attempting to
deny criminals the ability to produce, and denial of access to illegal activities that are the source
of the illicit funds of which money launderers scheme to avoid detection.
6.
Federal Bureau of Investigation (FBI), http://www.fbi.gov/hq/cid/fc/ml/ml_about.htm,
website hosted by the FBI with general content devoted to the purpose, mission and capabilities
of the FBIs anti-money laundering unit.
7.

Federal Deposit Insurance Corporation (FDIC), http://www.fdic.gov

8.
Financial Crimes Enforcement Network (FINCEN), http://www.fincen.gov
Hosted by the Financial Crimes Enforcement Network, whose overall goal is to support the
myriad of domestic and international law enforcement agencies, in the global war against money
laundering. FINCENs mission is to support law enforcement investigative efforts and foster
interagency and global cooperation against domestic and international financial crimes; and to
provide U.S. policy makers with strategic analysis of domestic and worldwide money laundering
developments, trends and patterns. FINCEN works towards those ends through information
collection, analysis, and sharing of technological assistance and innovative and cost-effective
implementation of Treasury authorities.
FINCENs Office of Enforcement and Regulation; U.S. Department of the Treasury; 270 Chain
Bridge Road, Suite 200; Vienna, Virginia 22182; 800-949-2732 (Regulatory Help Line); 866556-3974 (Hotline for Suspected Terrorist Related Activity) http://www.ustreas.gov/fincen/
FinCEN

Regulatory
/
BSA
http://www.treas.gov/fincen/bsaf_main.html

Forms

and

FinCEN Publications / Advisories, Bulletins, Rulings, Fact Sheets

http://www.treas.gov/fincen/pub_external_reports.html
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Filing

Information

FinCEN Publications / External Documents

http://www.treas.gov/fincen/pub_external-reports.html
FinCEN SAR Bulletin Issue 4 Aspects of Financial Transactions Indicative of Terrorist
Funding (January 2002): http://www.treas.gov/fincen/sarbul0201-f.pdf
FinCEN Follows the Money: A Local Approach to Identifying and Tracing Criminal Proceeds
(January 1999): http://www.treas.gov/fincen/followme.pdf
9.
IRS Criminal Investigative Division, http://www.ustreas.gov/irs/ci/: Official site of the
Internal Revenue Service featuring the criminal investigative arm of the administration.
10.
Justice Department, http://www.usdoj.gov, The justice department is responsible for
ensuring the success, and oversees the Department of Homeland Security
11..
Office of the Comptroller of the Currency, http://www.occ.treas.gov/: This office serves
to supervise and regulate financial institutions (specifically banks) to ensure a fair and equitable
banking system.
12.
Office of Foreign Assets Control, http://www.treas.gov/offices/enforcement/ofac/:
Subdivision of the U.S. Department of Treasury, administers economic and trade sanctions
against international narcotic traffickers and terrorists among others, based on U.S. foreign
policy as well as national security goals.
13.
Treasury Department, http://www.ustreas.gov: The Office of Terrorism and Financial
Intelligence (TFI) develops and implements U.S. government strategies to combat terrorist
financing domestically and internationally, develops and implements the National Money
Laundering Strategy as well as other policies and programs to fight financial crimes.
14.
U.S. Customs and Border Protection, http://www.costoms.ustreas.gov: U.S. Customs
works in conjunction with other federal agencies to prevent the flow of narcotics and bulk cash
smuggling into this country.
15.

U.S. Postal Inspection Services, http://www.usps.com/postalinspectors/

16.

U.S. Securities and Exchange Commission, http://www.sec.gov/:

International Web Sites

1.
The Asia Pacific Group on Money Laundering, http://www.apgml.org/:
The purpose of the Asia/Pacific Group on Money Laundering (APG) is to facilitate the adoption,
implementation and enforcement of internationally accepted standards against money laundering
and the financing of terrorism, in particular the Forty Recommendations and Eight Special
Recommendations on Terrorist Financing of the Financial Action Task Force on Money
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Laundering (FATF). This includes assisting jurisdictions in the region to enact laws criminalising
the laundering of the proceeds of crime and dealing also with mutual legal assistance,
confiscation, forfeiture and extradition. It also includes the provision of guidance in setting up
systems for reporting and investigating suspicious transactions and helping in the establishment
of financial intelligence units. The APG recognizes that regional and country factors would need
to be taken into account in the implementation of measures against money laundering and the
financing of terrorism and provides for peer review by means of a mutual evaluation process.
(The previous paragraph was copied from the introductory paragraph as found on the website).
2.
Basel Committee on Banking Supervision Customer Due Diligence for Banks (Basel,
October 2001), http://www.bis.org/publ/bcbs85.htm
3.
Basel Committee on Banking Supervision Prevention of Criminal Use of the Banking
System for
the
Purpose
of Money Laundering
(Basel,
October
2001),
http://www.bis.org/publ/bcbsc137.pdf
4.
The Caribbean Financial Action Task Force, http://www.catf.org/:
The Caribbean Financial Action Task Force is a collection of Caribbean Island nations (some of
whom have been labeled tax havens) which have agreed to implement common
countermeasures against launderers.
5.
(FATF) Financial Action Task Force, http://www1.oecd.org/fatf: The FATF is a group
organization comprised of numerous Nation-States, in the joint effort to combat international
money laundering through collective efforts, including the act of shaming nations that have done
little to nothing (ie: tax havens) to curb this illegal activity.
6.
Global Anti-Money Laundering Guidelines for Private Banking The Wolfsberg
Statement
(Wolfsberg,
January
2002),
http://www.wolfsbergprinciples.com/wolfsberg_principles_1st_revision.htm.
7.

The United Nations, http://www.un.org/

International Convention for the Suppression of the Financing of Terrorism (New York,
December 9, 1999): http://untreaty.un.org/English/Terrorism/Conv12.pdf
Link
to
current
participant
list:
http://untreaty.un.org/ENGLISH/Status/Chapter_xviii/treaty11.asp
UN Security Council Resolution 1373 (New York, September 28, 2001): http://daccessods.un.or/doc/UNDOC/GEN/N01/557/43/PDF/N0155743.pdf?OpenElement
UN
Security
Council
Resolution
1373
http://www.un.org/Docs/sc/committees/1373/

Counter

Terrorism

Committee:

UN Convention Against Transnational Organized Crime (Palermo, December 12-15 2000):

http://www.undcp.org/palermo/convmain.htm
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UN Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances (Vienna,
December 20, 1988): http://www.incb.org/e/conv/1988/index.htm

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"Money Laundering: FinCEN Needs to Better Communicate Regulatory Priorities and

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"Suspicious Bank Activities: Possible Money Laundering by U.S. Corporations for Russian
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Requires
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M. SERIO, , "Economic Crime and International Cooperation", Journal of Financial Crime, vol.
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Weiss, Martin A. Terrorist Financing: the 9/11 Commission Recommendation. Washington, DC:
Library of Congress, Congressional Research Service, 5 August 2004. 6 p.

CHAPTER 2: INTRODUCTION TO MONEY LAUNDERING: DEFINITIONS,

STAGES, PLAYERS, AND SIGNIFICANCE
Definition of Money Laundering *1
The origin phrase money laundering is somewhat uncertain. One source reports it was
coined in connection with the failed U.S. experiment with prohibition during the 1930s. 2
Another source reports the phrase was first used in 1961 and came into widespread use
during the Watergate scandal.3 The latter date seems more likely, since the phrase did not
appear in print until Watergate.4 The phrase is an interesting word usement, since it
functions as many different parts of speech.
The United Nations website defines money laundering as a noun phrase. "Money
Laundering: A three-stage process which disguises illegal profits without compromising
the criminals who wish to benefit from the proceeds. This requires: first, moving the
funds from direct association with the crime; second, disguising the trail to foil pursuit;
and third, making the money available to the criminal once again with the occupational
and geographic origins hidden from view (see also placement, layering, integration)."5
The FATF website conspicuously displays a definition of money laundering as a verb
phrase. "Money laundering is the processing of criminal proceeds to disguise their
illegal origin.6 It may come as a surprise, therefore, that the real interest of this group is
somewhat different. The fundamental objective of this effort is to ensure that criminal
misuse of the financial system is detected and defeated. 7 Thus, the real goal of this
group is to protect the financial system from criminal misuse.
The March 2003 INCSR report does not specifically define money laundering. The
report does, however, use the phrase as an adjective. A major money laundering
country is defined by statute as one whose financial institutions engage in currency
transactions involving significant amounts of proceeds from international narcotics
trafficking. FAA 481(e)(7). However, the complex nature of money laundering
transactions today makes it difficult in many cases to distinguish the proceeds of
1*Thomas.
2 What is Money Laundering available at http://www.countermoneylaundering.com/p01.htm
3 Online Etymology Dictionary, Laundry available at http://www.etymonline.com/l2etym.htm.
4 Paul Bauer, Undrstanding the Wash Cycle available at http://usinfo.state.gov
/journals/ites/0501/ijee/clevelandfed.htm.
5 Glossary of Money-Laundering Terms available at http://www.unodc.org/unodc/
money_laundering_glossary.html#M
6 Basic Facts about Money Laundering available at http://www.fatf-gafi.org/MLaundering_en.htm
7 See Report on Money laundering Typologies 2002-2003 p. 1 1 available at http:// www.fatfgafi.org/pdf/TY2002_en.pdf (requires Acrobat Reader)

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narcotics trafficking from the proceeds of other serious crime. 8 Thus, money laundering
is a currency transaction involving significant amounts of proceeds from serious crimes.
It seems apparent, though not stated, that only individuals and associations can engage in
money laundering, not governments. Since money laundering can be used so many
different ways, it is probably best to describe money laundering on an analytic basis.
Fortunately, there is an analytic model of money laundering that is widely agreed upon.
Stages of Money Laundering
Money laundering is commonly divided into three stages or elements: layering,
placement, and integration. Each stage is addressed in turn.
Placement
Placement is the first stage of the money laundering process, whereby the launderer
disguises the provenance of criminal proceeds, often by a complex series of financial
transactions.9 "This might be done 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 (cheques, money orders, etc.) that are then
collected and deposited into accounts at another location."10
Layering
Layering is the second step in the process of money laundering, whereby the launderer
attempts to remove the funds from direct association with the crime by a series of
financial transactions, thus making it harder to connect the proceeds to its origin. 11 "The
funds might be channeled through the purchase and sales of investment instruments, or
the launderer might simply wire the funds through a series of accounts at various banks
across the globe. This use of widely scattered accounts for laundering is especially
prevalent in those jurisdictions that do not co-operate in anti-money laundering
investigations. In some instances, the launderer might disguise the transfers as payments
for goods or services, thus giving them a legitimate appearance."12
8 United States Department of State, Bureau for International Narcotics and Law Enforcement Affairs, International
Narcotics Control Strategy p. I-5 (March 2003) available at www.state.gov/g/inl/ rls/nrcrpt/2002/.
9 Glossary of Money-Laundering Terms available at
http://www.unodc.org/unodc/money_laundering_glossary.html#M
10 Basic Facts about Money Laundering available at http://www.fatf-gafi.org/MLaundering_en.htm
11 Glossary of Money-Laundering Terms available at
http://www.unodc.org/unodc/money_laundering_glossary.html#M
12 Basic Facts about Money Laundering available at http://www.fatf-gafi.org/MLaundering_en.htm

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Integration:
"Having successfully processed his criminal profits through the first two phases of the
money laundering process, the launderer then 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."13
III. The Magnitude, Economics and Impact of Money Laundering
Money laundering is associated with the so-called underground economy.
Unfortunately, there is little empirical evidence available to estimate the amount of size
of the underground economy.14 The International Monetary Fund has described a direct
and indirect estimation approach to estimate the size. 15 Both methods rely heavily on
statistical interpretation of data sources and are thus subject to spin by their promoters.
The direct approach analyzes information obtained in criminal investigations to build
up sector-by-sector estimates of the size of the underground economy.16 A 1974 study put
the figure at 4% to 9%of gross domestic product (GDP). 17 The FATF has conducted
studies on Italy, Australia, Canada and The Netherlands and estimates the size of the
underground economy at 2%, 0.75%, 2-3% and <1%, respectively.18 The FATF does not
believe these figures accurately represent the worldwide figures, however.19 This is
somewhat surprising, since the FATF stopped trying to estimate the scale of money
laundering a year before the report came out.20 Thus, it seems that the FATF was not
coming up with the desired result so it stopped trying.
The indirect approach described by the IMF report involves using the principles of
macroeconomics to estimate the size of the underground economy from five indicators. 21
These indicators include:
(i) the discrepancy between income and expenditure statistics, assuming that the income
measure of GDP should be equal to the expenditure measure of GDP reported in the
national accounts; (ii) the discrepancy between the official and actual labor force
assuming that a decline in participation to the official market may reflect increasing
13 Id.
14 IMF Executive Board Discusses Money Laundering available at
http://www.imf.org/external/np/sec/pn/2001/pn0141.htm.
15 Financial System Abuse, Financial Crime and Money Laundering - Background Paper, 24 available at
http://www.imf.org/external/np/ml/2001/eng/021201.pdf (requires Acrobat Reader).
16 Id.
17 Id.
18 Id.
19 Id.
20 FATF Documents available at http://www1.oecd.org/fatf/FATDocs_en.htm. Look at the description under
the link for the FATF-XI report.
21 Financial System Abuse, Financial Crime and Money Laundering - Background Paper, 24.

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activity in the underground economy; (iii) the discrepancy between official GDP and total
nominal GDP (transactions approach) assumes a constant relationship over time between
the volume of transactions and official GDP (Fishers quantity equation); (iv) the
discrepancy between actual or excess demand for money and the demand for money
that can be explained by conventional or normal factors (currency demand approach)
considers that currency is the main (only) means of payment used to settle transactions in
the underground economy; (v) the discrepancy between actual and official GDP estimated
on the basis of electricity consumptionassumes that economic activity and electricity
consumption move together, with an electricity/GDP elasticity close to one.22
The net result of such studies is summarized below:23
Country Group
Developing Countries
Africa
Central and South America
Asia
Transition countries
OECD countries

Range (% of GDP)
20-76
25-61
13-71
8-63
5-28

One has to wonder about the significance of a study that has a range of error of 25% of
GDP in the OECD countries and 36 % to 58% in the rest of the world. The worldwide
GDP is estimated at $21 trillion. 24 The above statistics imply that the worldwide size of
the underground economy is in excess of $1 trillion at the low end and $3 trillion at the
high end. Thus, these statistics appear to be completely unbelievable because there is no
way this amount of money can move around unnoticed without the help of complicit
governments. Of course, if governments are involved, then the activity is not really
money laundering.

22 Id. at 24-25.
23 Id. at 25.
24 Regional Gross Domestic Product (GDP): Ranked North America, Europe, Japan & Oceania (Purchasing Power
Parity) available at http://www.demographia.com/db-intlppp-region.htm.

- 15 - 15 - 15 -

Money Laundering: Introductory Concepts

Written By: R. LeWayne Johnson, J.D.
Money laundering can have devastating economic consequences. Fighting it should be a
priority for all countries and is not incompatible with financial market liberalization.125
Contents: (1) International and Local Definition for Money Laundering; (2) Stages of
Money Laundering; (3) Impact of Money Laundering; (4) Proposed International
Solutions; (5) Conclusion
International and Local Definition for Money Laundering
Money laundering according to the definition in the International Guide to Money
Laundering: Law and Practice is the criminal process whereby the proceeds from
crime are hidden and transformed by attempts to integrate them into the financial system
in order to give them the appearance of legitimate funds.226
Activities and persons constituting money laundering as defined by the U.S. Money
Laundering Statute, 18 USC 1956 are as follow in pertinent part:
(a)(1) Whoever, knowing that the property involved in a financial transaction represents
the proceeds of some form of unlawful activity, conducts or attempts to conduct such a
financial transaction which in fact involves the proceeds of specified unlawful activity
(A)(i) with the intent to promote the carrying on of specified unlawful
activity; or
(ii) with intent to engage in conduct constituting a violation of section
7201 or 7206 of the Internal Revenue Code of 1986; or
(B) knowing that the transaction is designed in whole or in part
(i) to conceal or disguise the nature, the location, the source, the
ownership, or the control of the proceeds of specified unlawful
activity; or
(ii) to avoid a transaction reporting requirement under State or Federal
law,
(2) Whoever transports, transmits, or transfers, or attempts to transport, transmit,
251 Peter J. Quick. Money Laundering: Muddling the Waters,
www.worldbank.org/fandd/english/0397/articles/0110397.htm.(1996).
262 Council of Europe. Threat to Europe from Economic Crime, http://www.assembly.coe.int/Main.asp?link=http
%3A%2Fassembly.coe.i. (1997).

- 16 - 16 - 16 -

or transfer a monetary instrument or funds from a place in the United States to

or through a place outside the United States or to a place in the United States
from or through a place outside the United States
(A) with the intent to promote the carrying on of specified unlawful activity; or
(B) knowing that the monetary instrument or funds involved in the
transportation, transmission, or transfer represent the proceeds of some
form of unlawful activity and knowing that such transportation,
transmission, or transfer is designed in whole or in part
(i) to conceal or disguise the nature, the location, the source, the ownership,
or the control of the proceeds of specified unlawful activity; or
(ii) to avoid a transaction reporting requirement under State or Federal
law,.327
Stages of Money Laundering
Generally occurring in a series of transactions, money laundering is used to disguise the
source of financial assets so that those assets may be used without compromising the
criminals who seek to use the funds.
The Financial Action Task Force on money laundering (FATF) defines money laundering
as falling into three stages:
Placement: the process of placing, through deposits, wire transfers, or other means,
unlawful proceeds into financial institutions;
Layering: the process of separating the proceeds of criminal activity from their origin
through the use of layers of complex financial transactions; and
Integration: the process of using an apparently legitimate transaction to disguise the illicit
proceeds. Through this process the criminal tries to transform the monetary proceeds
derived from illicit activities into funds with an apparently legal source.428
Impact of Money Laundering
Money laundering and the financing of terrorism are worldwide concerns that increase
the risks to domestic and global financial systems and can impact national security.
According to the Financial Action Task Force (FATF), estimates of the amount of money
273 18 USC 1956, http://www.trac.syr.edu/laws/18USC1956.html.
284 Financial Action Task Force. What is Money Laundering? http://www1.oecd.org/fatf.
- 17 - 17 - 17 -

laundered annually worldwide from the illicit drug trade alone range between
$US 300 billion and $US 500 billion. The inclusion of laundered illicit funds from
economic and other non-drug crime could potentially double these figures.
Vulnerability Factors
The current ability of money launderers to penetrate virtually any financial system makes
every jurisdiction a potential money-laundering center. There is no precise measure of
vulnerability for any financial system, and not every vulnerable financial system will, in
fact, be host to large volumes of laundered proceeds, but a checklist of what drug money
managers reportedly look for provides a basic guide. The checklist includes:
Failure to criminalize money laundering for all serious crimes or limiting the offense to
narrow predicates.
Rigid bank secrecy rules that obstruct law enforcement investigations or that prohibit or
inhibit large value and/or suspicious or unusual transaction reporting by both banks and
non-bank financial institutions.
Lack of or inadequate "know your client" requirements to open accounts or conduct
financial transactions, including the permitted use of anonymous, nominee, numbered or
trustee accounts.
No requirement to disclose the beneficial owner of an account or the true beneficiary of a
transaction.
Lack of effective monitoring of cross-border currency movements.
No reporting requirements for large cash transactions.
No requirement to maintain financial records over a specific period of time.
No mandatory requirement to report suspicious transactions or a pattern of inconsistent
reporting under a voluntary system; lack of uniform guidelines for identifying suspicious
transactions.
Use of bearer monetary instruments.
Well-established non-bank financial systems, especially where regulation, supervision,
and monitoring are absent or lax.
Patterns of evasion of exchange controls by legitimate businesses.
Ease of incorporation, especially where ownership can be held through nominees or
bearer shares, or where off-the-shelf corporations can be acquired.
No central reporting unit for receiving, analyzing and disseminating to the competent
authorities information on large value, suspicious or unusual financial transactions that
might identify possible money laundering activity.
Lack of or weak bank regulatory controls, or failure to adopt or adhere to the Basle
Principles for International Banking Supervision, especially in jurisdictions where the
monetary or bank supervisory authority is understaffed, underskilled or uncommitted.
- 18 - 18 - 18 -

Well-established offshore financial centers or tax-haven banking systems, especially

jurisdictions where such banks and accounts can be readily established with minimal
background investigations.
Extensive foreign banking operations, especially where there is significant wire transfer
activity or multiple branches of foreign banks, or limited audit authority over foreignowned banks or institutions.
Limited asset seizure or confiscation authority.
Limited narcotics, money laundering and financial crime enforcement and lack of trained
investigators or regulators.
Jurisdictions with free trade zones where there is little government presence or other
supervisory authority.
Patterns of official corruption or a laissez-faire attitude toward the business and banking
communities.
Jurisdictions where the U.S. dollar is readily accepted, especially jurisdictions where
banks and other financial institutions allow dollar deposits.
Well-established access to international bullion trading centers in New York, Istanbul,
Zurich, Dubai and Mumbai.
Jurisdictions where there is significant trade in or export of gems, particularly diamonds.
Jurisdictions with large parallel or black market economies.
Limited or no ability to share financial information with foreign law enforcement
authorities.
Various Impacts
Tax Impact
With regard to a countrys economy, a significant impact of money laundering might be
in the area of tax collection, due to misreporting and underreporting of ones income.
However, it is still not clear how moving funds from the illicit economy, where they
would not be taxed, into the licit economy where by definition they would be declared
and liable for taxes, would result in tax losses. An exception to this situation, however,
would be instances in which illicit proceeds are moved out of the country, surface
elsewhere as licit funds and are taxed in that jurisdiction.
Overall Economic and Commercial Impact
The uncertainty regarding the magnitude of illicit funds laundered throughout the
international community and the precise nature of the economic and commercial impact
of the money laundering process renders a true assessment of the economic and
commercial impact of money laundering extremely difficult. Money Laundering,
therefore, given the current uncertainties surrounding the impact of the process, cannot be
assessed to have more than some economic and commercial impact on the international
community.
- 19 - 19 - 19 -

Social-political Impact of Money Laundering

Money laundering as defined by 18 USC 1956 is a criminal activity. At least this is the
case in the United States. As such, it has an enormous impact on the basic values of a
society because, to the extent that it is allowed to continue, it is a clear signal that crime
does indeed pay. Ultimately money laundering must be controlled not because it causes
significant economic distortions (in many cases it may not) but because it is recognized
as morally unacceptable that individuals profit from criminal activities. A key component
of effective anti-organized crime enforcement is removing profits from the criminals.
Proposed International Solutions
29

The Financial Action Task Force

At the July 1989 economic summit in Paris, the Group of Seven countries set up
the Financial Action Task Force (FATF), whose brief is to prevent banks and
financial institutions from laundering the proceeds of criminal activities--in
particular, sales of controlled substances, organized criminal activities, and
manipulation of markets by insiders. The FATF, which has 28 member countries
and governments, primarily from the industrial world, encourages countries to
make money laundering a criminal activity in itself (many have already done so);
it also seeks to strengthen international cooperation between criminal
investigation agencies and the judiciaries in different countries.5

The European Union broadened its anti-money laundering directive and imposed antimoney laundering obligations on gatekeepersprofessionals such as lawyers and
accountants who help place dirty money into the financial system (see International
Narcotics Control Strategy Report -2001 at http://www1.oecd.org/fatf/).
In the United States, Congress passed the Uniting and Strengthening America by
Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA
PATRIOT) Act of 2001 on October 26, 2001. This landmark piece of legislation made
major changes to the U.S. anti-money laundering regime. The broad new authorities
provided in the USA PATRIOT Act will have significant influence on the relationships
between U.S. financial institutions and their individual and institutional customers.
Conclusion
Money laundering as defined by the International Guide to Money Laundering: Law and
Practice, the FATF, statutory and case laws both in the U.S. and the international
community, is a crime.
295 Quirk at 2.
- 20 - 20 - 20 -

It is an attempt to assure drug dealers, illegal arms dealers, corrupt public officials and
other criminals that they can hide their profits and to provide them the fuel to operate and
expand their criminal enterprises.
Combating this progressive activity will require attacking it from at least two fronts:
Fighting money launderers and
Strengthening anti-money laundering regimes globally.
This strategy will reduce financial crime by depriving criminals of the means to commit
other serious crimes. Further strengthening anti-money laundering regimes, particularly
in the areas of identifying the originators of international wire transfers, will impact
terrorist financing as well. At a minimum, strong anti-money laundering measures help
to create a body of evidence that exposes criminal behavior and help law enforcement
identify perpetrators and build cases against them that lead to their arrests and
convictions.

- 21 - 21 - 21 -

Gil Manzano, Jr.

572-59-1212
Module 2B
Introduction of Money Laundering
[1] Money Laundering - Money laundering is a process whereby the origin of funds
generated by illegal means is concealed (drug trafficking, gun smuggling, corruption,
etc.). The objective of the operation, which usually takes places in several stages, consists
in making the capital and assets that are illegally gained seem as though they are derived
from a legitimate source, and inserting them into economic circulation. The crime of
money laundering consists of knowingly disguising the source, origin, or ownership of
illegal funds.
There are three stages involving in money laundering; placement, layering and
integration.
Placement This is the movement of cash from its source. On occasion, the source of the
money is disguised and/or misrepresented followed by placing it into circulation through
financial institutions, casinos, shops, bureau de change and other businesses. The process
of placement can be carried out through many processes including:
Currency Smuggling This is the physical illegal movement of currency and monetary
instruments out of a country. The various methods of transport do not leave a discernible
audit trail.
Bank Complicity This is when a financial institution, such as banks, is owned or
controlled by unscrupulous individuals suspected of conniving with drug dealers and
other organized crime groups. This makes the process easy for launderers. The complete
liberalization of the financial sector without adequate checks also provides leeway for
laundering.
Currency Exchanges In a number of transitional economies the liberalization of foreign
exchange markets provides room for currency movements and as such laundering
schemes can benefit from such policies.
Securities Brokers Brokers can facilitate the process of money laundering through
structuring large deposits of cash in a way that disguises the original source of the funds.
Blending of Funds The best place to hide cash is with a lot of other cash. Therefore,
financial institutions may be vehicles for laundering. The alternative is to use the money
from illicit activities to set up front companies. This enables the funds from illicit
activities to be obscured in legal transactions.
- 22 - 22 - 22 -

Asset Purchase The purchase of assets with cash is a classic money laundering method.
The major purpose is to change the form of the proceeds from conspicuous bulk cash to
some equally valuable but less conspicuous form.
Layering The purpose of this stage is to make it more difficult to detect and uncover a
laundering activity. It is meant to make the trailing of illegal proceeds difficult for the law
enforcement agencies. The known methods are:
Cash converted into Monetary Instruments Once the placement is successful within the
financial system by way of a bank or financial institution, the proceeds can then be
converted into monetary instruments. This involves the use of bankers drafts and money
orders.
Material assets bought with cash then sold Assets that are bought through illicit funds
can be resold locally or abroad and in such a case the assets become more difficult to
trace and thus seize.
Integration This is the movement of previously laundered money into the economy
mainly through the banking system and thus such monies appear to be normal business
earnings. This is dissimilar to layering, for in the integration process detection and
identification of laundered funds is provided through informants. The known methods
used are:
Property Dealing The sale of property to integrate laundered money back into the
economy is a common practice amongst criminals. For instance, many criminal groups
use shell companies to buy property; hence proceeds from the sale would be considered
legitimate.
Front Companies and False Loans Front companies that are incorporated in countries
with corporate secrecy laws, in which criminals lend themselves their own laundered
proceeds in an apparently legitimate transaction.
Foreign Bank Complicity Money laundering using known foreign banks represents a
higher order of sophistication and presents a very difficult target for law enforcement.
The willing assistance of the foreign banks is frequently protected against law
enforcement scrutiny. This is not only through criminals, but also by banking laws and
regulations of other sovereign countries.
False Import/Export Invoices The use of false invoices by import/export companies has
proven to be a very effective way of integrating illicit proceeds back into the economy.
This involves the overvaluation of entry documents to justify the funds later deposited in
domestic banks and/or the value of funds received from exports.
Economic Impact
Money Laundering has the Capacity to undermine world financial markets.
The major economic argument is that laundering has a detrimental effect on the operation
- 23 - 23 - 23 -

of markets. [2] Tanzi, an IMF economist, argues that the resources that go into illegal
activity might otherwise be directed legally. [3] Money laundering allocates illegal
money around the world based on the ease of avoiding controls. [4]
A large stock of laundered capital might bring instability to the world market. At the
national level, this will affect exchange and interest rates. Integration of financial markets
implies that difficulties can spread from market to market, transforming a national
problem into a systemic one. This is the thesis which, if correct, accounts for the harm of
money laundering. It only ever argues, however, for the criminalization of international
laundering, not laundering in one jurisdiction only.
The microeconomic effect of laundering remains more tangible and significant. The
effect upon the identifiable business may result in employees losing their jobs due to their
bosses laundering drug money or other illegal sources. [5] Nonetheless, the argument is
not overwhelming. There are two sorts of responses available. One is to challenge the
stereotypes of how the money is deployed. This can only be done by attention to the
micro data. Petrus van Duyne [6] suggests that the incidence of this sort of competition is
far less than is suggested by the law enforcement agencies.
Masciandaro [7] argues further that laundering has a pollutant effect. Once it takes place,
then more and more property will become tainted. [8] This is true, and particularly true if
tax evasion is to be treated like other forms of "criminal conduct" for the purposes of
money laundering. [9] But the very rate at which the pollution spreads might be regarded
as an indication of the high degree of criminogenesis attributable to attempts to regulate
laundering.
Money laundering activities can corrupt parts of the financial system and undermine
governance of banks. Once bank managers have become corrupted by the sizeable sums
of money involved in money laundering, non-market behavior can be introduced into
operating areas other than those directly related to the money laundering, which creates
risks for the safety and soundness of the bank. Bank supervisors also can be corrupted or
intimidated, which would reduce the effectiveness of supervision. [10]
Amongst the wider consequential claims, the effect of laundering upon the banking
system is frequently a particular concern. Smith writes, the fear of financial regulators is
that when credit and financial institutions are used to launder proceeds from criminal
activities ... the soundness and stability of the [particular] institution concerned and
confidence in the financial system as a whole could be seriously jeopardized. [11]
Likewise, Cranston asserts that, "[money laundering] affects public confidence in, and the
stability of, the banking system. [12]
- 24 - 24 - 24 -

A major concern is banking liquidity. The argument remains: If a bank deals with
investors, the provenance of whose money is illegal, then the kinds of demands which
those investors will make are less predictable than those coming from more conventional
investors. The sorts of clients with whom they choose to do business affect the proportion
of its assets, which a bank will need to keep liquid to meet such eventualities without
entirely collapsing. It is, however, by no means clear that these kinds of effects have
arisen in banks that launder money.

FOOTNOTES
[1] http://swiss-bank-accounts.com/e/index.html
[2] See Performance and Innovation Unit, Cabinet Office, Recovering the Proceeds of
Crime para. 1.3 (2000), at http://www.cabinet-office.gov.uk/ innovation/
2000/crime/recovering/01.htm
[3] See Vito Tanzi, International Monetary Fund Working Paper 96/55, Money
Laundering and the International Financial System 5 (1996) (noting that "recently some
small countries have almost advertised their willingness to accept laundered money.").
[4]

See

Recovering

the

Proceeds

of

Crime,

supra.

[5] See Vito Tanzi, International Monetary Fund Working Paper 96/55, Money
Laundering and the International Financial System 5 (1996) (noting that "recently some
small countries have almost advertised their willingness to accept laundered money.").
[6] See Petrus C. Van Duyne, The Emperor's Clothes of Disclosure: Hot Money and
Suspect Disclosures, 31 Crime L. & Soc. Change 245-71 (1999).
[7] Donato Masciandaro, Money Laundering: The Economics of Regulation, 7 Eur. J.L.
& Econ. 225-40 (1999); see also Donato Masciandaro, The Economics of Money
Laundering
[8] See Gianandrea Goisis, Economic Impact of Rules Against Money Laundering, 43
- 25 - 25 - 25 -

Riviista Internazionale di Scienze Economiche e Commerciali 303-30 (1996).

[9] See Peter Alldridge, Are Tax Evasion Offenses Predicate Offenses for Money
Laundering?, 4 J. Money Laundering Control 6 (2001).
[10] Peter Quirk, International Monetary Fund Working Paper 96/66, Macroeconomic
Implications of Money Laundering 24 (1996).
[11] Geoffrey Smith, Competition in the European Financial Services Industry: The Free
Movement of Capital versus the Regulation of Money Laundering, 13 U. Pa. J. Int'l Bus.
L.
101,
111
(1992).
[12]

Ross

Cranston,

Principles

of

Banking

Law

75

(1997).

Module 2B
Oliver Massmann
040804
--------------------1. Definition: MONEY LAUNDERING - Conduct/acts designed in whole or in part to
conceal or disguise the nature, location, source, ownership or control of money (can be
currency or equivalents, eg. checks, electronic transfers, etc.) to avoid a transaction
reporting requirement under state or federal law or to disguise the fact that the money
was acquired by illegal means.
-----------------2. Stages of money laundering:
placement - the process of placing unlawful proceeds into financial institutions through
deposits, wire transfers, or other means;
(2) layering - the process of separating the proceeds of criminal acti-vity from their origin
through the use of lay-ers of complex financial transactions; and
(3) integration - the process of using an apparently legitimate transaction to disguise
illicit proceeds.

-------------------2. Examples:
A. Large cash deposits by individuals and companies
- 26 - 26 - 26 -

1. The sum of 766 000 US dollars is deposited at Bank X in St. Petersburg from where it
is transferred to Bank Y in a Scandinavian country. The account holder is a national
trading company of this country. From Bank Y the money is then transferred to an
account held by a person with a Russian passport in Bank Z, in the same Scandinavian
country. From the latter bank account, the money goes to a foreign exchange service
where it is collected in cash and in the currency of the Scandinavian country by the
account holder of Bank Z.
2. In country X, suspicions were reported by two separate banking establishments.
Investigation of the first report uncovered nothing suspicious or conclusive. the
information was stored. The second report filed a year later by an establishment have no
knowledge of the first report, have exactly the same information: the same type of
transaction, the same pattern, the same outward transfer by citizens of the same country.
The scheme involved several citizens of a Middle Eastern country who attracted the
banks' attention because of substantial foreign exchange transactions between to
European countries, followed by short-term placements and subsequent transfers to North
America of amounts totalling the equivalent of approximately USD 1 million. The
investigation revealed that one of the people involved had financial connections with an
individual under indictment in one country for drug trafficking and money laundering.
Furthermore, a check on a funds courier by customs agents in this country established a
connection between physical movements of cash and one of the transferees in North
America.
Source: AUSTRAC - Money Laundering and Financial Industry Regulator OECD/OCDE
Financial
Action
Task
Force
Groupe D'Action Financire
Date: 14 March 1995
---------------4. Techniques of money laundering
4.1 - Transfer by means of compensation by underground banks
4.2 - Transfer of the funds by means of transfer using faked identification
4.3 - Transfer by means of under/over invoicing
4.4 - Placement by deception/bribery
4.5 - Placement by conversion business
4.6 - Placement by Structuring/Smurfing
4.7 - Layering using assistance of international transactions and/or enterprises
4.8 - Integration by direct investments
4.9 - Integration by loans
4.10 - Integration by pretended speculations

- 27 - 27 - 27 -

source: German BKA webpage

I.Definitions of Money Laundering:

a.
The INCSR Report, March 2003: A major money laundering country is defined
by statute as one whose financial institutions engage in currency transactions involving
significant amounts of proceeds from international narcotics trafficking (FAA 481(e)
(7)).
b.
An United Nations Document: The United Nations Convention Against
Transnational Organized Crime, Article 6, 1(a)(i) The conversion or transfer of property,
knowing that such property is the proceeds of crime, for purpose of concealing or
disguising the illicit origin of the property. 1(a)(ii) The concealment or disguise of the
true nature, source, location, disposition, movement or ownership of or rights with
respect to property, knowing that such property is the proceeds of crime.
c.
Definitions from the Financial Action Task Force (FATF): The goal of a large
number of criminal acts is to generate a profit for the individual or group that carries out
the act. Money laundering is the processing of these criminal proceeds to disguise their
illegal origin. This process is of critical importance, as it enables the criminal to enjoy
these profits without jeopardizing their source.
Illegal arms sales, smuggling, and the activities of organized crime, including for
example drug trafficking and prostitution rings, can generate huge sums. Embezzlement,
insider trading, bribery and computer fraud schemes can also produce large profits and
create the incentive to legitimize the ill-gotten gains through money laundering.
When a criminal activity generates substantial profits, the individual or group involved
must find a way to control the funds without attracting attention to the underlying activity
or the persons involved. Criminals do this by disguising the sources, changing the form,
or moving the funds to a place where they are less likely to attract attention. Definition
from FATF, http://www1.oecd.org/fatf/MLaundering_en.htm, 9/10/03.
d.
Definitions of Typologies from the FATF: The most common typologies used by
both terrorist and criminal money launderers are:

- 28 - 28 - 28 -

1.
front companies: companies which actually carry on business where illegal
profits can be co-mingled with revenues from legitimate undertakings.
2.
shell companies: businesses without substance or commercial purpose and
incorporated to conceal the true beneficial ownership of accounts and assets.
3.
informal money of value transfer system: black market money exchanges.
4.
nominees: use of family, friends, or associates who are trusted in the community,
and who will not attract attention, to conduct transactions and hide the source of income.
5.
structuring: depositing cash or purchasing bank drafts at various institutions by
various people, or conducting transactions below the reporting threshold.
6.
credit cards: creating credit on a card by paying cash, and then withdrawing cash
from this credit.
7.
EFT: using wire transfer services to wire funds to associates.
8.
currency smuggling: the movement of cash from one location to another to
disguise its source and ownership.
FATF, Report on Money Laundering Typologies,
http://www1.oecd.org/fatf/pdf/TY2003_en.pdf, 2/14/03.
II.

Three Basic Stages of Money Laundering:

The three basic stages of money laundering are as follows:

(washing), and integration.

placement, layering

During the first stage, the launderer introduces the illegal profits into the financial system
by a variety of methods (more fully discussed below). Some examples include breaking
up large sums into smaller sums and depositing them directly into banks. Additionally,
monetary instruments other than cash can be purchased and then deposited elsewhere.
This stage usually takes place close to the jurisdiction where the funds were originated.
The second stage consists of a series of movements of the funds recently entered into the
financial system, preferably moving the money as far away from the source jurisdiction
as possible. This process is usually accomplished by money wiring, property purchases,
or payments to import/export companies. This stage usually takes place in locations
with large business or financial infrastructures, or places with limited regulatory
oversight of the financial or banking sectors.
The last stage extracts the funds back into the local economy once the source of the funds
has been sufficiently obscured, or laundered (washed) in stage 2. Some of the more
- 29 - 29 - 29 -

common ways of reintroducing this clean money into the economy is by large luxury
purchases, property purchases, etc.
Information obtained from: SPGI, Money Laundering: A Practical Analysis With
Particular Reference To Bahamian And Caribbean Offshore Institutions,
http://www.spgi.org/articles/bain_APracticalAnalysis.shtml, 2002.
III.
List and describe 10 most-often used techniques of money laundering (entire list
courtesy of: Don Temple, Money Laundering 101: Ten Ways to Place Dirty Money,
SmartPros, Ltd., 7/26/02, available at: http://www.accountingnet.com/x34833.xml.
a.
Often exchange small denomination bills for one hundred dollar bills. This
reduces the bulk of the currency several fold and makes it easier to conceal and transport.
b.
Purchase monetary instruments such as money order, travelers checks, bank
drafts, cashiers checks, treasurers checks, and official bank checks with currency in
amounts below the $3,000 record-keeping thereby reducing the bulk of currency.
c.
Purchase the monetary instruments mentioned above in increments just below the
$10,000 Currency Transaction Report threshold. This will result in the financial
institution identifying the purchaser and maintaining a log of these transactions; however,
money launderers recognize that the log is not filed with the government.
d.
Bulk ship currency to a jurisdiction with bank secrecy laws. Although a Currency
and Monetary Instrument Report must be filed with the U. S. Customs Service anytime
currency and/or monetary instruments are exported from the U. S. or imported into the U.
S. money launderers do not file the report. Section 371 of the USA PATRIOT Act makes
bulk shipping cash into or out of the United States a crime.
e.
Recognize that financial institutions report repeated deposits of just under
$10,000. Therefore many money launderers will open several accounts in the names of
family members and possibly friends at several financial institutions and deposit small
amounts of currency in each account. The deposited amount in these situations may be
less than $1,000 on a daily basis or $2,000 to $3,000 twice or possibly three times a
week. These deposited amounts remain below the thresholds of any known internally
developed monitoring system and would probably only be detected using comprehensive
technology along with a compliance team.

- 30 - 30 - 30 -

f.
May purchase a currency generating business to launder funds. Money launderers
have used businesses such as restaurants and service/gasoline stations. These businesses
serve as both a method to place and layer dirty money simultaneously.
g.
Use electronic transfers to move dirty money. A money launderer may fund an
electronic transfer with up to $3,000 in currency without providing identification. These
funds can be rapidly transferred anyplace in the world. In many cases the money
launderer may request that a representative of a money service business (MSB) execute
several wire transfers during the course of a day all below the $3,000 record-keeping
threshold. The money launderer will normally offer the MSB employee a bribe for the
accommodation.
h.
May elect to execute electronic transfers below the $3,000 record-keeping
threshold at several financial institutions. Doing this will keep these transfers under the
radar screen since they are small increments and they are being distributed to multiple
places.
i.
Purchase a big-ticket item such as a car and use currency to pay down loans at an
accelerated rate. The dealership is required to file a currency report if the money
launderer uses currency and/or monetary instruments with a face value of $10,000 or less
and the total value of the currency and the monetary instruments aggregates to over
$10,000. Financing the automobile and making accelerated payments on the loan will
evade the filing of a currency report.
j.
Attempt to disassociate themselves from the proceeds of a fraud quickly. Money
launders may deposit the fraudulent proceeds into an account and almost immediately
withdraw those funds in the form of currency at various branches of an institution or via
ATMs.

I. Definition of Money Laundering

The origin phrase money laundering is somewhat uncertain. One source reports it was
coined in connection with the failed U.S. experiment with prohibition during the 1930s. 30
Another source reports the phrase was first used in 1961 and came into widespread use
during the Watergate scandal.31 The latter date seems more likely, since the phrase did

30 What is Money Laundering available at http://www.countermoneylaundering.com/p01.htm

31 Online Etymology Dictionary, Laundry available at http://www.etymonline.com/l2etym.htm.
- 31 - 31 - 31 -

not appear in print until Watergate.32 The phrase is an interesting word usement, since it
functions as many different parts of speech.
The United Nations website defines money laundering as a noun phrase. "Money
Laundering: A three-stage process which disguises illegal profits without compromising
the criminals who wish to benefit from the proceeds. This requires: first, moving the
funds from direct association with the crime; second, disguising the trail to foil pursuit;
and third, making the money available to the criminal once again with the occupational
and geographic origins hidden from view (see also placement, layering, integration)."33
The FATF website conspicuously displays a definition of money laundering as a verb
phrase. "Money laundering is the processing of criminal proceeds to disguise their
illegal origin.34 It may come as a surprise, therefore, that the real interest of this group is
somewhat different. The fundamental objective of this effort is to ensure that criminal
misuse of the financial system is detected and defeated. 35 Thus, the real goal of this
group is to protect the financial system from criminal misuse.
The March 2003 INCSR report does not specifically define money laundering. The
report does, however, use the phrase as an adjective. A major money laundering
country is defined by statute as one whose financial institutions engage in currency
transactions involving significant amounts of proceeds from international narcotics
trafficking. FAA 481(e)(7). However, the complex nature of money laundering
transactions today makes it difficult in many cases to distinguish the proceeds of
narcotics trafficking from the proceeds of other serious crime.36 Thus, money
laundering is a currency transaction involving significant amounts of proceeds from
serious crimes.
It seems apparent, though not stated, that only individuals and associations can engage in
money laundering, not governments. Since money laundering can be used so many
different ways, it is probably best to describe money laundering on an analytic basis.
Fortunately, there is an analytic model of money laundering that is widely agreed upon.
I. Stages of Money Laundering
Money laundering is commonly divided into three stages or elements: layering,
placement, and integration. Each stage is addressed in turn.
A. Placement
32 Paul Bauer, Undrstanding the Wash Cycle available at
http://usinfo.state.gov/journals/ites/0501/ijee/clevelandfed.htm.
33 Glossary of Money-Laundering Terms available at
http://www.unodc.org/unodc/money_laundering_glossary.html#M
34 Basic Facts about Money Laundering available at http://www.fatf-gafi.org/MLaundering_en.htm
35 See Report on Money laundering Typologies 2002-2003 p. 1 1 available at http:// www.fatfgafi.org/pdf/TY2002_en.pdf (requires Acrobat Reader)
36 United States Department of State, Bureau for International Narcotics and Law Enforcement Affairs,
International Narcotics Control Strategy p. I-5 (March 2003) available at www.state.gov/g/inl/rls/nrcrpt/2002/.

- 32 - 32 - 32 -

Placement is the first stage of the money laundering process, whereby the launderer
disguises the provenance of criminal proceeds, often by a complex series of financial
transactions.37 "This might be done 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 (cheques, money orders, etc.) that are then
collected and deposited into accounts at another location."38
B. Layering
Layering is the second step in the process of money laundering, whereby the launderer
attempts to remove the funds from direct association with the crime by a series of
financial transactions, thus making it harder to connect the proceeds to its origin. 39 "The
funds might be channeled through the purchase and sales of investment instruments, or
the launderer might simply wire the funds through a series of accounts at various banks
across the globe. This use of widely scattered accounts for laundering is especially
prevalent in those jurisdictions that do not co-operate in anti-money laundering
investigations. In some instances, the launderer might disguise the transfers as payments
for goods or services, thus giving them a legitimate appearance."40
C. Integration:
"Having successfully processed his criminal profits through the first two phases of the
money laundering process, the launderer then 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."41
III. The Magnitude, Economics and Impact of Money Laundering
Money laundering is associated with the so-called underground economy.
Unfortunately, there is little empirical evidence available to estimate the amount of size
of the underground economy.42 The International Monetary Fund has described a direct
and indirect estimation approach to estimate the size. 43 Both methods rely heavily on
statistical interpretation of data sources and are thus subject to spin by their promoters.

37 Glossary of Money-Laundering Terms available at

http://www.unodc.org/unodc/money_laundering_glossary.html#M
38 Basic Facts about Money Laundering available at http://www.fatf-gafi.org/MLaundering_en.htm
39 Glossary of Money-Laundering Terms available at
http://www.unodc.org/unodc/money_laundering_glossary.html#M
40 Basic Facts about Money Laundering available at http://www.fatf-gafi.org/MLaundering_en.htm
41 Id.
42 IMF Executive Board Discusses Money Laundering available at
http://www.imf.org/external/np/sec/pn/2001/pn0141.htm.
43 Financial System Abuse, Financial Crime and Money Laundering - Background
Paper, 24 available at http://www.imf.org/external/np/ml/2001/eng/021201.pdf
(requires Acrobat Reader).

- 33 - 33 - 33 -

The direct approach analyzes information obtained in criminal investigations to build

up sector-by-sector estimates of the size of the underground economy.44 A 1974 study put
the figure at 4% to 9%of gross domestic product (GDP). 45 The FATF has conducted
studies on Italy, Australia, Canada and The Netherlands and estimates the size of the
underground economy at 2%, 0.75%, 2-3% and <1%, respectively.46 The FATF does not
believe these figures accurately represent the worldwide figures, however.47 This is
somewhat surprising, since the FATF stopped trying to estimate the scale of money
laundering a year before the report came out.48 Thus, it seems that the FATF was not
coming up with the desired result so it stopped trying.
The indirect approach described by the IMF report involves using the principles of
macroeconomics to estimate the size of the underground economy from five indicators. 49
These indicators include:
(i) the discrepancy between income and expenditure statistics, assuming that the income
measure of GDP should be equal to the expenditure measure of GDP reported in the
national accounts; (ii) the discrepancy between the official and actual labor force
assuming that a decline in participation to the official market may reflect increasing
activity in the underground economy; (iii) the discrepancy between official GDP and total
nominal GDP (transactions approach) assumes a constant relationship over time between
the volume of transactions and official GDP (Fishers quantity equation); (iv) the
discrepancy between actual or excess demand for money and the demand for money
that can be explained by conventional or normal factors (currency demand approach)
considers that currency is the main (only) means of payment used to settle transactions in
the underground economy; (v) the discrepancy between actual and official GDP estimated
on the basis of electricity consumptionassumes that economic activity and electricity
consumption move together, with an electricity/GDP elasticity close to one.50
The net result of such studies is summarized below:51
Country Group
Range (% of GDP)
Developing Countries
Africa
20-76
Central and South America
25-61
Asia
13-71
44 Id.
45 Id.
46 Id.
47 Id.
48 FATF Documents available at http://www1.oecd.org/fatf/FATDocs_en.htm. Look at the description under
the link for the FATF-XI report.
49 Financial System Abuse, Financial Crime and Money Laundering - Background Paper, 24.
50 Id. at 24-25.
51 Id. at 25.

- 34 - 34 - 34 -

Transition countries
8-63
OECD countries
5-28
One has to wonder about the significance of a study that has a range of error of 25% of
GDP in the OECD countries and 36 % to 58% in the rest of the world. The worldwide
GDP is estimated at $21 trillion. 52 The above statistics imply that the worldwide size of
the underground economy is in excess of $1 trillion at the low end and $3 trillion at the
high end. Thus, these statistics appear to be completely unbelievable because there is no
way this amount of money can move around unnoticed without the help of complicit
governments. Of course, if governments are involved, then the activity is not really
money laundering.

52 Regional Gross Domestic Product (GDP): Ranked North America, Europe, Japan & Oceania (Purchasing Power
Parity) available at http://www.demographia.com/db-intlppp-region.htm.

- 35 - 35 - 35 -

The Players Primary, Secondary, Governments and Organizations

In the jargon of money laundering, the primary players are the persons directly engaged
in some revenue-generating unlawful activity. The secondary players are those persons
who facilitate laundering illicit proceeds.
I. THE PRIMARY PLAYERS
A. Narco-Traffickers
A narco-trafficker is just a smuggler specializing in illicit narcotics. Seemingly every
nation and ethnic has its own black market supply for narcotics. Thus, one has to wonder
whether mafia groups are just the natural response to intrusive government.
B. Sicilian Mafia
The Sicilian mafia is the largest of four organized crime groups originating in Italy. 53
These groups formed over the course of 3000 years in response to oppressive invaders in
order to help the people cope with their situation. 54 The present incarnation of the Italian
organized crime groups began in the 1800s and has now spread all over the world. 55 The
FBI estimates that the total number of people involved in these groups is approximately
275,000 people worldwide, with 2,500 in the United States. 56 Over the last two decades,
the primary emphasis has been on heroin smuggling. 57 Italian industry experts put the
value on their worldwide activity at $100 billion.58
C. Russian Mafia
The Russian mafia is one of the many organized crime groups originating in the former
Soviet Union and Warsaw Pact nations. 59 The FBU refers to these group collectively as
Eurasian Organized Crime (EOC).60 During the Soviet period, the "Vory V Zakone" or
Thieves-in-Law groups began to secure scarce consumer goods to the elite. When the
Soviet Union fell, the EOC groups used their political connections to acquire the stateowned businesses.61 This supplied a large infusion of cash to the system and an ongoing
supply of funds to the EOC.
The EOC groups also began to spread across the world after the fall of the Soviet
Union.62 The FBI estimates the effect of the EOC groups on the U.S. in the hundreds of
53 Italian Organized Crime available at http://www.fbi.gov/hq/cid/orgcrime/lcn/ioc.htm. The other three groups are
Camorra or Neapolitan Mafia, 'Ndrangheta or Calabrian Mafia, and Sacra Corona Unita or United Sacred Crown.
54 Id.
55 Id.
56 Id.
57 Id.
58 Id.
59 History of Eurasian Organized Crime in the U.S. available at
http://www.fbi.gov/hq/cid/orgcrime/eoc/eochistory.htm.
60 Id.
61 Id.
62 Id.

- 36 - 36 - 36 -

millions of dollars.63 The main crimes these groups have been detected in are health
care fraud, auto insurance fraud, securities and investment fraud, money laundering, drug
trafficking, extortion, auto theft, and Interstate Transportation of Stolen Property. 64 Of
course, the biggest concern is the proximity of the EOC groups to nuclear weapons still
deployed in the former Soviet Union.65
D. Turkish Mafia
The Turkish government estimates the Turkish mafia is involved in 100 different business
sectors and have total revenues of $60 billion per year.66 It is estimated that the Turkish
mafia is responsible for smuggling more than 90% of the heroin that enters Great
Britain.67 This is because Turkey is geographically located at the crossroad of southwest
Asia and Europe. The Turkish mafia has been in the news lately because some of its
leaders have been convicted in European courts.
In July 2004, the repute head of Turkish herion smuggling in Britain, Recip Yilmaz, was
convicted and sentence to thirty years in prison. 68 Along with Yilmaz, his wife, son and
seventeen other people were convicted on charges of smuggling and money laundering. 69
Also, Alaattin Cakci was arrested in Austria.70 Cakcis claim to fame is that he brought
down the Turkish government in 1998 claiming he had ties to the Prime Minister, Mesut
Yilmaz.71 Mesut Yilmaz was himself saved from prosecution in a banking scandal
because of procedural errors in the case. 72 It is unknown whether there is any familial
relationship between Recip and Masut Yilmaz.
E. Chinese Mafia - Triads
The FBI labels the Chinese Triads as traditional criminal organizations. 73 It is
unsurprising that the Triads formed as secret societies in response to the Han dynasty in
206 BC to 220AD,74 which is similar to the roots of the Sicilian mafia. The current
63 Id.
64 Id.
65 Id.
66 Turkish Mafia Godfather Arrested In Austri available at http://www.turkishpress.com/turkishpress/news.asp?
ID=22323.
67 Graham Johnson, Mulesto Car Ferries available at
http://www.sundaymirror.co.uk/news/tm_objectid=14414102&method=full&siteid=106694&headline=mules---tocar-ferries-name_page.html.
68 Justin Davenport, Drug Dealer who Claims Benefits avaialbale at
http://www.thisislondon.co.uk/news/londonnews/articles/12239714?source=Evening%20Standard.
69 Id.
70 Turkish Mafia Godfather Arrested In Austri available at http://www.turkishpress.com/turkishpress/news.asp?
ID=22323.
71 Id.
72 Turkish Court Rejects Trial of Former P.M on Procedural Grounds available at
http://www.turkishpress.com/turkishpress/news.asp?ID=23006.
73 Asian Criminal Enterprises available at http://www.fbi.gov/hq/cid/orgcrime/aace/asiancrim.htm.
74 Steve Macko, Evaluation of Chinese Triads in Great Britain available at http://www.emergency.com/ch-

- 37 - 37 - 37 -

organization, the Hung League, formed to resist the Manchu Emporers in the late 17th
century.75 While the Triads are envolved in similar business as other organized crime
groups, the Chinese Triads are more subtle than other groups and tend to be associated
with corrupt but highly placed public and private persons.76
F. Japanese Mafia - Yakusa
Similar to the Chinese Triads, the FBI labels the Japanese Yakusa (also spelled Yakuza)
as traditional criminal organizations.77 The Japanese Yakuza appear to be more brutal and
less subtle than any other organized crime group. When a henchman makes a mistake, he
loses a finger joint to his boss.78 The Yakuza control the Japanese pornography industry,
but recent anti-organized crime legislation has loosened the Yakuzas grip on the
industry.79
Similar to the Sicilian mafia and the Chinese Triads, the Japanese Yakuza formed at the
end of the Japanese shogun era in the 17th century.80 There are three general categories
of Yakuza members: tekiya (street peddlers), bakuto (gamblers), and gurentai
(hoodlums).81 The gurentai formed after World War II to supply the post-war black
market in goods and are based on American prohibition-era gangsters.82
The shear numbers of Yakuza members makes them worrisome the Japanese government.
While the population of Japan is roughly half of the United States, there are 110,00
Yakusa members divided among 2,500 families. 83 By way of comparison, there are only
a total of 20,000 members of organized crime families in the entire United States.84
G. Colombian Narco-Traffickers
Colombian-based mafia groups are responsible for most of the cocaine production and
distribution in the world.85 There are currently 20 cartels wielding power in Colombia,
collectively known as the Cali mafia.86 However, only five groups dominate the
industry.87 While other South American countries produce coca, only Colombia has
access to the Pacific Ocean which gives it transportation options. 88 The other entry into
triad.htm.
75 Triads available at http://www.gangland.net/triads.htm.
76 Steve Macko, Chinese Triads: An Update available at http://www.emergency.com/chi-tria.htm.
77 Asian Criminal Enterprises available at http://www.fbi.gov/hq/cid/orgcrime/aace/asiancrim.htm.
78 Yakusa BOD-MOD available at http://www.bmeworld.com/aine/yakusa_bod_mod.html.
79 Child Pornigraphy: An International Perspective available at http://www.crime-research.org/articles/536/.
80 Origins and Traditions available at http://www.crimelibrary.com/gangsters_outlaws/gang/yakuza/1.html.
81 Id.
82 Id.
83 Id.
84 Id.
85 The Colombian Drug Cartels available at http://exastriscientia.fateback.com/colombian.htm.
86 Id.
87 Id.
88 Id.

- 38 - 38 - 38 -

the United States is through Mexico. 89 In recent years, the Cali mafia has begun using its
transportation network to smuggle other drugs, such as heroin, into the United States.90
H. Jamaican Posse
The Jamaican posses are the most recently organized crime groups. The posses were
originally organized by corrupt politicians in the 1960s and 1970s to terrorize their
constituencies.91 The Rastaferian religion, dominant in Jamaica, uses marijuana as part of
its meditation ritual. Thus, the posses naturally became involved in marijuana smuggling,
which has lead to other smuggling activities.
II. THE SECONDARY PLAYERS:
The Gatekeepers: Attorneys, Accountants, Counselors
Certain professionals, such as lawyers and accountants, are useful in the implementation
of the laws in ways favorable to their clients position. Regarding lawyers and accounts,
the has the following table comparing the roles of lawyers and accountants:92
Professional Services Provided by . . .
LawyersAccountants
Legal advice Financial advice
Advocacy
Audit practice
Wills / probate Tax advice and tax structuring
Property transactions Property transactions
Investment services Bookkeeping
Trust Trust
Company formation Company formation
Company administration
Company administration
Introduction to banks Introduction to banks
Furthermore, computer specialists are used to create automated systems to handle
financial transactions and encrypt data files.
Professionals and technical experts cross the line when they willfully ignore how the
client is using their work product. Thus, many nations want to regulate such
professionals through anti-money laundering laws.93 The common ways professionals are
regulated through money laundering laws are through Susupicious Activity Reports,94
Know Your Client Regulations, and ethical rules on tipping off a client.
III. OTHER PLAYERS
89 Id.
90 Id.
91 Jamaican Posses available at http://beyondheroes2.tripod.com/jamaicanposse.htm.
92 FATF Report on money Laundering Typologies 2000-2001,12 available at .
93 Id. at 13
94 See ABA Money Laundering Enforcement Seminar available at
http://www.abanet.org/leadership/recommendations03/104.pdf (Acrobat Reader
required).

- 39 - 39 - 39 -

Corrupt Government Officials

Government officials can be drawn into corruption in a number of ways. For example, an
official charged with enforcement of criminal laws has some discretion in what
infractions to penalize. Thus, the official maybe induced to look the other way. A
military official entrusted with equipment may be induced to use that equipment for a
nefarious purpose. Since military maneuvers are often official secrets, the official may be
able to hide their activities behind the secrecy laws. Furthermore, officials entrusted with
unaccounted funds may use the funds for different purposes than those intended.

- 40 - 40 - 40 -

Oliver Massmann
Assignment
re questions on primary and secondary players and professional
responsibilities:

Who are the primary players and who are the secondary players?
Primary players:
Individuals or juridical persons engaged in a process of money laundering who own
illegal money and benefit from these activities.
Secondary players:
Individuals or juridical persons who support or assist primary players voluntarily.
a.The roles of user-friendly nations, attorneys, money managers,
accountants, compliance and trust advisors, computer specialists?
Following the given definition all of the above can be secondary players.
Due to the fact that money launders often use usual business activities to obtain their
aims the terms support and assist cover a very wide area of activities.
Therefore it might be difficult to punish these individuals and juridical persons without
any distinct rules or statues of behavior that state the borderline between correct and
incorrect professional behavior.
User-friendly nations:
although creating a haven for money launderers might be obvious these states can only
be punished on grounds of an international agreement and an international court.
Due to fact that a ratification of these agreements is necessary it is rather unlikely that an
user-friendly nation will also join international efforts to fight users.
The remaining way of punishing these states is to target them on other international
agreements.
Money managers, accountants:
Assisting or supporting money launderers will be done by normal ways of business that
is as long as there is no explicit law stating that this kind of professional activity is
punishable it will be almost impossible to exert any pressure on these professionals.
The only other way of restricting this kind of business is to use the relevant professional
organizations to state and enforce statutes (guidelines for professional behavior).
- 41 - 41 - 41 -

Attorneys:
The same problems as above occur. Considering statues of professional behavior the
statues of national and international bar associations have to be taken into account:
-International bar associations:
CCBE:
All the national bars and law societies of the European Union and the European
Economic Area are members of the CCBE
http://www.ccbe.org/en/documents/positions_en.htm#moneylaundering

the International Bar Association (IBA), see

http://www.ant-moneylaundering.org
(The International Bar Association Money Laundering Forum)
the Union Internationale des Avocats (UIA)
the American Bar Association (ABA)
the Japanese Federation of Bar Associations (JFBA)
- national bar associations
The multitude of these organizations may serve as any indicator to the problems of
diverging statues, enforcement practices etc.

b.
When do these secondary players "cross the line"? What are the liabilities and the
rules of professional ethics?

They definitely cross the line when Criminal Law is broken.

Referring to the Legislation in the European Community the implications of the
SECOND EU MONEY LAUNDERING DIRECTIVE95 can serve as an example.
http://www.anti-moneylaundering.org/countrylisting.asp
(The International Bar Association Money Laundering Forum with details
about Germany)
95 the Second Anti-Money Laundering Directive (97/2001/EC, see IP/01/1608)
- 42 - 42 - 42 -

Problems for lawyers arise not only with the rules of the Money Laundering
Act. Separate from this new law the legislation has created a criminal offence
of money laundering described in 261 of the traditional German Penal Code.
The new penal regulation was put in force in 1992. The statutory definition of
this offence is extremely wide. It includes many
activities of persons who assist in the business of money laundering without
knowing exactly the facts. If anybody has contact with infected money, he
runs the risk of committing a crime. Money laundering is possible as a result
not only of drug trafficking, but also of many other offences, even fiscal fraud.
There is no exemption for any profession. Every lawyer runs the risk of being
punished if he gets in contact with the money of his client who could be under
suspicion from an earlier crime. The problem has been discussed for ten years.
Now the highest criminal court in Germany (Bundesgerichtshof) sentenced
two lawyers for violation of 261 Criminal Code. The lawyers had accepted
infected money as fees for defending their clients in a criminal case.96
-

Apart from that by breaking rules set up by professional organizations

(i.e.: statue of international or national bar associations, policies).

The liabilities and rules of professional ethics:

The Sarbanes Oxley Act may be used as a reference for defining those terms:
Code of ethics means such standard as are reasonably necessary to promote
honest and ethical conduct, including the ethical handling of actual or apparent conflicts
of interest between personal and professional relationships; full, fair, accurate, timely, and
understandable disclosure in the periodic reports required to be filed by the issuer, and
compliance with applicable governmental rules and regulations.97
For a similar set of rules set up by an organization see the Bundesrechtsanwaltskammer:
brakstandesregelngeldwaesche.pdf

2. If and when we move to "All Crimes" Anti-Money Laundering Legislation, how will
the role of secondary players change? When is Civil Tax Avoidance "All Crimes"? When
is Criminal Tax Avoidance "All Crimes"??
a) Change of role:
They can and will be punished according to the provisions of law.
b) When is Civil Tax Avoidance All Crimes
96 BGH v. 04.07.2001 2 StR 513/00 in http://www.bundesgerichtshof.de
97 Sarbanes Oxley Act of 2002, http://www.findlaw.com
- 43 - 43 - 43 -

The United States and other nations are victims of tax evasion schemes
that use various financial centers around the world and their bank secrecy
laws to hide money from tax authorities, thus undermining legitimate tax
collection. Financial centers that have strong bank secrecy laws and weak
corporate formation regulations, and that do not cooperate in tax
inquiries from foreign governments, are found worldwide. These financial
centers, known as "tax havens," thrive in providing sanctuary for the
deposit of monies from individuals and businesses that evade the payment
of taxes in their home jurisdictions and allow them to keep the money they
have deposited from the knowledge of tax authorities. Billions of funds on
which tax is properly due, denominated in various currencies, are held on
deposit in these tax havens.
This demonstrates that civil tax avoidance is already considered to be all
crimes.
c)

Criminal Tax Avoidance:

This term implies that tax avoidance is a criminal act therefore it definitely is all crimes.

3. When is the attorney, banker, accountant and trustee a "gatekeeper" and

what are the legal consequences of being a gatekeeper??
There is a growing concern that criminals are increasingly enlisting the services of
unethical lawyers, accountants and other professionals to help them discover and
manipulate new money laundering opportunities. (FATF Report 2003/2004 S.50).
The term gatekeeper has frequently been used to describe the independent
professionals who serve investors by preparing, verifying, or assessing the disclosures
that they receive. Examples of gatekeepers include:
(1) the auditor who provides its certification that the issuers financial
statements comply with generally accepted accounting principles;
(2) the debt rating agency that evaluates the issuers creditworthiness;
(3) he securities analyst who communicates an assessment of the corporations
technology, competitiveness, or earnings prospects;
(4) the investment banker who furnishes its fairness opinion as to the pricing of a
merger; and
(5) the securities attorney for the issuer who delivers an opinion to the underwriters that
all material information of which the attorney is aware concerning the issuer has been
disclosed properly. The underwriter in an initial public offering also performs a gate
keeping function, in the sense that its reputation is implicitly pledged and it is expected to
perform due diligence services.
Structurally, gatekeepers are independent professionals who are so positioned that, if they
withhold their consent, approval, or rating, the corporation may be unable to effect some
transaction or to maintain some desired status.98
98 the attorney as Gatekeeper an agenda for the SEC, John C. Coffee Jr., in California Law Review 3-Jun 03
- 44 - 44 - 44 -

The legal consequences of being a gatekeeper depend on the area of jurisdiction.

In the European Community the ratification of the Second Directive on Money
laundering changed the German Criminal Code, so that gatekeepers esp. attorneys can
be punished.
4. Knowing Your Client?
Becomes a necessity, once All Crimes Money Laundering Legislation is imposed.
Until then it must be a policy of any honorable businessman or entity.
5. Suspicious Activities Reporting (SAR), Professional Privilege and
Statutory Confidentiality - What Must You Do and When?
As soon as one does receive information that indicates that a customer or client might be
a money launderer or terrorist financier information this information has to passed law
enforcement authorities.99
6. When Are You "Tipping Off" Your Client? What are the Consequences? How to
Avoid the "Catch 22" of "Tipping Off" and Professional Responsibility?
Companies should be very conscious of their clients confidentiality concerns. This means that
even in cases where they deem the release of client information to be appropriate, companies
should always make sure that only the appropriate, relevant, and necessary information is
disclosed.
It is therefore important to have internal policies and procedures that specifically address
situations where the government requests client information. Specifically, client information
should only be released upon receipt from the government of a written request for information
along with reasons for this request.100

99 see The AML policies and procedures envisioned by Section 352 of the USA
PATRIOT Act in

100 Consequence of Lopez v. First Union National Bank

- 45 - 45 - 45 -

Module 4B: Players, Primary, Secondary, Government & Organizations - Criminal Entrepreneurs
in Africa
Written by R. LeWayne Johnson, J.D.
Contents: (1) Overview: RICO and Case law definition of Enterprises; (2) Committee on
International Relations views of Crime Enterprises in Africa; (3) Primary Players; (4) Secondary
Players; (5) Gate Keepers & Government
OVERVIEW
18 U.S.C.S. 1961 provides that enterprise includes any individual, partnership, corporation,
association, or other legal entity, and any union or group of individuals associated in fact
although not a legal entity.
Further, 18 U.S.C.S. 1962 makes it unlawful for any person employed by or associated with
any enterprise engaged in, or the activities of which affect, interstate or foreign commerce, to
conduct or participate, directly or indirectly, in the conduct of such enterprises affairs through a
pattern of racketeering activity or collection of unlawful debt.
In the furtherance of this concept, the U.S. Supreme Court ruling in U.S. v Turkette, 452 U.S.
576 (1981), where an individual and several others were indicted, among other things, on the
charge that they conspired to conduct and participate in the affairs of an enterprise engaged in
interstate commerce through a pattern of racketeering activities. The indictment described the
enterprise as a group of individuals associated in effect for the purpose of illegally trafficking in
narcotics and other dangerous drugs, committing arsons, utilizing the United States mails to
defraud insurance companies, bribing and attempting to bribe local police officers, and corruptly
influencing and attempting to corruptly influence the outcome of state court proceedings. This
description of the group being ruled upon by the Supreme Court paralleled the statutory
definition put forward by 18 U.S.C.S. 1961.
The Defendant was convicted under the Racketeer Influenced and Corrupt Organizations Act
(RICO), 18 U.S.C.S. 1961-1968, for conspiracy to conduct and participate in the affairs of an
enterprise, engaged in interstate commerce, through a pattern of racketeering activities. The
enterprise conducted illegal activities. Where the appellate court reversed the judgment and held
that the term enterprise as used in RICO applied to legitimate enterprises, not illegitimate
enterprises, the Supreme Court reversed the appellate courts judgment. The Court ruled that the
language and structure of RICO did not limit its application to legitimate enterprises. Further,
the Turkette Court ruled, that the legislative history indicated that Congress intended the term
enterprise to include legitimate and well as illegitimate enterprises.
Committee on International Relations views of Crime Enterprises in Africa
- 46 - 46 - 46 -

Using the statutory and case law definition provided only as a backdrop while realizing that U.S.
statutes and court decisions are not controlling in Africa, we proceed.
International crime in todays society commands an estimated $1 trillion in business
revenue. While the Mafia, cocaine cartels, and other criminal organizations may be better
known, crime organizations are becoming big business in Africa.
Primary Players
The main sources of criminal proceeds in South Africa are generated by organised crime groups,
which engage in narcotics and abalone smuggling, vehicle theft, arms and human trafficking, and
mineral and precious stone trafficking. One specific criminal operation tracked to South Africa
is the use of 419 fraud schemes. These schemes remain a threat, as well as other types of fraud
using counterfeit cheques, credit cards, and pyramid schemes. Violent crimes such as robbery
and hijacking are also concerns. The levels of serious crime have stabilised over the past several
years. But officials indicate that drug trafficking has been increasing at a high rate. African
criminal organizations, to include the Nigerian drug cartels - which are among the most
sophisticated in the world are wreaking havoc throughout the world. South African police
estimate that their country is home to more than 190 criminal organizations, many of which are
sophisticated and international in scope. Swaziland is becoming a haven for drug traffickers and
for gunrunners.1
Criminal enterprises use several means to launder their proceeds in South Africa.
Included are the purchase of properties and goods (ranging from clothes to vehicles and
real estate), the establishment of companies and trusts for laundering the proceeds of
crime, the misuse of businesses, the use of casinos, and using the informal, cash-based
sector. The money laundering investigations that have occurred involved predicate
offences of fraud, theft, corruption, racketeering, and gambling.
Sophisticated criminals abuse front businesses and shell businesses to explain their affluence.
Cash proceeds are often retained in cash form and it sometimes changed into foreign currency by
foreign crime syndicates. These criminal enterprises regularly abuse financial institutions in
their laundering schemes, for instance by depositing their proceeds in bank accounts of family
members or by purchasing life insurance policies. The informal sector of the economy appears
to be vulnerable to abuse by launderers and in a number of cases the front business of the
criminal enterprises were operating in the informal sector.2
In 1992, South Africa government passed a statute that criminalized Money laundering. Its
initially was criminalized for drug trafficking. However, the scope of the offence was broadened
1 Combating International Crime in Africa, <http://www.
2 How Criminals Spend their Cash, http://www.business.iafrica.com/news/922035.htm.
- 47 - 47 - 47 -

in 1996. Currently, the main statutes are the Prevention of Organised Crime Act 1998 (POCA)
and the Financial Intelligence Centre Act 2001 (FICA). Although certain financial sector
obligations existed under previous legislation, the FICA creates a broad and more organised
framework of anti-money laundering measures.3
According to the POCA 1998, predicate crimes for money laundering now apply to all
underlying unlawful activity. This definition covers crimes both within and outside of South
Africa. Further, POCA 1998 covers not only all criminal offences, but also other activity that
contravenes South African law. The offence applies to own funds laundering, acts committed
intentionally (actual knowledge) or negligently (ought reasonably to have known). This is also
defined to include belief that a fact is reasonably possible. Criminal liability also extends to
legal entities, and there are severe sanctions for committing an offence.
Secondary Players
United States law enforcement authorities have observed that as money laundering schemes
become more complex, the perpetrators turn to the learned expertise of attorneys, accountants,
consultants and agent representatives to aid them in the movement of illegal currency. These
professionals, using shell corporations, nominees and fictitious records, devise elaborate paper
trails to disguise the true source of illegal income. During Fiscal Years 1999 and 2000, 131
attorneys, accountants and consultants were sentenced as a result of money laundering
convictions.
Similar to the United States investigative mechanism used to identify these secondary players,
South Africa has a number of agencies that investigate and prosecute cases involving money
laundering. The National Prosecuting Authority (NPA) provides a national framework for
prosecutions. Within the NPA, the Directorate of Special Operations (DSO), also known as the
Scorpions, investigates and prosecutes a range of more serious cases. The NPAs Asset
Forfeiture Unit (AFU) supports the police and other law enforcement structures in all aspects of
forfeiture. The South African Police Service (SAPS) investigates criminal activity generally, and
has allocated the responsibility for investigating money laundering to specific units. The South
Africa Revenue Service (SARS), which includes the Customs Service, is responsible for revenue
collection and the investigation of tax evasion and evasion of customs duties, and works closely
with law enforcement agencies on money laundering matters.
South Africas Government has granted investigators adequate legal means to obtain bank
records and other information and evidence regarding alleged offences. Investigators also have
sufficient legal tools for a wide range of investigative techniques, including controlled delivery,
undercover operations, and wiretaps.
While the offence of money laundering is broadly worded and both investigative and detection
agents have been established to detect the activities of these South African criminal enterprises, it
is a matter of concern that there have been only two money laundering convictions since 1996.4
3 FATF 2002-2003 Annual Report, http://www.oecd.org/fatf/ctry-orgpages/ctry-2a_en.htm (2002).
4 Ibid at 2.
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Gatekeepers/Government
In the United States (U.S.), pursuant to the 1999 Strategy, an interagency working group was
created to examine the responsibilities of professionals, such as lawyers and accountants, with
regard to money laundering. The 2000 Strategy directed the working group to continue its
review and to make recommendationsranging from enhanced professional education,
standards or rules, to legislationas might be needed. In April 2000, a meeting of
representatives from the G-8 countries was convened in Washington, D.C. to discuss this issue.
Because of the difficult legal and policy issues involved when considering the responsibilities of
lawyers and accountants in this area, the working group is continuing to study this issue and
prepare recommendations for the Steering Committee in 2001.
Similar to the U.S., the South Africa government has broad powers to provide a wide range of
mutual legal assistance (MLA) and extradition related to money laundering matters, and can
provide MLA even where there is no dual criminality. Thus, it can exchange information relating
to terrorist financing investigations, but cannot provide other types of assistance such as asset
seizure or extradition for terrorist financing. South Africa has acceded to the 1988 Vienna
Convention, has ratified the 1999 UN Convention on the Suppression of Terrorist Financing, and
is working to ratify the 2000 Palermo Convention. It has also entered into many bilateral treaties
and agreements, either for MLA or at a law enforcement level.
Under the POCA 1998, South Africa has mandated that all businesses that suspect that property
was the proceeds of an unlawful activity to make a report to the South African Police Service.
Further, under section 29 of the Financial Intelligence Centre Act 2001 (FICA), which came into
effect on 3 February 2003, all businesses are required to report to the Financial Intelligence
Centre (FIC) cases where they suspect that property is the proceeds of an unlawful activity.
Additionally, any transactions that have no apparent business or lawful purpose, are reportable
under the Act where they are relevant to tax evasion, or are otherwise related to money
laundering. The reporting obligation is therefore very broad. Similarly, the legal provisions
concerning protection from proceedings, and no tipping-off are comprehensive.5

5 FATF 2002-2003 Annual Report at 11.

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ANTI-MONEY LAUNDERING: The Players Primary, Secondary, Governments and

Organizations
Haidar (Haggar) Alsaleh
The United Nations and other international organizations such as Financial Action Task Force
(FATF) had always recognized the danger of organized crimes of drugs trafficking as well as
money laundering activities and as of recently organized crimes relating to terrorism activities.
The strong reason for the international communities involvement in combating
criminal activities by organized groups is the view that one country will not be able to
fight this kind of crimes without the cooperation of the international communities.
These groups include disciplined and savvy individuals. They run like a corporation with
strict rules of conduct. The rule of conduct is so thorough that some organizations apply these
rules literally for dealings among themselves, such as the following Thieves; Code example:101
A thief is bound by the Code to:
1. Forsake his relatives mother, father, brothers, sisters.
2. Not have a family of his own no wife, no children; this does not, however,
preclude him from having a love.
3. Never, under any circumstances work, no matter how much difficulty this
brings; live only on means gleaned from thievery.
4. Help other thieves both by moral and material support, utilizing the commune
of thieves.
5. Keep secret information about the whereabouts of accomplices (i.e., dens,
districts, hideouts, safe apartments, etc.).
6. In unavoidable situations (if a thief is under investigation) to take the blame for
someone elses crime; this buys the other person time of freedom.
7. Demand a convocation of inquiry for the purpose of resolving disputes in the
event of a conflict between oneself and other thieves, or between thieves.
8. If necessary, participate in such inquiries.
9. Carry out the punishment of the offending thief as decided by the convocation.
10. Not resist carrying out the decision of punishing the offending thief who is
found guilty, with punishment determined by the convocation.
11. Have good command of the thieves jargon (Fehnay).
12. Not gamble without being able to cover losses.
13. Teach the trade to young beginners.
14. Have, if possible, informants from the rank and file of thieves.
15. Not lose your reasoning ability when using alcohol.
16. Have nothing to do with the authorities (particularly with the ITU
[Correctional Labor Authority], not participate in public activities, nor join any community
organizations.
17. Not take weapons from the hands of authorities; not serve in the military.
18. Make good on promises given to other thieves.
Russian Connection
101 Russian organized crime code of conduct: http://members.tripod.com/~orgcrime/ruscali.htm.
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Of particular interest is the Russian organized crime. This group is with large amounts of
money as a result of looting, fraud, extortion, and other criminal activities. These groups are
taking advantage of unregulated and secretive Caribbean banks to launder their money. They use
elaborate schemes and some not much elaborate but taking advantage of the secretive banking
systems.102
St. Maarten in the Netherlands Antilles is a duty-free zone, and the relative lack of
customs formalities makes it easier to bring in large amounts of cash. The government recently
enacted legislation against money laundering. But according to a March U.N. study of money
laundering in the Caribbean, reporting of suspicious transactions is still voluntary in St. Maarten.
The same study found 450 banks in the Cayman Islands with assets of about $400 billion, or
about $15 million for each of the nations 26,000 residents. Only 68 of the offices have staff in
the Cayman Islands, the study said, while the vast majority have representative offices or brass
plate offices, and some only exist on paper. While the problem is said to be widespread, U.S.
and British officials are focusing their concern over Russian organized crime activities on
Antigua. Several Caribbean law enforcement officials said they no longer share narcotics or
money laundering intelligence with the Antiguan government. Everything we give them is
compromised, said one Caribbean official.103
These Russian groups are so connected that some of their activities related to drug trafficking
from South America as well as other groups such as the Italian Mafia. Members of this organized
group include previous government and KGP officials.
Narcotics
Even though trafficking in narcotics is a serious business, sometimes it is as innocent as
satisfying the daily necessities of life, as in the case of bartering narcotics in Pakistan and
Afghanistan for foodstuffs such as vegetable oils.104
Many methods are used to clean this kind of money, one of the key ones is where a broker would
have a pool of funds in the target country such as the USA, where the broker sells or exchanges
the money for legitimate trades.
Another purpose the authorities have interest in the narcotic money is Taxation. As an
example, The IRS Narcotics Related Financial Crimes Program seeks to reduce the profits and
financial gains of narcotics trafficking and money laundering organizations that comprise a
significant portion of the untaxed underground economy.105
Sicilian/Italian Mafia

102 Russian Crime Finds Haven in Caribbean: http://www.washingtonpost.com/wpsrv/inatl/longterm/drugs/oct/caribbi.htm.

103 See supra note 1.
104 International Narcotics Control Strategy Report:
http://www.state.gov/g/inl/rls/nrcrpt/2003/vol2/html/29910.htm.
105 See supra note 3.

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Also known as (La Cosa Nostra) originating from the Central and Eastern Europe. These groups
are very efficient in trafficking heroin and cocaine and also use its worldwide network advantage
in the U.S. and the rest of Europe.
This group also is known to be the money broker for less known groups. Or as a partner
in crime for other groups such as the Russian Mafia. The Italian Mafia in recent years are
building on the success of prior years in many countries around the world including their favorite
target businesses such as the construction industry, utilizing resources from the many other mafia
establishments, to buy material supplies.
Turkish Mafia
Turkey is becoming a major hub for drug trafficking as well as money laundering in and
out of Europe. The majority of the European heroin trade passes through Turkey. South Cyprus
and North Cyprus, a neighboring jurisdiction that is known to have lax laws and open borders
making it much harder for law enforcment to stop this new avenue for laundering money.
Chinese Mafia
Chinese Mafia also known as Triads specializes in endangered species trade. This is a
large and very disciplined network of individuals. New trends seem to be the underground
market to transfer money between Taiwan and China. Another outlet for the money laundering is
Vietnam where it is believed that the Chinese are investing and sponsoring large projects in that
country.
Japanese Mafia Yakusa
The law in Japan with regards to money laundering seems to be behind the time. Money
Laundering Laws are lacking in South East Asia, but Japan seems to be exceptionally behind the
time.
This group is considered to be one of the historical groups similar to the Chinese Mafia.
Colombian Narco-Traffickers
Over 640 metric tons of cocaine is trafficked out of South America and into the United
States every year. Colombian heroin account to a good part of that and demand higher prices
since it is considered better quality, this results in over $2.5 billion funneled back into
Columbia.106
These is so much money involved that unusual cases are detected in unexpected entities:
Unusual money laundering cases are becoming more commonplace as the lure of such large
sums of money become more and more tempting. Just last month in New York City, a rabbi was
indicted for taking cash proceeds from Colombian drug traffickers and, for a 15 percent
commission, running them through the bank accounts of a synagogue and a religious school. A
second rabbi was indicted in the same case for laundering money by writing checks from the
same accounts to businesses that were known fronts for the Colombian drug dealers. The rabbis
106 Taking the Profit Out of Drug Trafficking: The Battle Against Money Laundering:
http://commdocs.house.gov/committees/judiciary/hju58953.000/hju58953_0F.htm.

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were also indicted for providing $3.4 million from U.S. and Swiss bank accounts to buy an
aircraft for the Colombian drug traffickers.107
It is estimated that the average immigrant family from Colombia in New York City earns
$27,000 a year before taxes; while the amount sent to Colombia by each family each year is over
$50,000,108 indicating that money transfers is used for laundering purposes.
Jamaican Posse
They are known to be as a large and multi-state drug trafficking organization mostly involved in
the Crack market.
There are two basic Jamaican Posses, the Spangler Posse and the Shower Posse. 109
All Posses are politically aligned with either the Peoples National Party (PNP) (socialistic
tendencies rumored to be aligned with Fidel Castro) or the Jamaican Labor Party (JLP)
(reportedly aligned with the U.S. and CIA). The Spangler Posse is aligned with PNP, and the
Shower Posse is aligned with JLP.110
Posse members are known for violent activities that include drive by shootings, targeted towards
other competing gangs or anyone that comes between them and their goal.
Gatekeepers: Attorneys, Accountants and Counselors
Many countries such as the U.S. and the UK making intermediary individual also
responsible for the act of money laundering.
The new recommendation from the FATF includes revised plan for its 40
Recommendations against money laundering. This revision is the first in 14 years so as to
include anti-money laundering measures for non-bank financial businesses such as real estate
agents, dealers in precious stones and metals, accountants and lawyers, and trust and company
services providers:111
1. Real estate agents when they are involved in transactions for their client concerning the
buying and selling of real estate.
2. Dealers in precious metals and dealers in precious stones when they engage in any
cash transaction with a customer equal to or above the applicable designated threshold.
3. Lawyers, notaries, other independent legal professionals and accountants when they
prepare for or carry out transactions for their client concerning the following activities: Buying
and selling or real estate; Managing of client money, securities or other assets; Management of
banks, savings or securities accounts; Organization of contributions for the creation, operation or
management of companies; or Creation, operation or management of legal persons or
arrangements, and buying and selling of business entities.
4. Trust and company service providers when they prepare for or carry out transactions
for a client concerning the activities listed in the definition.
107 Taking the Profit Out of Drug Trafficking: The Battle Against Money Laundering:
http://commdocs.house.gov/committees/judiciary/hju58953.000/hju58953_0F.htm.
108 See supra note 7.
109 The Squad Room: http://www.brooklynnorth.blogspot.com/2001_07_01_brooklynnorth_archive.html.
110 See supra note 7.
111 Forty recommendations: http://www.fatf-gafi.org/pdf/40Recs-2003_en.pdf.

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Corrupt Government Officials

Corruption used to be internal problem to the country with the corrupt official. But in this
modern ear this is no longer the case since violation of the internal laws or lack of it, could be
easily transformed into an international problem.
Official corruption is a problem that most commonly is associated with South American
countries. But a new trend developing where corrupt officials are appearing in Eastern Europe
and the Old Russian Republics.
It is understood that each country must have strong laws and better enforcement against
corruption as such the U.S. had become the twentieth nation to ratify the Inter-American
Convention Against Corruption. This Convention binds signatory nations to criminalize a wide
range of corrupt acts, including bribery of public officials, and was the first multilateral
agreement against bribery to be adopted anywhere in the world. 112 Also 34 nations signed and
23 countries have ratified the Anti-Bribery Convention of the OECD, including the U.S. This
convention monitors governmental implementations of anti-bribery legislation with independent
official entities such as the U.S. Inspector General.
CHAPTER 3: TRENDS AND TYPOLOGIES IN MONEY LAUNDERING
FATF 1990
Typologies: use of cash and need for cash conversion into larger denominations; banks
and banking systems; use of currency conversion ATMs; currency conversion centers;
precious metal exchanges; cash shipments abroad; use of off-shore corporations and other
corporate entities.
Solutions: The Vienna Convention of 1988 dealing with drug trafficking and money
laundering; The Basal Statement of Principles of 1988 outlining ways to combat money
laundering through the banking system; various national programs outlawing money
laundering; bank secrecy laws and reporting requirements; suspicious transaction
reporting and reporting transactions over a certain amount; 40 Recommendations.
Trends: Increased drug trafficking.
Geographic locations and concerns: Southeast Asia, South America; drug trafficking. Initial
membership consists of Summit participants (United States, Japan, Germany, France, United
Kingdom, Italy, Canada, and the Commission of the European Communities) and eight
additional countries (Australia, Austria, Belgium, Luxembourg, Netherlands, Spain, Sweden and
Switzerland).
FATF 1991
112 Remarks By Treasury Deputy Secretary Stuart E. Eizenstat Before the Anti-Corruption Summit 2000:
http://www.ustreas.gov/press/releases/ls895.htm.

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Typologies: use of cash and need for cash conversion into larger denominations; banks
and banking systems; use of currency conversion centers; precious metal exchanges; cash
shipments abroad; purchase of casino chips; purchase of antique firearms; purchase of
property through legal profession; double invoicing.
Solutions: Agree to continue FATF for 5 years; 40 Recommendations implementation by
all members, with most members already implementing the Recommendations through
legislative means; proposal of blacklist of non-cooperating countries of several or all of
the Recommendations, but placed responsibility of such a list in each jurisdiction based
on local laws and concerns; cooperation between law enforcement agencies; reporting
requirements; development of a contact list with the UNIDCP to facilitate cross-border
searches and seizures; development of a white list of FATF-compliant countries to
assist financial institutions; peer pressure; self-monitoring;
Trends: Increased drug trafficking; use of regulatory havens.
Geographic locations and concerns: Southeast Asia, South America; regulatory havens (mostly
dependent or loosely associated with FATF members); drug trafficking. Membership increased
to include: Denmark, Finland, Greece, Hong Kong, Ireland, New Zealand, Norway, Portugal,
Turkey and the Gulf Co-operation Council.
FATF 1992
Typologies: use of cash and need for cash conversion into larger denominations; banks
and banking systems; currency conversion centers; precious metal exchanges; cash
shipments abroad; lawyers using bank secrecy and attorney/client privileges to protect
launderers.
Solutions: Formal association with OECD; implementation of 40 Recommendations;
only ten FATF members ratified Vienna Convention out of twenty required for formal
implementation; mutual evaluation process; interpretive notes to the Recommendations.
Trends: Non-compliance of non-bank institutions and reporting requirements for
fiduciary transactions.
Geographic locations and concerns: Caribbean; Central and Eastern Europe; Pacific;
membership increased to all OECD countries with inclusion of Singapore and Iceland.
FATF 1993
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Typologies: same continued use of previous typologies discussed, such as use of cash
and need for cash conversion into larger denominations; banks and banking systems; use
of currency conversion ATMs; currency conversion centers; precious metal exchanges;
cash shipments abroad; use of off-shore corporations and other corporate entities; use of
retail shops and import-export companies; control of legitimate established companies to
commingle funds; increase in the laundering of non-drug smuggling proceeds from arms
smuggling and white collar crimes.
Solutions: Annual self-assessment exercises of members and detailed mutual evaluation
process of each member to monitor compliance with implementation of the 40
Recommendations; additional interpretive notes to the 40 Recommendations rather than
changing them; use of controlled delivery as law enforcement technique; cooperation
with SWIFT for identifying originator of wire transfers.
Trends: Increased arms smuggling and white collar crime.
Geographic locations and concerns: Caribbean; Central and Eastern Europe; Asia.
FATF 1994
Typologies: use of cash and need for cash conversion into larger denominations; banks
and banking systems; use of currency conversion ATMs; currency conversion centers;
precious metal exchanges; cash shipments abroad; use of off-shore corporations and other
corporate entities.
Solutions: Missions and seminars in non-member financial centers and creation of a
FATF for Caribbean States; close cooperation with UNIDCP and INTERPOL; nearly all
members have enacted laws making money laundering an illegal act; increased
transparency of corporate bodies.
Trends: Increased arms smuggling and white collar crime; trafficking in animal hormones;
prostitution; joint ventures with money launderers and financial professionals; underground
banking structures.
Geographic locations and concerns: Eastern Europe, South America.
FATF 1995
Typologies: casinos; real estate purchases; corruption of banking officials; underground
banking systems in Asia; bankruptcy, financial and advance fee fraud; single premium
life insurance policies; import-export businesses.
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Solutions: Ongoing cooperation between member jurisdictions sharing crime

information; seizing assets; recognizing money laundering as an extraditable offense;
coordinating with Western Union for money transfers.
Trends: Russian organized crime; use of non-financial businesses (gambling houses; bookies,
antique dealers); increased uses of the bureaux de change.
Geographic locations and concerns: Eastern Europe and Russia; creation of the FATF Secretariat
for the Asian Region.
FATF 1996
Typologies: use of cash and need for cash conversion into larger denominations; banks
and banking systems; use of currency conversion ATMs; currency conversion centers;
precious metal exchanges; cash shipments abroad; use of off-shore corporations and other
corporate entities.
Solutions: Extending money laundering predicate offenses beyond narcotics trafficking;
mandatory suspicious transaction reporting systems; expanded recommendations for
identifying customers; all non-bank financial institutions (bureaux de change) should be
subject to the same anti-money laundering laws or regulations as other financial
institutions; easing the burden of proof regarding the illicit origin of funds. 40
Recommendations revised.
Trends: use of new technologies for instantaneous, anonymous transactions.
Geographic locations and concerns: Eastern Europe, Russia, Turkey.
FATF 1997
Typologies: banks and banking systems; currency conversion centers; use of financial
professionals; e-money.
Solutions: Increasing focus on money laundering in non-FATF members; new SWIFT
optional data formatting; providing feedback to financial institutions; creation of FATF
website.
Trends: drug trafficking; use of e-money (stored value cards and internet/web based
transactions).
Geographic locations and concerns: Eastern Europe, Russia, Turkey, Middle East.
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FATF 1998
Typologies: use of cash and need for cash conversion into larger denominations; banks
and banking systems; use of currency conversion ATMs; currency conversion centers;
precious metal exchanges; cash shipments abroad; use of off-shore corporations and other
corporate entities.
Solutions: establishment of world-wide anti-money laundering network through
expansion of FATF membership, closer cooperation with FATF-based bodies, and closer
cooperation with relevant international bodies; almost all members of FATF are in
compliance with the 40 Recommendations; policies for dealing with non-complying
FATF members
Trends: use of gold market; conversion of European currencies into Euro; additional cooperation
with other groups (UN, Council of Europe), etc.
Geographic locations and concerns: Eastern Europe, Russia, Turkey, Middle East.
FATF 1999
Typologies: banks and banking systems; use of currency conversion ATMs; currency
conversion centers; precious metal exchanges; use of off-shore corporations and other
corporate entities.
Solutions: All members but one have ratified Vienna Convention of 1988, and all have
implemented the money laundering components of the Convention. Continuation of self
and mutual monitoring, showing steady progress in implementing 40 Recommendations.
Cooperation with IFAC to bring awareness of FATF to accountants. Increase
membership of FATF as long as certain minimum standards were met by potential new
members.
Trends: Increased use of gold market and internet banking.
Geographic locations and concerns: Japan still had not implemented over half of the 40
Recommendations, and Austria still had anonymous passbook savings accounts. Concerns over
money laundering with the introduction of the euro, particularly from 1/02 to 6/02. Increase in
the use of gold in the hawala/hundi parallel banking systems; use of internet banking; inability to
obtain information on beneficial owners of foreign corporations. Increased use of professionals
to create, run, and add a layer of respectability to money laundering schemes, and very little in
the way of suspicious activity reporting requirements on these professionals. Argentina, Brazil,
and Mexico were invited to attend subsequent FATF meetings.
- 58 - 58 - 58 -

FATF 2000
Typologies: banks and banking systems; currency conversion centers; precious metal
exchanges; use of off-shore corporations and other corporate entities; import/export.
Solutions: Continuation of development with FATF-style regional bodies throughout the
world, including CFATF, APG, PC-R-EV, ESAAMLG, and ECOWAS. UN Convention
against Transnational Organized Crime earned FATFs support. Twenty five criteria
approved by FATF for identifying non-cooperative nations.
Trends: On-line financial transactions (purchases, banking); alternative remittance systems
(hawala/hundi, Black Market Peso Exchange, and Chinese/East Asian systems); growing use of
corporations and financial professionals; trade-related laundering not associated with alternative
remittance systems.
Geographic locations and concerns: Argentina, Brazil, and Mexico were made members of
FATF.
FATF 2001
Typologies: banks and banking systems; currency conversion centers; precious metal
exchanges; use of off-shore corporations and other corporate entities; import/export.
Solutions: Continuation of development with FATF-style regional bodies throughout the
world, including CFATF, APG, PC-R-EV, ESAAMLG, ECOWAS, and GAFISUD. UN
Convention against Transnational Organized Crime earned FATFs support. Twenty five
criteria approved by FATF for identifying non-cooperative nations; ongoing development
of financial intelligence units (FIU) and suspicious transaction reporting (STR).
Obtaining records from the ISP for on-line banking. Including lawyers with other
financial intermediaries when their services are used for those purposes.
Trends: Growing use of the internet, use of trusts. Discussion on whether terrorist groups fall
under money laundering laws or other laws.
Geographic locations and concerns: Continued development of FATF-type of groups and other
international bodies.
FATF 2002
Typologies: Use of bearer securities.

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Solutions: Expansion of mandate to fight terrorism-linked money laundering. Eight

special recommendations against terrorism were adopted in addition to the 40
Recommendations previously provided. Voluntary self-assessment exercise by all
nations regarding implementation of eight special recommendations. Egmont group of
FIUs given observer status; EU amends 1991 European Council Directive on Prevention
of the Use of the Financial System for the Purpose of Money Laundering. INTERPOL
providing additional information to US and other agencies regarding terrorist related
money laundering.
Trends: Use of professionals; use of euro.
Geographic locations and concerns: South Africa invited to join.
FATF 2003
Typologies: Use of non-profit organizations (NPO) as source of funneling funds to
terrorist groups.
Solutions: 40 Recommendations revised a second time to address terrorist financing,
along with the Eight Special Recommendations. Emphasizing due diligence, as well as
professionals.
Trends: Emphasis on tracking terrorist funding.
Geographic locations and concerns: South Africa and Russia members.

- 60 - 60 - 60 -

Module 3B: Techniques, Typologies and Trends in Money Laundering*

Contents: (1) International and Local Definition for Money Laundering; (2) Stages of Money
Laundering; (3) 2003-2000 FATF Reports on Typologies and Trends in Money Laundering ; (4)
Conclusion
The aim of this submission is two fold:
1. To define money laundering both on the national and international arena.
2. To identify the techniques, typologies and trends outlined in the FATF reports depicting
money laundering activities.

International and Local Definition for Money Laundering

Money laundering according to the definition in the International Guide to Money Laundering:
Law and Practice is the criminal process whereby the proceeds from crime are hidden and
transformed by attempts to integrate them into the financial system in order to give them the
appearance of legitimate funds.1
Activities and persons constituting money laundering as defined by the U.S. Money Laundering
Statute, 18 USC 1956 are as follow in pertinent part:
(a)(1) Whoever, knowing that the property involved in a financial transaction represents the
proceeds of some form of unlawful activity, conducts or attempts to conduct such a financial
transaction which in fact involves the proceeds of specified unlawful activity
(A)(i) with the intent to promote the carrying on of specified unlawful
activity; or
(ii) with intent to engage in conduct constituting a violation of section
7201 or 7206 of the Internal Revenue Code of 1986; or
(B) knowing that the transaction is designed in whole or in part
(i) to conceal or disguise the nature, the location, the source, the
ownership, or the control of the proceeds of specified unlawful
activity; or
(ii) to avoid a transaction reporting requirement under State or Federal
law,

* R. LeWayne Johnson.
1 Council of Europe. Threat to Europe from Economic Crime, http://www.assembly.coe.int/Main.asp?link=http%3A
%2Fassembly.coe.i. (1997).

- 61 - 61 - 61 -

(2) Whoever transports, transmits, or transfers, or attempts to transport, transmit,

or transfer a monetary instrument or funds from a place in the United States to
or through a place outside the United States or to a place in the United States
from or through a place outside the United States
(A) with the intent to promote the carrying on of specified unlawful activity; or
(B) knowing that the monetary instrument or funds involved in the
transportation, transmission, or transfer represent the proceeds of some
form of unlawful activity and knowing that such transportation,
transmission, or transfer is designed in whole or in part
(i) to conceal or disguise the nature, the location, the source, the ownership,
or the control of the proceeds of specified unlawful activity; or
(ii) to avoid a transaction reporting requirement under State or Federal
law,.3
Stages of Money Laundering
Generally occurring in a series of transactions, money laundering is used to disguise the source
of financial assets so that those assets may be used without compromising the criminals who
seek to use the funds.
The Financial Action Task Force on money laundering (FATF) defines money laundering as
falling into three stages:
Placement: the process of placing, through deposits, wire transfers, or other means, unlawful
proceeds into financial institutions;
Layering: the process of separating the proceeds of criminal activity from their origin through the
use of layers of complex financial transactions; and
Integration: the process of using an apparently legitimate transaction to disguise the illicit
proceeds. Through this process the criminal tries to transform the monetary proceeds derived
from illicit activities into funds with an apparently legal source.4
Techniques, Typologies and Trends Outlined in the FATF Reports
The FATF report on money laundering typologies, outline trends and developments compiled by
law enforcement experts from its member countries.
The reports focus on several typologies to include securities being purchased or sold, accounts
manipulated, in an effort to cleanse criminal profits; money launderers using foreign exchange
dealers; the laundering of funds through reinsurance companies; casinos and insurance
companies being used to launder monies; criminal groups smuggling cash across borders via
purchasing businesses engaged in the shipment of goods and hiding dirty money inside the
3 18 USC 1956, http://www.trac.syr.edu/laws/18USC1956.html.
4 Financial Action Task Force. What is Money Laundering? http://www1.oecd.org/fatf.
- 62 - 62 - 62 -

product and the use of non-profit and charitable organizations in addition to informal money or
value transfer (IMVT) entities by criminal and terrorist organizations to launder money and illicit
proceeds.
1. 2003
The core of the 2003 report was the FATF focus on the use of non-profit and charitable
organizations by terrorist organization and other criminal organizations to launder money and
illicit proceeds from illegal activities. The report identified several methods employed by
terrorists/criminals in converting charitable and Non-Profit Organizations (NPOs) into money
laundering vehicles. One method is to establish an NPO with a legitimate purpose and use it to
channel funds to the terrorist organization. Another method identified in the report suggests that
the terrorist organization would infiltrate an existing NPO, having a legitimate purpose and use
their status in the NPO to funnel money into criminal ranks. The FATF recommended an
increase in the transparency of alternative remittance systems by encouraging national authorities
by bringing them under some sort of oversight.
2. 2002
The 2002 FATF report outlined a set of due diligence guidelines suggested for use by financial
institutions in an effort to detect and monitor suspicious activities that have been identified in use
to launder money by terrorist organizations and networks.
The 2002 report further the vulnerability of international corresponding accounts of major
financial institutions. Money launderers to gain access into the financial markets often utilize
correspondent accounts. The FATF suggested that this activity took effect in the layering phase
of money laundering.
The FATFs report drew a parallel between suspicious transaction reports (STR) and money
laundering cases. Such reports, according to the FATF are often the first-step in generating such
cases.
3. 2001
The 2001 FATF report advocated that financial institutions implement the element of duediligence of knowing your customer. The 2001 report recommended that in an effort of curving
money laundering, financial institutions develop and implement safeguards for investigating its
customers. By implementing the Knowing your customer strategy a financial institution could
obtain information about the customer and the customers transactions in a way of ascertaining
that funds being deposited into the various types of accounts lack an illicit origin.
4. 2000
The 2000 FATFs report focused on the continuing use and abuse of alternative remittance
systems by money launderers and criminal organizations. The report revealed a new trend used
- 63 - 63 - 63 -

for money laundering purposes during the annual typology exercise. This trend was the use of
easily obtained documents (by criminals) as a means of setting up accounts or other entities for
laundering purposes. The report cited temporary accounts as being another trend by criminals in
laundering money.
Further, in the 2000 report FATF published its first list of jurisdictions deemed to be
noncooperative in the global fight against money laundering (NCCT).
The
FATF used the following criteria to determine what jurisdictions would go on the list:

Loopholes in financial regulations;

Obstacles raised by other regulatory requirements;
Obstacles to international cooperation; and,
Inadequate resources for preventing and detecting money laundering activities.

Conclusion
The various reports concern countries that range from major drug producing and drug-transit
countries, where drug control is a critical element of national policy, to small countries or entities
where drug issues or the capacity to deal with them are minimal.
Combating this progressive activity will require attacking it from at least two fronts:

Fighting money launderers and

Strengthening anti-money laundering regimes globally.

This strategy will reduce financial crime by depriving criminals of the means to commit other
serious crimes. Further strengthening anti-money laundering regimes, particularly in the areas of
identifying the originators of international wire transfers, will impact terrorist financing as well.
At a minimum, strong anti-money laundering measures help to create a body of evidence that
exposes criminal behavior and help law enforcement identify perpetrators and build cases against
them that lead to their arrests and convictions.

- 64 - 64 - 64 -

3 FATF Discussion
The Financial Action Task Force has annual typologies, or round table discussions, to review and
discuss recent trends in the laundering of criminal proceedings, emerging threats, and effective
countermeasures.
FATF 1996-1997
Typologies (Discussions) Raised
Determinative percentages of money laundering activities within certain regions are
difficult to quantify. Rough estimates of the size of money laundering activities to the amount of
legitimate activities as anticipated the years losses to illegal activity. They further discussed
principle sources of illegal laundered proceeds including principle money laundering methods
detected in banking, non-laundering institutions, and non-financial transactions. They expressed
their concerns with non-FATF members due to their lack of counter-measures. Finally, E-funds
transfers and whether there are difficulties in identifying the ordering customer in e-funds
transfer transactions.
FATF 1998
Typologies (Discussions) Raised
The FATF focused its discussion to implement specific measures on the new methods of
payment fertile for money laundering. For example, electronic purse systems (electronic
transfer funds), banking on-line, and direct (distance) banking activities are emerging as new
technological advances, in which have not been contemplated as to properly regulation.
Discussions further included non-professional activities through fund transfer companies,
emerging threats, and effective counter-measures. Finally, the committee continued discussion of
regions without FATF members.
Implementing counter-measures would include how the existing laws could be adopted as
opposed to implementation of new legislation. Also, encouraging international assistance from
other FATF members to assist with implementing counter-measures. Other segments of concern
are the gold market, insurance sector. And money changing.
FATF 1999
Typologies (Discussions) Raised
The implementation of the single European currency (Euro), large denomination
banknotes, offshore financial centers, and potential use of the gold market in money laundering
operations dominated the discussions. Another issue was the new payment technologies such as
SmartCards and electronic funds transfers allow users to transfer monies without being
identified.
Many proposed solutions were discussed. For example, requiring designated jurisdictions
and countries to require owners of legal entities of offshore accounts to register . As to
- 65 - 65 - 65 -

disclose such information to global, investigative agencies dealing with offshore accounts. As
such, the Caribbean region remains an extreme concern of its offshore, financial centers and shell
corporations. The analysis and discussion of methods and trends virtually all FATF members
countries began with analysis of suspicious transaction reports.
FATF 2000
Typologies (Discussions) Raised
Online banking was discussed once again due to previous years concrete indicators.
Further, practical counter-measures had not been fully developed as to discuss. However, one
definite concern regarding online banking remains the decreased face-to-face interactions bank
clients. Thus, substantially identifying the online customer remains more difficult. Other issues
were company formation and agents and their services, and trade related activities and money
laundering.
But, the discussion of alternative remittance systems was important because the FATF
has recognized different regions have methods of money laundering. Some examples are: Black
market peso Exchange in North and South Americas. Another remittance system is the
Hawala/Hundi, a traditional method of money laundering in south Asia and India. Such methods
have been known to pre-date any Western methods of moving money illegally.
The United States has proposed certain solutions to the alternative systems. For example,
restricting such activities to authorized financial centers, imposing licensing requirements, and
more thoroughly regulating business in the regions.
As previously discussed, the FATF will seek assistance from its members to monitor
activities within their own region.
FATF 2001
Typologies (Discussions) Raised
The topics of discussion varied from online banking and Internet casinos (internet
gambling). The topic of Trusts was discussed along with other corporate vehicles dealing with
money laundering. Also, the duties of lawyers, notaries, and certified accountants dealing with
client consultation of financial services were discussed due to the increase of assistance from
such professionals to launder illegal monies.
Also know as gatekeepers, they will be held to a high standard to disclose any and all
illegal activities. The role of case verses other payment methods in money laundering schemes.
Finally, terrorist related monies by use of money laundering. On the recent events of 9/11 in the
United States, terrorist financing has become more of an issue to prevent any future terrorist
attacks by disrupting their finances.
Certain countries such as Japan and Canada have reinforced their anti-money laundering
regimes based upon the recommendations of previous FATF meetings. Other organizations such
as the Eastern and Southern Africa Anti-Money Laundering Group have generated reliable
information regarding money laundering in Africa and the Middle East.
FATF 2002
- 66 - 66 - 66 -

Typologies (Discussions) Raised

Terrorist financing led the discussions of concern at the annual meeting. The FATF
extended its remit to include terrorist financing and issued eight (8) Special Recommendations
for national governments to deal with global financing of terrorist activities.
Other issues were correspondent banking, bearer securities, negotiable instruments, and
the introduction of the euro banknotes. The euro banknotes were mentioned once again and
analyzed whether any vulnerabilities exists from the introduction of the monetary notes.
However, the Eurozone members are confident the current anti-money laundering systems are
adequate to detect any attempts to use the physical euro introduction to conceal laundering
operations.
FATF 2003
Typologies (Discussions) Raised
The topics of discussion included, once again, terrorist financing and money laundering
through the securities sector. The gold/diamonds markets in regards to money laundering,
insurance sector, and the use of credit/debit cards with money laundering.
The sectors of gold and diamonds have become a new sector of concern for money
laundering. According to FATF, it has determined, the primary sources of illegal funds
laundered through such markets are illegal narcotics, organized crimes, and smuggling.
Finally, the insurance sector remains a major area of concern, in which will warrant
further discussion in the future. Both this sector and securities sector has shown to be vulnerable
due to the lack of money laundering training to the agents.
FATF 2004
Typologies (Discussions) Raised
The major issues of concern were terrorist financing by the use of wire transfers, nonprofit organizations linked to terrorist financing, vulnerabilities of insurance companies of
terrorist financing, politically exposed persons, and the role of gatekeepers and nonprofessionals dealing with client money laundering. Professionals such as accountants and
attorneys are being closely monitored to ensure they do not provide any assistance to clients as to
launder their monies. Furthermore, they are obligated to report any client misappropriation of
monies or laundering of monies they have actual knowledge. The theme of terrorism dominated
the majority of the meeting, especially the potential activities that may financially assist
terrorists.
The insurance sector and the gatekeepers remains a continued concern requiring stricter
guidelines and continued commitment to encourage the development of information
technology systems that could look for objective indicators.

- 67 - 67 - 67 -

Anti-Money Laundering: Analysis of the FATF Reports*

CONTENTS
EXECUTIVE SUMMARY
1. 2003 Analysis
2. 2002 Analysis
3. 2001 Analysis
4. 2000 Analysis
5. 1998 Analysis
6. 1997 Analysis
7. 1996 Analysis

EXECUTIVE SUMMARY
The aim of this submission is to identify the following issues as they pertain to the FATF
reports of the years 1996 to 2003:

Which typologies are raised in each report?

What are the proposed solutions?
What trends are identified in each report?
What geographic locations and concerns are mentioned in each report?

The FATF report on money laundering typologies, outline trends and developments compiled by
law enforcement experts from its member countries.
The reports focus on several typologies to include securities being purchased or sold, accounts
manipulated, in an effort to cleanse criminal profits; money launderers using foreign exchange
dealers; the laundering of funds through reinsurance companies; casinos and insurance
companies being used to launder monies; criminal groups smuggling cash across borders via
purchasing businesses engaged in the shipment of goods and hiding dirty money inside the
product and the use of non-profit and charitable organizations in addition to informal money or
value transfer (IMVT) entities by criminal and terrorist organizations to launder money and illicit
proceeds.
* R. LeWayne Johnson.
- 68 - 68 - 68 -

2. 2003
The core of the 2003 report was the FATF focus on the use of non-profit and charitable
organizations by terrorist organization and other criminal organizations to launder money and
illicit proceeds from illegal activities. The report identified several methods employed by
terrorists/criminals in converting charitable and Non-Profit Organizations (NPOs) into money
laundering vehicles. One method is to establish an NPO with a legitimate purpose and use it to
channel funds to the terrorist organization. Another method identified in the report suggests that
the terrorist organization would infiltrate an existing NPO, having a legitimate purpose and use
their status in the NPO to funnel money into criminal ranks. The FATF recommended an
increase in the transparency of alternative remittance systems by encouraging national authorities
by bringing them under some sort of oversight.
2. 2002
The 2002 FATF report outlined a set of due diligence guidelines suggested for use by financial
institutions in an effort to detect and monitor suspicious activities that have been identified in use
to launder money by terrorist organizations and networks.
The 2002 report further the vulnerability of international corresponding accounts of major
financial institutions. Money launderers to gain access into the financial markets often utilize
correspondent accounts. The FATF suggested that this activity took effect in the layering phase
of money laundering.
The FATFs report drew a parallel between suspicious transaction reports (STR) and money
laundering cases. Such reports, according to the FATF are often the first-step in generating such
cases.

3. 2001
The 2001 FATF report advocated that financial institutions implement the element of duediligence of knowing your customer. The 2001 report recommended that in an effort of curving
money laundering, financial institutions develop and implement safeguards for investigating its
customers. By implementing the Knowing your customer strategy a financial institution could
obtain information about the customer and the customers transactions in a way of ascertaining
that funds being deposited into the various types of accounts lack an illicit origin.

4. 2000
- 69 - 69 - 69 -

The 2000 FATFs report focused on the continuing use and abuse of alternative remittance
systems by money launderers and criminal organizations. The report revealed a new trend used
for money laundering purposes during the annual typology exercise. This trend was the use of
easily obtained documents (by criminals) as a means of setting up accounts or other entities for
laundering purposes. The report cited temporary accounts as being another trend by criminals in
laundering money.
Further, in the 2000 report FATF published its first list of jurisdictions deemed to be
noncooperative in the global fight against money laundering (NCCT).
The
FATF used the following criteria to determine what jurisdictions would go on the list:

Loopholes in financial regulations;

Obstacles raised by other regulatory requirements;
Obstacles to international cooperation; and,
Inadequate resources for preventing and detecting money laundering activities.
5.

1998

In 1998 the FATF report focused on the use of offshore financial centers (primarily bank secrecy
locations) to launder illicit proceeds of criminal activity. FATF identified various nations that
have failed to cooperate with the OECD and FATFs recommendations on compliance.
6.

1997

The 1997 report focused on money laundering as being an aggressive and evasive activity. The
use of the internet and wire transfers, according to the FATFs report by criminals was a new and
emerging tool to launder illicit proceeds.
7.

1996

The 1996 report by the FATF had as its main focus the vulnerability of the securities market(s).
The report spoke to criminals using the securities market(s) as a means of layering their illicit
proceeds.

What geographic locations and concerns are mentioned in each report?

- 70 - 70 - 70 -

The various reports concern countries that range from major drug producing and drug-transit
countries, where drug control is a critical element of national policy, to small countries or entities
where drug issues or the capacity to deal with them are minimal.
The 2003 INCSR assigned priorities to jurisdictions using a classification system consisting of
three differential categories titled Jurisdictions of Primary Concern, Jurisdictions of Concern, and
Other Jurisdictions Monitored.
Module 3B: Techniques, Typologies and Trends in Money Laundering

Topic: 1. Topic:
Module 3B: Techniques, Typologies and Trends in Money Laundering
Cyber-Crime, Electronic Money Laundering and Critical Infrastructure Protection
Corruption - Private and Public
PLEASE COVER ALL ISSUES LISTED ABOVE!
2. memo must be 3 pages long
3. deadline
17th august
1) Cyber-Crime:
The Prefix Cyber relates to new technologies in general and especially the internet.
At the beginning of the spread of the internet and the rapid development of new means of
communication and interaction (e-mails, e-commerce etc.) based on the internet, the prefix
cyber was used to generally refer to this rapidly developing area. Apart from the euphoria
affiliated with it, there has also been a wide spread feeling of concern about the unforeseeable
developments and implications of these utterly new techniques.
It has been already indicated that the prefix cyber, having a rather science-fiction like
connotation, is these days mostly replaced by the term e-, which might be due to the fact that
these new techniques easily found their way into common day-life and are nowadays rather seen
as an useful replacement of, or better, an addition to well-known ways of interaction and
communication.
Cyber-Crime can therefore be understood as any crime related to these new techniques.
The FATF-reports show a similar development as outlined above. The early days were marked by
a profound concern considering cyber-crime and its relation to money-laundering. But, with
time progressing (and the slow down of the cyber hype), the reports focussed on the
characteristics of these new techniques and their actual occurrence in money laundering
schemes.
- 71 - 71 - 71 -

The Time of Awareness, FATF-report 1996:

. beyond conventional laundering techniques, the experts have become alert to new
developments occurring in the financial sector which may present significant money
laundering threats:
(iii) Emerging Threats: Banking Sector
24.
In addition to the more familiar money laundering methods discussed
above, the emergence of new payment technologies has presented new
challenges. The banking and financial services industry has been
developing and testing an array of new products, referred to generally as
cyberpayments, designed to act as cash surrogates or to provide
alternative means of effecting transactions.
29.

At present, the experts have no evidence to suggest that

cyberpayments technologies are being manipulated by criminal interests.
Still, there was general agreement that this issue must be addressed
directly. Given the speed with which the cyberpayments industry is
developing, and the fundamental threat its abuse would pose to existing
anti-money laundering mechanisms, the FATF cannot afford to wait until
the launderers have already begun to exploit cyberpayments products.
Rather, the experts were adamant that the FATF must be proactive,
working with the vendors and users of cyberpayments technology to
identify vulnerabilities, and to build the appropriate safeguards into system
design and operation.

The following reports referred to cyber-crime(s) more specifically with regard to money
laundering itself, which shall be discussed in detail later, and not as means of producing illicit
revenues.
FATF Report 1998:
Although many members stressed that there had been little innovation relative to
laundering, it was generally found that the new technology systems were in a phase of
steady development or even rapid expansion. In Sweden, one of the countrys largest
banks now has 100 000 customers with an account on the Internet, with the same 24-hour
services as those offered at the counter. An increasing number of banks have their own
website and some have even introduced virtual counters permitting most of the
conventional banking operations: consultation of accounts, transfers, etc. In some
countries (Belgium, for example) these services are at present confined to domestic
transactions.
b.

How may the new technology systems facilitate money laundering?

7.
Although no case of laundering has been detected in this sector, the experts
endeavoured to show what might be the risks posed by the new technologies. The fact
that no laundering operation has been identified to date may mean that the appropriate
services lack the necessary means and capability of detection or else that the new
payment technologies do not carry any particular laundering risks. However, this second
- 72 - 72 - 72 -

possibility should probably be discounted in view of several features of these

technologies such as the rapidity of transaction performance, the numerous opportunities
for anonymity that are offered, and the risk of a break in the audit trail and withdrawal
from the traditional banking system. The experts exchanged views on these questions in
regard to the following systems: electronic purses, banking on the Internet and direct
(distance) banking. Most members saw more inherent danger in Internet transactions than
in smart cards, although other delegations stressed the dangers of the latter.
14. Before introducing any countermeasures, law enforcement authorities should make
certain that such measures will be of a nature compatible with the real risks and the
constraints imposed on financial institutions and should engage in consultations with the
private sector for this purpose. If one is to avoid the emergence of a two-speed system of
anti-laundering action, with the traditional banking system on the one hand and the new
technology systems on the other, controls will havc to be adapted to the latter.
15. A number of countries have set up task forces on this question: in Australia, following
a 1996 report by AUSTRAC (Australian Transaction Reports and Analysis Centre) to the
Commonwealth Law Enforcement Board, a research group on electronic trading has been
established to provide advice to the Board and Government. In Belgium, a task force on
the Internet has been set up by the Minister of Justice, notably to study prevention and
indictment of all forms of criminal action committed on the network. In Sweden, a
government commission is currently working on various problems connected with
electronic money, including money laundering, and has produced a partial report. The
final report is scheduled for the end of July 1998.
In conclusion, cyber-crime itself seems not to be a major point of concern in FATFreports until today. After a period of utter awareness of the new cyber-developments
and a considerable fear of being outwitted and overtaken by the complexity and speed of
these fast developing techniques, there has been no further proof of cyber-crimes being
a new major threat to modern society. Either the awareness led to an effective prevention,
criminals have not taken a liking for cyberspace or ,as stressed in some reports, cybercrimes are due to their nature hard to detect.
The author tends to see a parallel in recent economic developments. After a period of
exaggerated enthusiasm in almost any firm that started doing cyber-business, a major crash
took place, proving, that there is no such thing as a cyber-space paved with golden tiles. Major
concerns with regard to cyber-space as a new haven for criminal action seem to have vanished
in the aftermath of the crash. The internet and its affiliated techniques are a new form of
communication but not a dimension.

2) Electronic Money Laundering:

- 73 - 73 - 73 -

It has already been mentioned that, from the very beginning of the evolving internet business,
new techniques were eyed critically. Even before any misuse of electronic transactions took
place, FATF Members were considering possible threats and scheming countermeasures.
The following excerptions therefore highlight POSSIBLE THREATS as outlined in the FATF
reports.
FATF report 1997:
However, it was agreed that the application of new technologies to electronic payment
systems is still in its infancy, and that how these systems develop will depend on a
combination of the effectiveness and efficiency of these technologies, the market and
consumer acceptance. Therefore, it is premature to consider prescriptive solutions to
theoretical problems. However, it is important for law enforcement and regulators to
continue to work to understand the issues that need to be considered and perhaps
addressed as markets and technologies mature.
FATF report 2001:
New payment technologies such as the electronic purse and Smartcards have been
considered in previous FATF typologies work as these systems were first being developed
and tested.17 A few of the FATF delegations mentioned these technologies as still being
of concern for the future. However, the implementation of such systems has remained
relatively limited up to now, and no new vulnerabilities have therefore been identified in
this regard.
Society for Worldwide Interbank Financial Telecommunications, the leading international
payment and messaging network.
See FATF-VI Report on Money Laundering Typologies, 1996-1997. (see above)
FATF- report 2002-3:
This might use as an example for the change in the FATF approach to electronic transactions.
The securities sector on a global scale is characterised by its diversity, the ease with
which trading can now take place (through electronic trading for example), and the ability
to perform transactions in markets with little regard to national borders. These
characteristics make securities markets attractive to the ordinary investor looking for a
good return on his or her money. These same characteristics, along with the sheer volume
of transactions in many markets, also make the securities sector a potentially inviting
mechanism for the laundering of funds from criminal sources.
FATF- report 2000 - 2001:
The most comprehensive approach to money laundering schemes via the internet is included in
this report. A number of different possible ways of misusing electronic payments and internet
business forms is outlined and discussed.
(i)

On-Line Banking and Internet Casinos:113

113 FATF Report 1999: Internet gambling, which generates nearly $1.5 million a
month in this region, represents a major new business trend in Western Samoa,
Niue, Vanuatu, Tonga, and Fiji and another potential vulnerability for money

- 74 - 74 - 74 -

a.General
5. When the FATF examined on-line banking during last years typologies exercise, most
experts, along with their national delegations, expressed serious concern about the
vulnerabilities that the Internet might offer for money laundering. Concrete indicators for
such use by criminals were not available at that time, however, and practical
countermeasures had not been fully developed. For these reasons, the FATF decided to
address the on-line banking issue again during the FATF-XII typologies exercise and to
expand consideration of web-based laundering to other areas including gambling through
the Internet.
b.

Use of web-based financial services for money laundering

6.
During the past year, the number of financial institutions offering on-line banking
facilities has continued to grow. Virtually all FATF members now report a presence, if not
an increased one, of financial services offered in their jurisdictions through the Internet.
The range of services available also appears to be growing along with the acceptance
and usage of electronic payment systems by the general public. However, these trends
vary from one jurisdiction to another. In Hong Kong, China, for example, cash payments
are the norm, and, although banks offer on-line banking services, the public currently
favours the use of automated teller machines (ATMs) or direct contact with the financial
institutions. In Finland on the other hand, almost half of the population has access to
Internet, and some 85% of retail payment orders are transmitted to banks electronically.
7.
The discussions on on-line banking during the FATF-XII typologies exercise
reinforced many of the concerns raised during last years exercise. Transactions
performed by access to financial services through the Internet do not appear to present
specific risks for money laundering in and of themselves. Rather, it is three characteristics
of the Internet that together tend to aggravate certain conventional money laundering
risks: (1) the ease of access through the Internet, (2) the depersonalisation of contact
between the customer and the institution, and (3) the rapidity of electronic transactions.
Although these factors could be considered as contributing positively to the level of
efficiency and the reduction of costs of financial services, they also make customer
identification and routine monitoring of accounts and transactions by financial
institutions more difficult.
f.

Other ways of using the Internet to facilitate money laundering

12.
During last year's typologies meeting, the experts were not able to put forward
any concrete examples of money laundering through the Internet; however, they were
able to describe numerous instances in which various types of fraud had be committed by
laundering and financial crime in those jurisdictions.

- 75 - 75 - 75 -

this means. For the FATF-XII meeting, some jurisdictions were able to present cases in
which laundering is believed to have taken place using virtually the same methods found
in some of the previously examined fraud cases. In both types of cases, it appears that the
perpetrators take advantage of the near anonymity that can sometimes be achieved
through Internet communication on the Internet, as well as the difficulty in following the
path of communication links from one Internet server to another.
See FATF-XI Report on Money Laundering Typologies, 1999-2000, for further
discussion of this issue.
13. One method of money laundering through the Internet would be to establish a
company offering services payable through the Internet. The launderer then uses those
services and charges for them using credit or debit cards tied to accounts under his
control (located perhaps in an offshore area) which contain criminal proceeds. The
launderers company then invoices the credit card company which, in turn, forwards the
payment for the service rendered. The launderers company may then justify these
income payments for a service rendered (See Figure 1). In this example, the launderer
actually controls only the invoiced accounts and the company offering services through
the Internet. The credit card company, the Internet service provider, the Internet invoicing
service, and even the bank from which the illegal proceeds begin this process would
likely have no reason to believe there was anything suspicious about the activity, since
they each only see one part of it. Indeed, this method is virtually the same as used in
many fraud cases with the difference being that, in the latter, the bank accounts billed
belong to innocent third parties rather than the perpetrator of the scheme (See Figure 2).

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14. The problem for the investigator in dealing with such schemes is being able to follow
the links between the various parts of the scheme. The launderer can easily use fictitious
identities in setting up his presence on the web. If he takes advantage of the easy access
to Internet services in other geographical locations so as to ensure additional distance
between him and his activities, he can be sure that the lack of uniformity in maintaining
on-line communication records by service providers will also work to ensure his
anonymity. The fact that the various components of the scheme only see part of the
picture means that it will be very difficult to determine if illegal activity is taking place
without first obtaining a picture of the whole operation. In short, the criminal using the
Internet takes advantage of certain inherent aspects of the system to ensure that the whole
picture is not visible by the investigator. To understand this better, it is perhaps
worthwhile to provide some explanation of how Internet communication is organised.

- 77 - 77 - 77 -

Internet Fraud : Dial-up Connection Figure 2

Internet Service Provider
- Fake user ID
- Phone number

- Fake user ID
- Phone number

Billing records:
- IP number/time - Creditcard n
USD 5,000 payment cheque

Instruction to debit credit card holders

50 account owners
i.
Internet gambling
16. Given this scenario, it seems that Internet gambling might be an ideal web-based
service to serve as a cover for a money laundering scheme through the net. There is
evidence in some FATF jurisdictions that criminals are using the Internet gambling industry
to commit crime and to launder the proceeds of crime. Despite attempts to deal with the
potential problems of Internet gambling by regulating it, requiring licenses in order to
operate, or banning such services outright, a number of concerns remain in addition to the
inability to track the Internet links mentioned above. for example, transactions are primarily
performed through credit cards, and the offshore placement of many Internet gambling sites
makes locating and prosecuting the relevant parties more difficult if not impossible.
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Furthermore, gambling transactions, the records of which might be needed as evidence, are
conducted at the gambling site and are software-based; this may add to the difficulty of
collecting and presenting such evidence.

3) Critical Infrastructure Protection

None of the reports contained information of an intended protection of the infrastructure.
Problems addressed and dealt with were those arising from the appropriate use of the
infrastructure and not its destruction or disablement.
4) Corruption
a) Private
In this context corruption is used to gain access to institutions or individuals in order to start
a money laundering scheme.
FATF report 2002:
Given the size of the securities sector in some financial centres, it is reasoned by certain of
the FATF experts that such markets could be a destination for large-scale criminal laundering.
As mentioned above, to gain entry to the market, the launderer would require the assistance
of a willing securities professional. With the financial resources available to organised crime
groups, there is the inherent risk of corruption being used to gain entry to the sector. This
means that illegal funds could enter the financial system through, for example, a co-opted
professional service provider. As in other financial sectors, a further potential danger may be
that some securities practitioners fail to comply with their customer du diligence obligations
under the assumption that all customer due diligence obligations have already been
performed by the financial institutions, professional service providers or other parties that
send the funds to be invested.
b) Public Corruption as a source of money to be laundered and as a sign for an economic
society that attracts money launderers.
The following excerpts show that corruption can be a source of money that needs laundering
but, and this seems to be more important, that prevailing corruption is a sign for a society that
attracts money launderers and provides the means for successful money laundering schemes.
FATF report 1998
In South-East Asia the countries that seem to warrant particular attention are Indonesia
and Malaysia. Given the absence of appropriate legislation and the regime of strict bank
secrecy in Indonesia, money laundering is only part of the financial crime that prevails
there essentially in the shape of large-scale fraud and corruption.
Corruption remains the chief impediment to Mexicos anti-laundering efforts.
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FATF report 1999

These organisations are able to operate in Mexico by taking advantage of loopholes in
existing legislation. Corruption continues to hamper the countrys anti-money laundering
efforts.
Africa south of the Sahara is also considered by many of the FATF experts
to be vulnerable to money laundering, although, again, information on the region is
limited. A factor which contribute to this vulnerability is the increasingly widespread
activity of indigenous and, to certain extent, non-indigenous organised crime groups.
These groups can operate throughout the region due to lack of strong anti-money
laundering laws, combined with the endemic corruption, lack of training, and low pay of
government authorities. Narcotics trafficking appears still to be the primary single source
of criminal proceeds among the majority of FATF members. The various types of fraud
(fiscal, EU funds, value added tax, insurance, bankruptcy, etc.) are the next major source
of illegal funds, if not, in some jurisdictions, the primary source. Organised crime activity
generates a considerable amount of illegal proceeds that are laundered in or through
FATF member countries. Some members have noted with concern the increasing trend for
these crime groups to operate in loose alliances (Russian and Latin American groups, for
example). Written submissions from some of the members also mentioned an increase in
the number of cases in which laundering was related to official corruption or the funding
of international terrorism.
FATF report 2002:
Examples of senior government officials involved in corruption and other types of
proceeds generating crime are no longer rare occurrences. In the past few years several
high visibility corruption cases involving politically exposed persons or PEPs and the
laundering of vast amounts of criminal proceeds through various FATF jurisdictions have
been detected and investigated. Some of these laundering schemes may have been
facilitated by private banking operations. While the negative publicity arising from these
cases has undoubtedly increased awareness of and compliance with anti-money
laundering requirements within the private banking sectors of some countries, it is
unclear whether an adequate level of compliance has been reached universally.
Basic concepts
Private banking is the term used for preferential banking service provided to high net
worth individuals. Within the institution, this service usually entails a higher degree of
discretion and confidentiality for the client in comparison with the ordinary retail
customer. Financial institutions often separate private banking from other retail banking
operations as part of their customer segmentation strategy, that is, specific financial
services are marketed across a customer base according to the value of the service
offered. Private bank accounts can be opened in the name of an individual, a commercial
business, a trust, an intermediary or an investment company. These services are
administered by a relationship manager and his support team who sometimes are on call
24 hours a day and 7 days a week in order to build a strong rapport and intricate
knowledge of the clients financial affairs. The services offered by private bankers are
often self-administered and frequently go beyond the call of duty of a normal retail
banker.
support team who sometimes are on call 24 hours a day and 7 days a week in order to
build a strong rapport and intricate knowledge of the clients financial affairs. The
services offered by private bankers are often self-administered and frequently go beyond
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the call of duty of a normal retail banker. FATF members who provided information on
this topic were in agreement that private banking potentially has two main areas of
vulnerability that could be exploited by corrupt PEPs or their associates. The first is when
the private banker simply fails to apply appropriate and thorough due diligence to a
customer and his activities. A criminal or PEP will generally seek out private banking
services, as they offer the ideal opportunity for them, their family members, and close
associates to carry out sophisticated and/or complex financial transactions that will
further protect their illicit assets. Since a private bank is often involved in helping the
client to invest or protect his or her assets, a private bank that fails to apply due diligence
could find itself unwittingly assisting a corrupt politician to set up nominees and shell
companies, ensuring therefore that the beneficial ownership remains hidden. The use of a
professional intermediary to open an account on a clients behalf, as related by one
expert, can also enable a corrupt public official to open and operate an account virtually
anonymously.
FATF report 2003-4:
PEPs are individuals who are or have been in the past entrusted prominent public
functions in a particular country. New revelations of suspected PEPs involvement in
financial crime especially as related to corruption occur frequently in the press. PEPs,
when involved in criminal activity, often conceal their illicit assets through networks of
shell companies and off-shore banks located outside the PEPs country of origin. PEPs
were noted as frequently using middlemen or family members to move or hold assets on
their behalf. The techniques used by PEPs to hide assets are similar to those of money
launderers. Financial institutions may thus be able to detect potential illegal activity of
PEPs by applying enhanced due diligence methods similar to those used for countering
money laundering.
PEPs that come from countries or regions where corruption is endemic, organised and
systemic seem to present the greatest potential risk; however, it should be noted that
corrupt or dishonest PEPs can be found in almost any country.
The common techniques of money laundering:
1. Smurfing:If the criminal only needs to move a few million dollars a year, the simplest way to
launder cash without detection is "smurfing " having people deposit random amounts of less
than $10,000 into variously named accounts at many different banks. They will also buy bank
drafts from various financial institutions to circumvent thresholds for transaction reporting. Then
a middleman can ship the compact negotiables for deposit elsewhere. Due diligence rarely
catches this activity. Laundering of accounts held by relatives or friends is also popular.
2. Shipping Money Abroad. Sometimes they have to resort to shipping the money abroad in bulk
cash then arrange to get it back. Someone might smuggle cash to Mexico, deposit it in a United
States dollar account, draw out a draft, mail or carry it back into the U.S., deposit or cash it in a
bank, with no requirement for the bank to report the transaction. Sometimes less bulky items are
purchased domestically such as diamonds, gold or even precious stamps and other collectibles.
The criterion is that they be of high value in relation to bulk, making them physically easy to
- 81 - 81 - 81 -

smuggle as well as relatively easy to reconvert into cash at the point of destination. Commonly,
the proceeds will be wire transferred to accounts back in the U.S.
3. Placement Through Banks Banks and other financial institutions may unwittingly be used as
intermediaries for the transfer or deposit of money derived from criminal activity.
Suspicious activity may include; use of Letters of Credit and other methods to move money
between countries where such trade is inconsistent with the customer's usual business; customers
who make regular payments or receive wire transactions from countries which are tax havens;
frequent requests or use of travelers cheques, foreign currency drafts or other negotiable
instruments; reluctance to provide normal information or providing minimal or fictitious
information that is difficult or expensive for the financial institution to verify when applying to
open an account; using accounts with several financial institutions then consolidating them prior
to onward transmission of the funds; greater or unusual use of safe deposit facilities; companies'
representatives avoiding contact with the branch; and requests to borrow against assets held by
the financial institution or a third party, where the origin of the assets is unknown or the assets
are inconsistent with the customer's standing.
4. Use of "Pass Through" or "Payable Through" Accounts for Placement
Financial institutions must take care in opening accounts for foreign deposit-taking institutions
because a foreign bank may open a checking account to enable their clients, which the domestic
bank may not have sufficient knowledge of, to conduct financial transactions in Canada.
5. Placement Using Electronic Wire Transfers
Criminals are making extensive use of the electronic payment and message systems for wire
transfers. Modern financial systems permit criminals to transfer instantly millions of dollars
though personal computers and satellite dishes. The rapid movement of funds between accounts
in different jurisdictions increases the complexity of investigating and tracing the source of funds
especially when non-customers and non-correspondent banks transfer to equally unknown third
parties.
6. Placement Using Insurance Products
A particular area where the life insurance industry is vulnerable is the single premium product so
they must now keep the client application form for every purchase of an immediate or deferred
annuity and any insurance policy for which the client will pay $10,000 or more.
7. Placement Using Investment Related Transactions
Every person engaged in the "business of dealing in securities" must keep appropriate client data
and records. Unusual activity includes requests by customers for investment management
services (either foreign currency or securities) where the source of the funds is inconsistent with
the customer's apparent standing, large or unusual settlements of securities in cash form and
buying and selling a security with no discernible purpose.
8. Placement Through Collusion of Financial Institution Employees and Agents
Suspicious indications include changes in employee characteristics such as lavish life styles or
performance, remarkable or unexpected increase in business volume of selling products for cash;
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consistently high levels of single premium insurance business far in excess of any average
company expectation.
9. Placement Using Non-Bank Financial Services
There is a growing trend of money launderers moving away from the banking sector to the nonbank financial institution sector where the use of currency exchange houses and wire transfer
companies to dispose of criminal proceeds remain among the most often cited threats. The above
9 techniques of money laundering were obtained from an article posted on the website below;
http://www.crimespersuasion.com/Criminals/placement.htm
10. Hawala
An excellent example of non-bank financial services is known as "Hawala". It consists of
transferring money (usually across borders and in order to avoid taxes or the need to bribe
officials) without physical or electronic transfer of funds. Money changers ("Hawaladar") receive
cash in one country, no questions asked. Correspondent hawaladars in another country dispense
an identical amount (minus minimal fees and commissions) to a recipient or, less often, to a bank
account. E-mail, or letter ("Hundi") carrying couriers are used to convey the necessary
information (the amount of money, the date it has to be paid on) between Hawaladars. The
sender provides the recipient with code words (or numbers, for instance the serial numbers of
currency notes), a digital encrypted message, or agreed signals (like handshakes), to be used to
retrieve the money. Big Hawaladars use a chain of middlemen in cities around the globe. The
above is an excerpt from an online book; Sam Vaknin, Ph.D. Crime and Corruption Edited by
Lidija Rangelovska A Narcissus Publications Imprint, Skopje 2003 First published by United
Press
International

UPI,
it
can
be
viewed
below;http://www.suite101.com/files/topics/6514/files/corruption.rtf
Module 3B: Techniques, Typologies and Trends in Money Laundering

I. Cyber-Crime
This type of criminal activity is the inevitable effect of technological advances made over
the past 30 years. For example, the advent of the automobile opened the way for criminals to
target the automobile itself (e.g., auto theft) or use it to facilitate traditional crimes (e.g., the bank
robbery getaway vehicle). In addition, law enforcement had to learn to seize vehicles to search
them for evidence of some offense unrelated to the vehicle itself (e.g., the box of documents in
the trunk).114 A computer may be the target of the offense, such as when a criminal's goal is to
steal information from, or cause damage to, a computer, computer system, or computer network.
Second, the computer may be a tool of the offense. This occurs when an individual uses a
computer to facilitate some traditional offense such as fraud (e.g., a bank teller who once stole
money from a cash drawer may now use a computer program to skim money directly from
depositors' accounts). Last, computers are sometimes incidental to the offense, but significant to
114 Computer Crime and Intellectual Property Section, U.S. Department of Justice, Legislative Analysis of the
1996 National Information Infrastructure Protection Act, 2 Electronic Info. Pol'y & L. Rep. 240, 240 (1997),
available at http://www.cybercrime.gov/1030_anal.html.

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law enforcement because they contain evidence of a crime. Narcotics dealers, for example, may
use a personal computer to store records pertaining to drug trafficking instead of relying on oldfashioned ledgers.115
The Council of Europe Convention of Cybercrime of November 2001 was the first
international treaty on crimes committed via the Internet and other computer networks, dealing
particularly with infringements of copyright, computer-related fraud, child pornography and
violations of network security. It also contained a series of powers and procedures such as the
search of computer networks and interception.116
In essence, cybercrime is basically a term that refers to all criminal activities done using
the medium of computers, the internet, cyber space and the worldwide web.117
II. Electronic Money Laundering
Financial systems are emerging which allow economic value to be represented digitally
by electronic patterns. This 'electronic money', or e-money, can be exchanged through the use of
'smart cards' or over the Internet. Unlike stored value cards, e-money can pass immediately
between the two transacting on-line parties, without the need for an intermediary and works just
like paper money, without the risk, inconvenience and cost associated with handling,
administering and safeguarding traditional currency.118 The electronic money can also be
transferred and stored between computers, without an actual tangible smart card, such as
transferring money between computers via PayPal or a similar sogtware system.
Additionally, the growth in the use of computers, both personally and in business, is making it
easier for people and businesses of all skill levels to transfer money between each other without
actually have to use real paper money, or intermediaries. In particular, internet banking allows
customers to perform all transactions on the internet, with the exception of making cash deposits
or withdrawals.119 The use of other means to access the internet, including cell phones and
hand-held portable devices, financial transactions will become more numerous and less
dependent on the physical location of the parties, or the intercession of traditional payment
methods.120 Money can literally be beamed around the world and never take a tangible form, go
through traditional financial systems, or encounter traditional regulatory schemes.
III. Critical Infrastructure Protection

115 Id.
116 Convention on Cybercrime, Summary of the Treaty, July 2004, available at
http://conventions.coe.int/Treaty/en/Summaries/Html/185.htm.
117 Pavan Duggal, Whats a Cybercime, and What is Not, The Economic Times Online, February 16, 2003,
available at http://economictimes.indiatimes.com//articleshow/msid-37599958,prtpage-1.cms?.
118 Electronic Money Laundering: An Environmental Scan, Solicitor General, Canadian Department of Justice,
October 1998, available at
http://www.psepc-sppcc.gc.ca/publications/crim_jus/money_laundering_e.asp.
119 A Survey of Electronic Cash, Electronic Banking, and Internet Gambling, Financial Crimes Enforcement
Network, U.S. Department of the Treasury, 2000, available at http://www.fincen.gov/e-cash.pdf.
120 Id.

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In October 1996, the National Information Infrastructure Protection Act of 1996

was enacted as part of Public Law 104-294. It amended the Computer Fraud and Abuse
Act, which is codified at 18 U.S.C. 1030. Then on May 22, 1998, President Clinton
ordered the strengthening of the nation's defenses against emerging unconventional
threats to the United States to include those involving terrorist acts, weapons of mass
destruction, assaults on our critical infrastructures, and cyber-based attacks. The Critical
Infrastructure Protection Directive (Presidential Decision Directive (PDD) -63) called for
a national-level effort to assure the security of the increasingly vulnerable and
interconnected infrastructures of the United States.121 Following September 11, 2001, the
primary responsibility for infrastructure protection programs fell within the jurisdiction of
the Department of Homeland Security, as part of the National Homeland Security Act of
2002.
Additionally, in 2002 the U.S. enacted the Critical Infrastructure Information Act,
creating a framework that enabled members of the private sector to voluntarily submit
sensitive information regarding the nations critical infrastructure to the DHS. 122 This
program is known as the Protected Critical Infrastructure Information Program (PCII). 123
According to the DHS, critical infrastructure includes the assets and systems that, if
disrupted, would threaten our national security, public health and safety, economy, and
way of life. Although these industries, services and systems may be found in both the
public and private sectors, the Department of Homeland Security estimates that more
than 85 percent falls within the private sector.124
As has already been discussed, the banking sector is a critical part of the nations
infrastructure. The development of electronic banking, e-money, etc. has made money
laundering that much easier and accessible to individuals with access to a computer and a
telephone line.
Additionally, terrorism and money laundering are inextricably
interconnected, and the same internet used to launder money for terrorist groups is also
the same internet used to attack the electronic infrastructure of the U.S.; tracking this
money is of primary importance.125
121 Critical Infrastructure Protection, U.S. Department of Commerce, 1999, available at
http://www.osec.doc.gov/cio/oipr/CIP.html.
122 DHS Organization: Information Analysis and Infrastructure Protection, U.S. Department of Homeland
Security, available at http://www.dhs.gov/dhspublic/display?theme=52&content=3455.
123 DHS Launches Protected Critical Infrastructure Information Program to Enhance Homeland Security,
Facilitate Information Sharing, Press Release, U.S. Department of Homeland Security, February 18, 2004,
available at http://www.dhs.gov/dhspublic/display?content=3250.
124 Id.
125 See Implications of Homeland Security on Information Technology Infrastructure, EMC White Paper,
January 2003, available at http://www.emc.com/solutions/continuity/pdf/homeland_security.pdf?
emccomjsessionid=1054441094093910563. (membership required). See also Money Laundering and Financial

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IV. Corruption - Private and Public

In order to prevent corruption in the private and correspondent banking industries, as well as the
securities industry, the USA PATRIOT Act required U.S. financial institutions to exercise due
diligence when opening and administering accounts for foreign political figures, and deemed
corrupt acts by foreign officials as allowable basis for U.S. money laundering prosecutions. 126
Certain guidelines have been proposed when examining the effectiveness of the PATRIOT Act,
and improvement in the following areas are necessary: enforcement of anti-money laundering
technique, regulations and guidelines implementing due diligence requirements of the Act, issue
annual anti-money laundering assessments, strengthen post-employment restrictions, authorize
intra-bank disclosures, and increase transparency.127
Examples of public corruption include investigative agencies and personnel who are bribed or
extorted to look the other way. Typically, public officials will use their positions for private
benefit. Corruption deters investment and growth, decrease pubic expenditures that lend
themselves to corruption (public health projects, etc.), reduce the productivity of public
expenditure, reducing tax revenues, and reducing foreign investment.128

Cybercrime
The dictionary definition of crime may be defined as [a]n act that the law makes
punishable; the breach of a legal duty treated as the subject matter of a criminal proceeding. 129
There are a number of practical problems with this definition. For example, whether an act is
intentional, harmful to society or considered dangerous, and specifically defined in the criminal
law as prohibited and punishable must be understood for each jurisdiction.130
Similarly, the dictionary definition of cybercrime is [a] crime involving the use of a
computer131 It seems apparent that the dictionary definition is overbroad. The concept of
cybercrime does not encompass bludgeoning with a workstation or strangling with an Ethernet
cable. Instead, the emphasis should be on the use and misuse of computer, data, and/or network
resources.
Other aspects of criminal law that are relevant to cyber-crime and money laundering
include:
Crimes Report 2000, U.S. Department of State, available at
http://www.freedom.orlingrabbe.com/money_laundering/ml_intro2000.html.
126 Money Laundering and Foreign Corruption: Enforcement and Effectiveness of the PATRIOT Act, Senate
Subcommittee on Investigations, Committee on Governmental Affairs, Norm Coleman, Chairman, July 15, 2004,
available at http://www.levin.senate.gov/newsroom/supporting/2004/071504psireport.pdf.
127 Id.
128 The Fight Against Corruption: A World Bank Perspective, Inter-American Development Bank, May 1999,
available at http://www.iadb.org/regions/re2/consultative_group/groups/transparency_workshop6.htm.
129 Black's Law Dictionary (8th ed. 2004), crime.
130 A Report on Cyber-Crime and Money Laundering available at
http://www.yorku.ca/nathanson/Publications/e.htm#_Toc504182575.
131 Black's Law Dictionary (8th ed. 2004), crime.

- 86 - 86 - 86 -

various cultural concepts of crime,

usage of legal terms change over time,
few acts are universally criminal (malum in se),
criminal laws may protect property rights,
expansion of criminal law to economic areas,
principles of interpretation may not be expressed in the criminal code,
a trend interpret the scope of criminal law expansively,
novel technologies lead to novel abuses, which lead to novel restrictions ,
proactive/reactive legislation of abuses.132

The widely varying jurisdictional treatment of cybercrime and the ease of cross-boarder acts
make it a good area for the international harmonization. One such effort is the Council of
Europe Convention on Cybercrime.133
The Convention describes nine categories of cyber crimes:

illegal access,
illegal interception,
data interference,
system interference,
misuse of devices,
computer-related forgery,
computer-related fraud,
offences related to child pornography;
offences related to infringements of copyright and related rights.134

The United States was one of the original signatories of the Convention, but the U.S. Senate has
not ratified it yet.135 The U.S. Department of Justice position is that
Although we believe that the obligations and powers that the Convention requires
the U.S. to undertake are already provided for under United States law, the
Convention makes progress in this area by (1) requiring signatory countries to
establish certain substantive offenses in the area of computer crime, (2) requiring
Parties to adopt domestic procedural laws to investigate computer crimes, and (3)
providing a solid basis for international law enforcement cooperation in
combating crime committed through computer systems.136
132 A Report on Cyber-Crime and Money Laundering available at
http://www.yorku.ca/nathanson/Publications/e.htm#_Toc504182575.
133 FATF Report on Money Laundering Typologies 2000-2001 (released February 1, 2001) available at
http://www1.oecd.org/fatf/pdf/AR2001_en.pdf (requires Acrobat Reader).
134 Zara Sketon and Alan Williams, Council of Europes Convention on Cybercrime available at
http://www.dentonwildesapte.com/assets/C/CouncilOfEuropeCyberCrimeConv_Nov2001.pdf (requires Acrobat
Readr).
135 See Steve Lilienthal, Cybercrime Treaty: Blow The Whistle... Again available at
http://www.washingtondispatch.com/article_9447.shtml.
136 Frequently Asked Questions and Answers Council of Europe Convention on Cybercrime (Update as of
November 10, 2003) available at http://www.usdoj.gov/criminal/cybercrime/COEFAQs.htm#QA5.

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The treaty will come into force once five countries have ratified the agreement, and three of them
must be members of the Council of Europe. 137 The only three countries that have ratified the
agreement are Albania, Croatia and Estonia.138 This is interesting since these countries are not
usually considered leaders in technology or related crimes.
Electronic Money Laundering
A subset of cybercrime is electronic money laundering. Any financial activity
traditionally conducted in person may now be conducted online. Since the object of the FATF is
to weed out money laundering and terrorist financing, FATF typology reports are good resources
to follow the development of electronic money laundering.
The FATF first identified electronic payment systems as an emerging threat in 1996. 139
The document described early smart cards and electronic wallets as examples of the
technology.140 The experts pointed out that they had no evidence that the technology had been
misused.141
In the 1997 FATF report described in detail the various electronic payment systems
available.142 The main problem identified was customer identification. 143 In addition, an
appendix to the report contrasts the traditional banking system with the new electronic payments
systems.144 The conclusion was that it was premature to recommend prescriptive solutions to the
abuse of electronic payment systems because these systems were still in their infancy.145
The 1998 FATF revealed that electronic money laundering had been detected in some
member countries.146 The report identified three vulnerabilities of electronic purses: limitation of
the amount of a single transaction, distribution of cards by issuers connected to a bank account,
and restriction of card operations to a single national territory.147 This report also discussed
Internet banks that were operating illegally, and one that explicitly advertised anonymous
accounts.148 The existence of Internet casinos was discussed and the possibility of anonymous
gambling.149 Finally, the report discussed the possibility of money laundering through online
stock trading accounts.150
137 Id.
138 Id.
139 FATF-VII Report on Money Laundering Typologies (released June 28, 1996), 5 available at
http://www1.oecd.org/fatf/pdf/AR1996_en.pdf (requires Acrobat Reader). This document reminds me of the quip
that a person is not paranoid if someone really is out to get them.
140 Id.
141 Id. at 6.
142 1996-1997 Report of Money Laundering Typologies (released February 1997), 2 available at
http://www1.oecd.org/fatf/pdf/AR1997_en.pdf (requires Acrobat Reader).
143 Id. at 6.
144 Id. at 26.
145 Id. at 14.
146 1997-1998 Report of Money Laundering Typologies (released February 12, 1998), 7 available at
http://www1.oecd.org/fatf/pdf/AR1998_en.pdf (requires Acrobat Reader).
147 Id. at 8.
148 Id. at 11.
149 Id. at 13.
150 Id. at 87.

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[Note to professor: I am already well over the page limit. I will finish this topic but
would prefer to leave it to another classmate.]
Critical Infrastructure Protection
Critical infrastructure protection has to do with the protection of the financial system. 151
The U.S. Department of Treasury has an Office of Critical Infrastructure Protection and
Compliance Policy (Office).152 The Office seems most interested in using the Patriot Act to
stop phishing attacks, identity theft, and credit reporting. At first blush, these topics seem to
overlap the ambit Federal Trade Commission but the application of the Patriot Act distinguishes
the two administrative agencies.
Phishing attacks involve fraudulently inducing a consumer through email to reveal
personal information by impersonating a trusted Internet website.153 The magnitude of the
problem is not large compared to the Internet; with only about 600 and 1125 attacks occurred in
March and April 2004.154 On the other hand, the size of the Internet makes the potential for harm
very high.
Stopping identity theft and helping people fix their credit reports after identity theft
sounds great on paper. The Fair and Accurate Credit Transactions Act of 2003, however, has a
provision instructing the Secretary of the Treasury to conduct a study of the possibility of using
biometrics to reduce the incidence of identity theft. 155 Reading between the lines, this is just
another attempt at a biometric national identity card. On the other hand, the act allows
consumers to freeze their credit report from outsiders by requiring a PIN number be given for
access.156 Maybe the act is not all bad.
Corruption - Private and Public
Corruption is sometimes divided into three categories: public corruption, private
corruption and petty corruption.157 Public corruption has to do with government officials and
employees, private corruption has to do with business, and petty corruption has to do with
everyone else. Of course, each of these categories can stand alone or interact with the others.
Petty corruption is facilitating payments at a very low level and does not carry criminal
sanctions.158 Thus, petty corruption is essentially a loophole to money laundering laws.

151 Office of Critical Infrastructure Protection and Compliance Policy available at

http://www.ustreas.gov/offices/domestic-finance/financial-institution/cip/.
152 Id.
153 Lessons Learned by Consumers, Financial Sector Firms, and Government Agencies During th Recent Rise of
Phishing Attacks (May 2004), 1 available at http://www.ustreas.gov/offices/domestic-finance/financialinstitution/cip/.
154 Id.
155 69 F.R. 9895 (2004).
156 Credit Firms Resist Anti-ID Theft Measure available at
http://www.miami.com/mld/miamiherald/business/9297986.htm?1c.
157 Workshop 5: Government and the Business Sector available at
http://www.globalforum3.org/gf2/tekst/workshopvreport.htm.
158 Id.

- 89 - 89 - 89 -

Private corruption has to do with business. The most obvious example is bribery and it is
not uncommon for small and medium sized businesses to make bribes in foreign countries for
protection and other advantages.
Public corruption has to do with government officials. Public corruption statistics are
available from the IRS for the years 1999-2001.159
FY 2001

FY 2000

FY 1999

Investigations

95

108

111

Prosecution Recommendations

69

50

97

Indictments/Informations

70

56

76

Convictions

52

66

68

Incarceration Rate*

75.0%

79.7%

79.2%

Average Months to Serve (with Prison)

21

33

26

Average Months to Serve (All Sentenced)

16

26

21

Direct Investigative Time (DIT)

2.8%

2.9%

3.3%

*Includes confinement to federal prison, a halfway house, home detention or some combination
thereof.
While the conviction rates are very high, the total number of cases prosecuted is very low.
Judging from the examples listed on the IRS web page (e.g., postal employees, city councilmen,
etc.) the targets of such investigations seem to be of a very low level. Considering the high level
corporate corruption that has been revealed in recent years, it seems unlikely that high-ranking
government officials are completely clean, only not discovered or prosecuted.

CHAPTER 4: COMPARISONS OF AML REGIMES OF KEY NATIONS AND

OFFSHORE FINANCIAL CENTERS

159 Public Corruption, 2001 Criminal Investigation (CI) Annual Report available at
http://www.irs.gov/irs/article/0,,id=107645,00.html.

- 90 - 90 - 90 -

A. The INCSR Report of 2003 lists the following criteria for the evaluation of Anti-Money
Laundering Regimes of All Nations and Offshore Financial Centers (74-75, INCSR Report
2003):
All Nations
1. Has the nation criminalized money laundering for all serious crimes?
2. Has the nation criminalized beyond drugs? Or has the nation limited the offense to
narrow predicates?
3. Are there requirements of recording and reporting large transactions?
4. Are there requirements of maintaining records over a specific period of time, e.g., five
years or ten years?
5. Is there a requirement to report suspicious transactions? Are there uniform guidelines for
identifying suspicious transactions?
6. Is there a financial intelligence unit (FIU)? A FIU is a central reporting unit for receiving,
analyzing and disseminating to the competent authorities information on large value,
suspicious or unusual financial transactions that might identify possible money
laundering activity.
7. Is there a system for identifying and forfeiting assets?
8. Are there arrangements for asset sharing?
9. Does the nation cooperate with international law enforcement?
10. Does the nation regulate the international transportation of currency? Is there effective
monitoring of cross-border currency movements?
11. Is the nation a party to Mutual Legal Assistance Treaties (MLATs)?
12. Are there well-established non-bank financial systems, especially where regulation,
supervision and monitoring are absent or lax?
13. Are non-bank financial institutions covered by anti-money laundering legislation?
14. Does the nation offer disclosure protection safe harbor?
15. Is the nation a party to the 1988 United Nations Convention on drugs and money
laundering?
16. Has the nation criminalized the financing of terrorism?
17. Is there an international terrorism financing connection?
18. Do rigid bank secrecy rules obstruct law enforcement investigations or prohibit or inhibit
large value and/or suspicious or unusual transaction reporting by both banks and nonbank financial institutions?
19. Does the government and/or private institutions have know your customer
requirements to open accounts or conduct financial transactions, including the permitted
use of anonymous, nominee, numbered or trustee accounts?
20. Is there a requirement to disclose the beneficial owner of an account or the true
beneficiary of a transaction?
21. Are bearer monetary instruments allowed?
22. Are there patterns of evasion of exchange controls by legitimate businesses?
23. Is there ease of incorporation, in particular where ownership can be held through
nominees or bearer shares, or where the off-the-shelf corporations can be acquired?
24. Is there a lack of or weak bank regulatory controls, or failure to adopt or adhere to Basel
Committees Core Principles for Effective Banking Supervision, especially in
- 91 - 91 - 91 -

jurisdictions where the monetary or bank supervisory authority is understaffed, underskilled or uncommitted?
25. Is there an offshore financial center or tax haven banking system, especially where such
banks and accounts can be readily established with minimal background investigations?
26. Is there extensive foreign banking operations, especially where there is significant wire
transfer activity or multiple branches of foreign banks, or limited audit authority over
foreign-owned banks or institutions?
27. Are charitable organizations or alternate remittance systems, because of their unregulated
and unsupervised nature, are used as avenues for money laundering or terrorist financing?
28. Is there limited narcotics, money laundering and financial crime enforcement and a lack
of trained investigators or regulators?
29. Is there a free trade zone area where there is little government presence or other
supervisory authority?
30. Is there a pattern of corruption or a laissez-faire attitude toward the business and banking
communities.
31. Is there well-established access to international bullion trading centers?
32. Is there significant trade in or export of gold, diamonds and other gems?
33. Is there a large parallel or black market economy?
34. Is there limited or no ability to share financial information with foreign law enforcement
authorities?
B. Victoria Figge, the former head of the Financial Intelligence Unit of Panama, has proposed the
following criminal and civil criteria for evaluation of national AML regimes:
1. Criminal Aspects: a. Underlying crimes. Are the following predicate crimes?: 1. common
crimes; 2.membership in a criminal organization; 3.fraud 4.corruption 5. tax evasion 6.terrorism
7.drug trafficking. In other words, one must determine which of these categories of crime are
predicate crimes under the money laundering statues of the respective nation.
b. Criminal Sanctions: Consider the prison terms in years and any fines for crimes.
c. Which nations allow for seizure? For forfeiture? And by whom? For example, court, judge,
authority, public notary or prosecutor??
d. Which of the nations have Financial Intelligence Units (FIUs)?
e. Obligated Subjects under the Law: Banks?, Attorneys?, Accountants?, Brokers?, Exporters?,
Real Estate Brokers?, Travel Agencies?, Investment Advisors?
2. Civil Aspects: a. What is the Know Your Customer policy of each nation? What is required of
the client: a copy of the ID or profile of the client or both? Is identification of beneficiaries or
directors or both required? Are references required? Is a compliance officer required? Are
compliance and training required? Are CTRs required? Are SARs required?
b. Are there administrative sanctions such as fines or cancellation of licenses for money
laundering required?
c. Is banking secrecy an obstacle to the money laundering law?
C. Particular Criteria for Offshore Financial Centers (OFCs):
- 92 - 92 - 92 -

1. Does the OFC have offshore banks?

2. Does the OFC have trust and management companies?
3. Does the OFC offer IBCs/exempt and/or restricted companies?
4. Does the OFC offer bearer shares?
5. Does the OFC offer asset protection trusts?
6. Does the OFC offer insurance and re-insurance?
7. Does the OFC sell economic citizenship?
8. Does the OFC offer internet gaming?
9. Has the OFC criminalized drug money laundering and beyond drugs?
10. Has the OFC been listed in the FATF Non-cooperative Exercise?
11. Is the OFC a member of international organizations such as the Asia/Pacific Group,
Caribbean Financial Action Task Force, Council of Europe Select Committee on Money
Laundering, Eastern and Southern Africa Anti-Money Laundering Group, The Egmont
Group; Financial Action Task Force, Offshore Group of Insurance Supervisors (OGIS),
Observer to the OGIS, Offshore Group of Banking Supervisors, OAS/Inter-American
Drug Abuse Control Commission, International Organization of Security Commissioners.

INTRODUCTION
Here is my breakdown of the various criteria used to evaluate a nations anti-money laundering
efforts. I started originally just intending to list the various criteria gleaned from other posts on
the BlackBoard and through our reading, but I ended up adding my own personal biases to the
breakdown. I guess you can say its how I would approach anti-money laundering regimes if I
were King of the World.
The breakdown was divided into two primary sections, Internal Efforts by a Nation to combat
money laundering, and External Efforts, or the way on nation would deal with another on this
issue. Obviously, some of the Internal recommendations would overlap with the External; e.g.,
criminalizing money laundering would allow a nation to prosecute a money launderer, and seek
seizure/forfeiture of assets located outside the nation.
I.INTERNAL EFFORTS
There are measures that nations take internally to combat money laundering. These do not
require interaction with supra-governmental agencies or rely on the participation or coordination
with other nations. Special attention must be given to ensure minimal government intrusion into
to financial and business sectors, except when absolutely necessary. These measures can be
broken down into the following sub-categories:
A.

Legislative/Executive

1.
Criminalize money laundering for all serious crimes or limiting the offense to narrow
predicates.
2.
Enact measures to seize and confiscate the proceeds of all serious crime, but most
importantly those with the flavor of money laundering.
3.
Ensuring an adequate domestic system for the control and supervision of financial
institutions (bank and non-bank). This can be accomplished through national over-site boards,
- 93 - 93 - 93 -

agencies, departments, etc., or through private sector associations, as long as all financial
institutions are required to register/participate/license in order to operate.
a.
This also includes regulation, supervision, and monitoring non-bank financial
systems, and they should be required to participate in whatever over-site method is
developed for banks.
4.
Enact domestic legislation to implement treaties on money laundering. Any executing
legislation and/or treaty should have a sunset provision requiring periodic review by the national
legislature, so that changes can be made, or agreements revoked.
5.
Require domestic corporations to provide beneficial owner information to the
State/jurisdiction in which it is incorporating. Each State would maintain a database with
corporate, fictitious name, etc. information that is readily available to the public and searchable
by other States and the Federal government.
6.
Provision of narcotics, money laundering and financial crime enforcement and trained
investigators or regulators (i.e., a well trained FIU).
7.
Removal of parallel or black market items from the local economy. Alternative forms of
trade, such as the barter system, should not be discouraged. Prohibited items or contraband,
however, should be controlled.
8.
Intense monitoring of political influence by money launderers through campaign
contributions, donations, real estate purchases, etc. to prevent corruption.
9.
Enact procedures to detect counterfeit currency and other monetary instruments. This
should be a domestic entity or agency outside the auspices of any supra-governmental agency to
prevent loss of sovereignty or outside influence in a nations monetary market/supply.
B.

Judicial

1.
Actual enforcement of money laundering crimes, with emphasis on adequate punishment
for the crime.
2.
Seizure/forfeiture of property and assets pending the final outcome of criminal/civil
matters. If necessary, the eventual return of property to legitimate owner, or sale on the
courthouse steps, with proceeds to fund judicial administration and law enforcement. Due
process should be vigorously maintained.
C.

Private Sector

1.
Requiring financial institutions to identify all clients, including any beneficial owners of
property, and to keep appropriate records. The actual methods should be reserved to the financial
institution, with minimum standards outlined through legislation. The intent here is not to
legislate every aspect of business, but merely establish a set of guidelines that will allow the
private sector financial institutions to police themselves by implementing a comprehensive range
of internal control measures.
a.
Through the self-policing method, financial institutions should be required to
report suspicious or large transactions to the competent national authorities (i.e., the IRS).
b.
Restriction of bank secrecy rules to allow necessary law enforcement
investigation, with the protection of due process. This should be a domestic allowance;
i.e., financial institutions should not be required to directly disclose information to
- 94 - 94 - 94 -

foreign nations or supra-national organizations. If there is law enforcement issue,

financial institutions should only be required to disclose information to the appropriate
domestic law enforcement agency. Further disclosure of information can then be
safeguarded by due process and absolute necessity.
2.
Implementation of know your client requirements, and suspicious or unusual
transaction reporting requirements. These requirements, however, should not cast a chilling
effect on a customers right to handle money as he sees fit. A reporting requirement for money
transfers/deposits should not be so low as to require virtually every transaction be documented
and reported to a government agency. Additionally, know your client requirements should be
so intrusive as to require disclosure of non-vital information; e.g., name, address, social security
number.
a.
Although anonymous, nominee, numbered or trustee accounts should be
permitted, they should also meet the bare minimum know your client requirements. To
avoid abuse by money launderers, but to protect the right to conduct business
anonymously within the financial system, information requests for these types of
accounts should only be permitted through domestic law enforcement agencies, and only
through subpoena. This will allow judicial review of requests for anonymous
information while protecting due process (subpoenas can be quashed). In civil cases, the
process should also require the additional step of in camera inspections by a judge of any
information obtained through subpoena to prevent unnecessary disclosure of personal
information.
3.
An effective requirement to maintain financial records over a specific period of time.
Although the legislature should set a minimum period, the private sector should have the final
determination on the length of time to maintain records, due to costs, overhead, and logistics
involved in such a process. As record keeping becomes paperless, the private sector should
encourage longer periods of time, although purging records should continue to occur after the
expiration of the time limit. This would help protect the privacy of the clients and prevent a
centralized database of information from being developed.
4.
Develop sufficiently comprehensive laws dealing with charities, both domestic and
international. These organizations present a special case where particular attention must be paid,
especially in light of their putatively humanitarian purposes. These organizations must be
monitored while at the same time the government should not cast a chilling effect on the use of
charities for legitimate purposes.
5.
Implementation of guidelines for accountants, lawyers, commodities dealers (precious
metals, etc.), real estate agents, etc. It is assumed that each nation will have private sector
regulatory bodies, as well as governmental agencies overseeing these non-financial groups.
Again, guidelines should be proposed, and rules of professional conduct implemented, that take
into consideration both the right of the client to professional and confidential service, while
preventing the commission of a crime. In cases where there is a doubt as to which concern
should prevail, the rights of the client should always trump those of the state.
II.

EXTERNAL EFFORTS

A.

Treaties
- 95 - 95 - 95 -

1.
Establishment of international treaties or agreements. These should be kept to the bare
minimum necessary to participate in international efforts against money laundering, without a
sacrifice of national sovereignty or local control over all issues, cases, etc. A basis for these
treaties, agreements, etc. are the FATF 40 Recommendations, the Aruba 19 Recommendations
(CFATF), the OAS Model Regulations on Money Laundering, the Summit of the Americas
December 1995 Buenos Aires Communiqu Plan of Action, the European Directive on Money
Laundering, and the Basle Principles. These should be considered suggestions only, subject to
modification to fit a nations best interests.
2.
Effective monitoring of cross-border currency movements through agreements with other
nations. This would require the cooperation of all nations involved with the agreement. This can
most easily be accomplished through reporting requirements for large cash transactions, with the
understanding that no nation is required, but may do so voluntarily, to report transactions of
lesser amounts (such as a seizure of foreign currency by law enforcement in an amount less than
the minimum for reporting purposes).
B.

Administrative Practices

1.
Requirement of foreign corporations to register with a database, to include beneficial
owner information, before a corporation can be licensed to do business in a particular
jurisdiction. In a federal system of government, like the U.S., the database can be maintained by
each State (i.e., through the Secretary of State), but be coordinated for ease of search by each
other State or the Federal government.
2.

Provision of adequate audit authority over foreign-owned banks or institutions.

3.
Limited ability to share financial information with foreign law enforcement
authorities, so long as the due process safeguards established under the Internal section
are not violated. Some safeguards would include domesticating foreign warrants,
execution of warrants by local law enforcement agencies, judicial involvement to protect
due process rights, etc.
a.
Use of information standards such as those recommended by FATF and
SWIFT for electronic transfers, allowing certain key information to be easily
assimilated by other nations when necessary.
4. Monitoring of money laundering patterns, trends, typologies, and management pervasive in
the international community in order to detect trends nationally.
5. Recognition of property confiscation order issued by a foreign authority, providing that the
property would be subject to a confiscation order under national law, local judicial review, and
guarantee of due process.
CONCLUSION
As you can tell, I incorporated many of the major criteria into a list that attempted to take into
consideration a nations sovereignty, the protection of individual rights, while at the same time
attempting to discourage money laundering. Notice I did not say stop money laundering; as
long as there are financial institutions, there will be money laundering. A nation that makes it as
difficult as possible for laundering, without compromising its identity, traditions, culture, and
way of doing things, is well on its way to doing its part against money laundering. Just as
- 96 - 96 - 96 -

money laundering is an abuse of the financial systems of the world, oppressive and/or repressive
anti-money laundering practices can become abused by nations, political parties, agencies,
national and international organizations, etc. seeking to control the individual by controlling
individual finance.
Sources:
U.S.
Dept.
State,
Money
Laundering
and
Financial
http://www.freedom.orlingrabbe.com/money_laundering/ml_intro2000.html
http://www.state.gov/g/inl/rls/nrcrpt/2000/959.htm

Crimes,

2000,
and

U.S Dept. State, The Financial Action Task Force on Money Laundering, May 2001,
http://usinfo.state.gov/journals/ites/0501/ijee/fatffacts.htm
U.S. Dept. State, INCSR, Money Laundering and Financial Crimes, March 1998,
http://www.freedom.orlingrabbe.com/money_laundering/money97.html
Yahoo! Finance, Summary of FATF Report and
http://biz.yahoo.com/prnews/040614/phm042_1.html
OECD/FATF,
The
40
http://www1.oecd.org/fatf/40Recs_en.htm#Scope

Conclusions

for

Recommendations

Saudi Arabia,
(2003),

CRITERIA FOR THE EVALUATION OF AML REGIMES OF NATIONS

Submitted By: R. LEWAYNE JOHNSON, J.D.

Contents:
(1) Introduction; (2) Implementation of FATF Instruments; (3) Applicability of Filing of
SAR/Reporting Suspicious Activity; (4) Criminalizing Money Laundering activities; (5)
Financial Intelligence Unit Establishment Measures; (6) Ratification and Implementation of UN
Instruments; (7) Conclusion
Introduction
In an effort to stay abreast of the ever changing faces of the methods and techniques associated
with money laundering, the Financial Action Task Force (FATF an intergovernmental body
which sets standards, and develops and promotes policies to combat money laundering and
terrorist financing), has established recommendations that countries should put in place both
within their criminal justice system and their regulatory system to detect and combat money
laundering. Moreover, these polices/measures extend to financial institutes, businesses,
professions and international cooperation to form a comprehensive barrier in the fight against
money laundering activities and combating the funding of terrorist activities.
- 97 - 97 - 97 -

In 1996, the FATF recommendations were revised from the initial 1990 version to include
identifying evolving money laundering typologies. More than 130 countries have adopted the
1996 FATF recommendations which include 40 recommendations for combating money
laundering and terrorist financing.
Additionally, the FATF has provided 8 Special
Recommendations on terrorist financing. Endorsed by more than 130 countries and territories,
these recommendations serve as the international standards for combating money laundering and
the combating of financing of terrorism.1
Implementation of FATF Instruments
Nations are currently viewed through the scope of all the FATF recommendations. These
recommendations, nonetheless, set minimum standards for countries to use as a base to model
detailed procedures/systems based on the countries constitutional frameworks and particular
circumstances applicable to banks, non-bank financial institutions, or other businesses or entities
subjected to anti-money laundering obligations.
These instruments include the following measures:

Scope of the Criminal Offence of Money Laundering: Countries should used the UN
1988 Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances
and the UN 2000 Convention against Transnational Organized Crime as a threshold for
criminalizing money laundering.
Provisional measures and confiscation: Countries should ensure that their criteria for
establishing intent and knowledge in proving the offense of money laundering
comports with the standards outlined in the 1988 and 2000 Conventions. Additionally,
countries should ensure that criminal liability or civil/administrative liability attaches
to all legal persons.

Customer due diligence and record keeping and Reporting of suspicious transactions
and compliance: Countries should ensure that secrecy laws imposed by financial
institutions do not inhibit the implementation of FATF recommendations. Additionally,
countries should ensure that due diligence is taken using FATF recommended CDD
measures as guidance.

Other measures to deter money laundering and terrorist financing: In relations to

politically exposed persons, countries should ensure that appropriate risk management
systems are in place to ascertain whether the individual is a politically exposed person.
Involve senior management in the conducting and monitoring of business relations
with the person. Countries should ensure that measures are in place that allow
financial institutions dealing with cross-border correspondent banking to gather
sufficient information about a respondent institution, assess the respondent institutions
anti-money laundering and terrorist financing controls, document the responsibilities of

1 Financial Action Task Force on Money Laundering, The Forty Recommendations (2003). http://www.fatfgafi.org/40Recs_en.htm.

- 98 - 98 - 98 -

each institution and as it applies to payable-through accounts, coordinate with the

respondent bank on due diligence.

Additional recommendations full under the following subjects:

o Measures to be taken by financial institutions and non-financial businesses and
professions to prevent money laundering and terrorist financing

Measures to be taken with respect to countries that do not or

insufficiently comply with the FATF recommendations
Regulatory and supervision

o Institutional and other measures necessary in systems for combating money

laundering and terrorist financing.

Competent authorities, their powers and resources

Transparency of legal powers and arrangements

o International Co-operation

Mutual legal assistance and extradition

Other forms of co-operation

Applicability of Filing of SAR

Pursuant to FATF Recommendation 16, lawyers, notaries, other independent legal professions,
accountants, dealers in precious metals/stones and trust and company service providers are
required to comply with Recommendations 13 to 15 and 21. Recommendation 13 specifically
mandates reporting suspicious financial criminal activities to the financial intelligence unit
(FIU). Further, Recommendation 14 protects lawyers, notaries, other independent legal
professions, accountants, financial institutions, etc., from criminal or civil liability upon
reporting suspicious financial criminal activities to the FIU.
The exception, however to this provision/mandate is that where, information relevant to the
aforementioned requirements as applicable to attorneys, notaries, other independent legal
professionals, is subject to professional secrecy or legal professional privileges, these
professionals are not required to report their suspicions.
Criminalizing Money Laundering Activities
Recommendation 1 of the FATF Recommendations provides in relevant terms that countries
should criminalize money laundering on the basis of United Nations Convention against Illicit
- 99 - 99 - 99 -

Traffic in Narcotic Drugs and Psychotropic Substances, 1988 and the United Nations Convention
against Transnational Organized Crime, 2000.2
Further recommended by this section of the FATF Recommendations is that countries apply a
threshold approach to the crime of money laundering, with the threshold linked to either a
category of serious offenses or to the punishment of imprisonment applicable to the predicate
offense. Moreover, predicate offenses, according to FATF Recommendations 1, should
extend to conduct that occurred in another country, which constitutes an offense in that country
and which would have constituted a predicated offense had it occurred domestically.3
Financial Intelligence Unit Establishment Requirements
Where Recommendation 13 of the FATF Recommendations implies the mandate of the
establishment of a financial intelligence unit (FIU), Recommendations 26-32 go further to
specify the requirements of a FIU by countries and specify the perimeters/functions of the FIU.
Countries complying with the FATF recommendations should establish a FIU to serve as a
national center for receiving, analysis and dissemination of STR and certain other information
regarding money laundering and terrorist financing.
On the other hand, countries that do not or insufficiently comply with the FATF
Recommendations will be subject to the sacaintions and/ stipulations outlined at
Recommendation 21 and 22.
Ratification and Implementation of UN Instruments
The resolution issues contained in both the UN Convention against Illicit Traffic in Narcotic
Drugs and Psychotropic Substances (1988) and the UN Convention against Transnational
Organized Crime (2000) are mandatory when the UNSC acts under Chapter VII of the UN
Charter. This activity makes the resolution issues mandatory for all UN members. Therefore by
being a UN member, and noting that the UNSC was acting under Chapter VII of the UN Charter
in issuing the 1988 UN Convention, the resolution issues are mandatory on UN members.
Summary
The FATF is chartered with promoting anti-money laundering initiatives in all continents and
regions of the world and on the same accord, building a worldwide anti-money laundering
network. One of the strategies employed by the FATF in accomplishing the goal of its charter is
to work closely with other international organizations to develop a common methodology for
assessing the measures taken by jurisdictions to combat money laundering and to counter
terrorist financing.4
2 Ibid at 3.
3 Ibid at 4.
4 Financial Action Task Force on Money Laundering, Annual Report 2002-2003, (20 June 2003), http://www.fatfgafi.org/NCCT_en.htm.

- 100 - 100 - 100 -

One of the most important tasks of the FATF since its 2001 adoption of the Eight Special
Recommendations on terrorist financing was the completion of the Forty Recommendations for
combating money laundering. The FATF continues to make significant progress to fight money
laundering and terrorist financing.
Analysis of Criteria and Progress of North American and Latin American AML Regimes
Submitted By: R. LEWAYNE JOHNSON, J.D.
This paper summarizes progress by the Latin American AML Regimes and North America in
implementing their action plans to intensify work on issues of anti-money laundering and
combating the financing of terrorism (AML/CFT).
Nations are currently viewed through the scope of all the FATF recommendations. These
recommendations, nonetheless, set minimum standards for countries to use as a base to model
detailed procedures/systems based on the countries constitutional frameworks and particular
circumstances applicable to banks, non-bank financial institutions, or other businesses or entities
subjected to anti-money laundering obligations.
These instruments include the following measures:

Scope of the Criminal Offence of Money Laundering: Countries should used the UN
1988 Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances
and the UN 2000 Convention against Transnational Organized Crime as a threshold for
criminalizing money laundering.

Provisional measures and confiscation: Countries should ensure that their criteria for
establishing intent and knowledge in proving the offense of money laundering comports
with the standards outlined in the 1988 and 2000 Conventions. Additionally, countries
should ensure that criminal liability or civil/administrative liability attaches to all legal
persons.

Customer due diligence and record keeping and Reporting of suspicious transactions and
compliance: Countries should ensure that secrecy laws imposed by financial institutions
do not inhibit the implementation of FATF recommendations. Additionally, countries
should ensure that due diligence is taken using FATF recommended CDD measures as
guidance.

Other measures to deter money laundering and terrorist financing:

In relations to politically exposed persons, countries should ensure that:

Appropriate risk management systems are in place to ascertain whether the individual is
a politically exposed person.
- 101 - 101 - 101 -

Involve senior management in the conducting and monitoring of business relations with
the person.

Countries should ensure that measures are in place that allow financial institutions
dealing with cross-border correspondent banking to gather sufficient information about a
respondent institution, assess the respondent institutions anti-money laundering and
terrorist financing controls, document the responsibilities of each institution and as it
applies to payable-through accounts, coordinate with the respondent bank on due
diligence.

Additional recommendations full under the following subjects:

Measures to be taken by financial institutions and non-financial businesses and

professions to prevent money laundering and terrorist financing

Measures to be taken with respect to countries that do not or insufficiently comply with
the FATF recommendations, regulatory and supervision

Institutional and other measures necessary in systems for combating money laundering and
terrorist financing.

Competent authorities, their powers and resources

Transparency of legal powers and arrangements

International Co-operation

Mutual legal assistance and extradition

Other forms of co-operation

In assisting Latin AML Regimes, the Department of States Bureau for International Narcotics
and Law Enforcement Affairs (INL) and the Departments Office of the Coordinator for CounterTerrorism (SCT) are together implementing a multi-million dollar training and technical
assistance program to provide law enforcement, prosecutorial and Central Bank training. One
prime focus of the training program is a multi-agency approach to develop or enhance financial
crime and anti-money laundering regimes capable of combating not only money laundering
activities but also terrorist financing in selected jurisdictions. Additionally, the State
Department, the Department of Justice, Treasury Department component agencies, the Board of
Governors of the Federal Reserve, the Federal Deposit Insurance Corporation, and various nongovernment organizations are continuously offering law enforcement, regulatory and criminal
justice programs both to Latin America and worldwide.
In 2003, INL/SCT-funded programs were delivered in Latin American countries in addition to
other countries in an effort of combating international financial crimes, money laundering and
- 102 - 102 - 102 -

terrorist financing. U.S federal law enforcement agencies assisted in this effort by providing
basic and advanced training courses in all aspects of financial criminal activity. Additionally,
INL made funds available for intermittent posting of financial advisors at selected overseas
locations. Working directly with host governments, these advisors assisted in the creation,
implementation, and enforcement of anti-money laundering and financial crime legislation. INL
also provided several federal agencies funding to conduct multi-agency financial crime training
assessments and develop specialized training in specific jurisdictions worldwide to combat
money laundering.1
In an effort to bring the Latin American AML regime alone the continuum in combating
international financial crime, money and terrorist financing, INL, along with the European Union
and the Government of the United Kingdom, continues to fund the Caribbean Anti-Money
Laundering Programme (CALP). INL contributed $600,000 to the CALP in 2003.
CALP has adopted the objectives of reducing the laundering of the proceeds of all serious crime
by facilitating the prevention, investigation, and prosecution of money laundering. Further,
CALP is in the process of developing a sustainable institutional capacity in the Caribbean region
to address the issues related to anti-money laundering efforts at a local, regional and international
level.
As in previous years, INL training programs continue to focus on an interagency approach and
on bringing together, where possible, foreign law enforcement, judicial and Central Bank
authorities in assessments and training programs. This allows for an extensive dialogue and
exchange of information. This approach has been used successfully in Asia, Central and South
America, Russia, the New Independent States (NIS) of the former Soviet Union, and Central
Europe. INL also provides funding for many of the regional training and technical assistance
programs offered by the various law enforcement agencies, including assistance to the
International Law Enforcement Academies (ILEAs).
Conclusion
The North American AML Regime has made considerable progress in assisting the Latin
American AML and other worldwide regimes in implementing all aspects of the action plan to
combat international financial crime, money and terrorist financing. The policy development
and organization work is well advanced. The immediate next step would be to ensure a
successful implementation of the FATF Plenary strategies, with FATF endorsement of the
comprehensive AML/CFT methodology, and other conditions outlined by the Fund and Bank
Boards for the preparation of AML/CFT ROSCs, as well as reports on the outcome to the
Boards.
A 12-month pilot program of assessments using the comprehensive methodology, and to step up
the implementation of technical assistance would also be a step that Latin Americans regimes
would need to position them to implement. It is well recognized that strengthening AML/CFT
1 International Narcotics Control Strategy Report, www.state.gov/g/inl/rls/nrcrpt/2003/vol2/html/29913.
(March 2004).

- 103 - 103 - 103 -

regimes worldwide will involve capacity building, strengthening financial sectors and
supervisory reform, and will be a medium/long-term effort.2

040804AML Module5 Assignment

09. August 2004

1) Definition of an Offshore Financial Center:

a) Short Definition:
An OFC is a jurisdiction where an intentional effort has been made to attract foreign business
by deliberate government policies such as the enactment of tax and other fiscal incentives,
"business friendly" regulatory/supervisory regimes and secrecy enforced by law. It is the
OFC's legal framework that makes it unique. Common to most developing and mature OFCs
is a legal framework that to varying degrees facilitates the maintenance of secrecy, the
minimization or mitigation of tax and
supervisory burdens, and freedom from common regulatory constraints, such as exchange
controls and disclosure requirements. When viewed as a financial services concept, an OFC
is any jurisdiction that enables banks, trust companies, company incorporators, other
financial intermediaries and financial advisors resident in that
jurisdiction to provide products and services to non-residents in their home countries. In
many cases the same services are not available to their own residents. These jurisdictions are
often sovereign states but not necessarily so. They may be a free zone within a city, such as
Dublin, Ireland. They may also be political subdivisions within a sovereign state, such as
Madeira or Hong Kong. The relationship between offshore and onshore jurisdictions is
complex, but for the most part offshore financial centers tailor their products and services to
residents of other jurisdictions. Through a practice known as nicheing, OFCs regularly
modify their legislation, developing new financial vehicles and services to attract business
from their target markets.160
b) Detailed Definition:
Although there is little consensus regarding the exact definition of an offshore financial
center (OFC), certain characteristics distinguish traditional onshore financial centers from
those termed "offshore". Offshore financial centers are, in the vast majority of cases,
segregated from the traditional banking structure of the jurisdiction. At least 90 percent of all
jurisdictions offering offshore financial services restrict access to the offshore sector to nonresidents, thereby creating a highly confidential and parallel financial system within their
2 Intensified Work on Anti-money Laundering and Combating the Financing of Terrorism (AML/CFT),
http://www.imf.org/external/np/mae/aml/2002/eng/092502.html. (September 2002).
160Hellenic Resources Network, INCSR 1996, (available at: http://www.hri.org )
(accessed June 08, 2004)

- 104 - 104 - 104 -

own borders. Many jurisdictions with OFCs conduct financial transactions only in currencies
other than the local currency. OFCs also differ from onshore jurisdictions in their regulatory
regimes and legal frameworks. Many OFCs lack the stringent regulatory and supervisory
regimes found in developed onshore jurisdictions. In the majority of OFCs, banks are not
required to adhere to a wide range of regulations normally imposed on onshore banks. In
most OFCs, non-bank financial industries, such as the insurance and securities industries, are
subject to even less, if any, regulation than is the banking industry.
OFCs maintain that their carefully crafted laws and regulations provide beneficial business
and financial planning options for their clients. These include, but are not limited to:
sophisticated trade financing; estate planning for high net worth individuals; tax mitigation
for individuals and corporations; avoidance of exchange controls; liability containment for
ships and airplanes; sophisticated insurance management options; investment opportunities
that transcend home country marketing regulations; preservation of assets; investment of
overnight funds; and freedom from certain home country regulatory requirements.
Freedom from certain home country regulatory requirements provides opportunities to those
with criminal intent. In many OFCs, a bank can be formed, registered and its ownership
placed in the hands of nominee directors via the Internet. However formed, there are few, if
any, disclosure requirements, bank transactions are free of exchange and interest rate
restrictions, minimal or no capital reserve requirements are required and transactions are
mostly tax-free. Some OFCs permit the licensing and registration of "shell banks" enerally
understood as banks that exist on paper only and do not have a physical presence in any
jurisdiction. Of the more than 4000 offshore banks thought to exist, the number of shell
banks remains unknown.
A principal attraction of the OFCs is often the existence of legal frameworks designed to
obscure the identity of the beneficial owner, to promote regulatory and supervisory arbitrage,
and to provide mitigation or evasion of home-country tax regimes. Some of these OFCs offer
the ability to form and manage confidentiality of a variety of international business
companies (IBCs) and exempt companies, trusts, investment funds and insurance companies,
many with nominee directors, nominee officeholders and nominee shareholders. 1 When
combined with the use of bearer shares (shares that do not name the owner) and "mini-trusts"
(the latter are instruments used to further insulate the beneficial owner while bridging the
ownership and management of the corporate entity), IBCs can present impenetrable barriers
to law enforcement.
"IBC" is the term used to describe a variety of offshore corporate entities, which are almost
always restricted to transacting business outside the jurisdiction in which they are formed.
IBCs are characterized by rapid formation, at low cost, with broad powers, low to no
taxation, minimal or non-existent reporting requirements and secrecy. Many OFCs permit
IBCs to issue bearer shares. The Enron Corporation, for example, reportedly registered IBCs
in the Cayman Islands and the Turks and Caicos OFCs.
This lack of transparency and the ability to engage in regulatory arbitrage, coupled with a
concomitant reluctance or refusal of many OFCs to cooperate with regulators and law
enforcement officials from other jurisdictions, attract those with both legitimate and
illegitimate purposes. Drug traffickers, terrorists, money launderers, tax evaders and other
criminals have found the OFCs a particularly inviting venue in which to conduct and conceal
- 105 - 105 - 105 -

their activities. With the advent of the Internet and other technological advances, funds can
be transferred around the globe instantaneously, providing further opportunities to engage in
the placement and layering of illicitly gained funds. There is also a growing concern that
terrorists and other criminals are increasingly enlisting the services of unethical lawyers,
accountants and other professionals to help them discover and manipulate new money
laundering and terrorist financing opportunities afforded by the new technologies. The
attraction for small states in the offshore financial services market is a dependable source of
income that in some instances exceeds 50 percent of a jurisdictions GDP. 161
While there are many well-regulated OFCs, a principal attraction is often the existence of
legal frameworks designed to obscure the identity of the beneficial owner, to promote
regulatory and supervisory arbitrage, and to provide mitigation or evasion of home-country
tax regimes. Some of these OFCs offer the ability to form and manage confidentiality of a
variety of international business companies (IBCs) and exempt companies, trusts, investment
funds and insurance companies, many with nominee directors, nominee officeholders and
nominee shareholders. When combined with the use of bearer shares and "mini-trusts" (the
latter are instruments used to further insulate the beneficial owner while bridging the
ownership and management of the corporate entity), IBCs can present impenetrable barriers
to law enforcement. The term "offshore financial center" (OFC) is generally thought to
describe an entire jurisdiction. However, there are important OFCs located with the borders
of jurisdictions. "OFC" in this report is used to describe both cases. OFCs maintain that their
carefully crafted laws and regulations provide beneficial business and financial planning
options for their clients. These include, but are not limited to: sophisticated trade financing;
estate planning for high net worth individuals; tax mitigation for individuals and
corporations; avoidance of exchange controls; liability containment for ships and airplanes;
sophisticated insurance management options; investment opportunities that transcend home
country marketing regulations; preservation of assets; investment of overnight funds; and
freedom from certain home country regulatory requirements.162

2) List of Offshore Financial Centers:163

a) Africa
Seychelles
b) Asia and the Pacific
Cook Islands
Macao SAR
Malaysia (Labuan)
Marshall Islands
161 Bureau of Public Affairs, U.S. Department of State, International Narcotics Strategy Report 2001, (available
at: http://www.state.gov/g/inl/rls/nrcrpt/2001/rpt/8487.htm ) (accessed Aug. 08, 2004)
162Bureau of Public Affairs, U.S. Department of State, International Narcotics Strategy Report 2003, (available at:
http://www.state.gov/g/inl/rls/nrcrpt/2003/vol2/html/29918.htm ) (accessed Aug. 08, 2004)
163International Monetary Fond, List of offshore financial centers,
(http://www.imf.org/external/np/mae/oshore/2002/eng/082902.htm#top )
(accessed Aug. 06, 2004)

- 106 - 106 - 106 -

Nauru
Niue
Palau
Samoa
Vanuatu
c) Middle East
Bahrain
d) Europe
Andorra
Cyprus
Gibraltar
Guernsey
Isle of Man
Jersey
Liechtenstein
Monaco
e) Western Hemisphere
Anguilla
Antigua and Barbuda
Aruba
Belize
Bermuda
British Virgin Islands
Cayman Islands
Dominica
Grenada
Montserrat
Netherlands Antilles
Panama
St. Kitts and Nevis
St. Lucia
St. Vincent and the Grenadines
The Bahamas
Turks and Caicos Islands

3) Compliance with AML Laws and OECD Regulations

a) Compliance with AML Laws:164
164IMF, Standard Setting Agencies, The FATF has developed the 40
Recommendations against money laundering and the 8 Special Recommendations
on combatting terrorism financing. The FATF began a process to review and
update the 40 Recommendations in 2002. The FATF, IMF and World Bank have
produced an AML/CFT assessment methodology. (available at:
http://www.imf.org/external/standards/agency.htm )(accessed: Aug.08, 2004)

- 107 - 107 - 107 -

The Financial Action Task Force (FATF) holds an annual exercise to examine the methods
and trends the typologies of money laundering and, since 2001, of terrorist financing. The
primary objective of this work is to obtain material that will help the FATF policy makers
develop and refine anti-money laundering and counter-terrorist financing (AML/CFT)
standards.165
An enlistment in the NCCT List, published by the FATF (see 4)a)), therefore proves a
countrys lack of or unwillingness to enforce AML Laws and is there proof of a countries
non-compliance with AML Laws.
Offshore financial centers enlisted in the NCCT are:
Cook Islands and
Nauru.
b) Broader approach:
In July 2000, the Executive Board of the IMF initiated an offshore financial center (OFC)
program to help members identify gaps and reduce potential vulnerabilities in their financial
systems, and improve the coverage of statistics on activities of OFCs in financial markets.
The assessment component of the program evaluates financial regulation and supervision in
jurisdictions with significant financial activity and few previous assessments of standards. 166 ,
IMF staff undertake detailed assessments of the extent to which OFCs meet the standards
advocated by the international standard-setters, and of any further action required to meet
these standards. These standards include the Basel Principles on Banking and OECD
standards for Corporate Governance.
Results:167
i) Aruba (June 2002):
- Its Banking system is largely compliant with 19 of the Basel Core Principles
(BCP). In respect to 4 BCPs (esp. credit policies, loan evaluation, loan-loss
provisioning and on- and off-site supervision) further governmental efforts
were considered to be necessary..
- In respect to the insurance sector a new law has been passed but its effects
could not be evaluated at the time of the assessment. Nevertheless according
to this law Aruba will be observant of 12 of 17 IAIS Core Principles.
-

Considering AML regulations Aruba claims to be compliant with 25 of the 28

most important FATF recommendations.

Offshore corporate entities are virtually unsupervised and highly nontransparent with regard to ownership, corporate governance and financial
condition.

165Financial Action Task Force, Introduction, (available at: http://www.fatf-gafi.org )(accessed June 06, 2004)
166 IMF, Offshore Financial Centers The Assessment Program: An Information Note Prepared by the Monetary
and Exchange Affairs Department, (available at:
http://www.imf.org/external/np/mae/oshore/2002/eng/082902.htm#top )(accessed Aug. 08, 2004)
167 in alphabetical order, and as far as assessment reports were already available

- 108 - 108 - 108 -

There is currently no supervision of the companies that help set up and

manage the offshore corporate entites (due to the fact that these do not directly
provide financial services).
In general respect: Aruba has made very substantial progress.

ii) Andora (Feb. 2002):

- Financial sector supervision is generally sound.
- A supervising authority is installed and Andorra is on its way to address those
principoles and recommendations (with regard to AML) not fully compliant.
- The insurance sector has not been fully assessed due to its minor importance
(1 % of the financial system assets). A second technical assistance report will
be drafted.
iii) Anguilla:
- Anguilla is in process of creating a supervising authority in the financial
sector.
- In the areas of AML/CFT, there has been progress in the legislative and
regulatory framework but more intensified efforts are required to implement
the legislation. Nevertheless Anguella has a relatively strong legal framework
for countering money laundering and the financing of terrorism.
- Offshore banks are mostly operated by domestic banks.
- Anguilla still has to put in place the necessary mechanisms for compliance
with many of the Basel Core Principles (esp. with regard to the absence of
prudential risk management requirements or guidelines)
iv) British Virgin Islands (Apr. 2004):
- The BVI has most of the essential elements for a suitable framework for
financial supervision. Primary legislation provides the FSC with adequate
independence and authority to license and supervise covered financial
services, which include banking, insurance, securities (mutual funds, their
management and invetors), and trust and company service providers, whether
onshore or offshore, and implementation ahs largely been good.
- There is a weakness with respect to onsite supervision of banking, insurance,
and securities sectors due to the fact that there currently is no no regular and
comprehensive examination and compliance program in operation.
- Most banks are subsidiaries or branches of high-quality banking institutions
subject to effective consolidated supervision by the home country supervisor.
Prudential standards such as guidance and parameters for assuming and
managing risk in accordance with BIS have not been issued.
- The insurance sector is considered to be well supervised sector due to the fact
that most companies due have strong ties to high-quality enterprises (see
above). Guidelines with regard to corporate governance and internal controls
are missing.
- The legal framework for AML/CFT measures in the BVI is generally
compliant with international standards. The implementation fo the full range
of AML/CFT supervisory measures has not yet been fully achieved.
- 109 - 109 - 109 -

In general cross-border information exchange and cooperation has been

excellent in all areas.

v) Cyprus (July 2001):

- There was some scarcity of resources available, and this meant that the
amount of onsite supervision has been somewhat less than desirable.
- Authorities are encouraged (EU accession) to introduce a large volume of
legislative changes.
- Nevertheless high-risk institutions from some countries have been licensed.
vi) Gibraltar (Oct. 2001)
- The results of the assessment indicated that supervision is generally effective
and thorough and that Gibraltar ranks as a well-developed supervisor. It meets
most of the international standards and good practices and is making
considerable progress with respect to those principles with which it si not yet
fully compliant or observant.
- Gibraltar is compliant with 18 of the Basel Core Principles and largely
compliant with the other seven.
- With regard to the regulation and supervision of investment and securities
activities Gibraltar is fully compliant with 19 IOSCO principles, largely
compliant with three and eight are not applicable.
- In the area of company and trust regulation and the supervision of company
and trust service providers, Gibraltar is in the forefront of the development of
good practices.
vii) Guernsey (Noc. 2003):
- The financial, regulatory, and supervisory system of the Bailiwick of
Guernsey complies well with the assessed international standards.
- The financial regulatory and supervisory system has been upgraded to meet
international standards in banking, insurance, securities, anti-money
laundering and combating the financing of terrorism, and best practices for
company and trust service providers.
- Legal, regulatory, and supervisory arrangements with regard to the
supervising authority, and AML/CFT practices should be enforced.
viii)

Isle of Man (Oct. 2002)

- The financial, regulatory, and supervisory system of the Isle of Man complies
well with the assessed international standards.
- The jurisdiction has been assessed to have a high level of compliance with the
four key standards.
- There are currently minor shortcomings in the independence and
accountability of the supervising authority, the robustness of supervisory
tools, the legal framework for AML/CFT.

ix) Jersey (Sep. 2002, Feb. 2003):

- 110 - 110 - 110 -

The financial, regulatory, and supervisory system of the Jersey complies well
with the assessed international standards.
Shortcomings were noted in following areas:
Customer identification
Functions and regime of the supervising authority

x) Liechtenstein (Nov. 2002)

- Liechtenstein does comply with international standards for anti-money
laundering and combating the financing of terrorism (AML/CFT);
particularly, the standard issued by the FATF.
- The expertise and the amount of the staff concerned with supervisory
functions is considered to be insufficient.
- Financing of terrorism is not fully covered under existing legislation.
xi) Macao SAR (Aug. 2002):
- There is a high level of compliance with the Basel Core Principles for
Effective Banking Supervision. Macao SAR is compliant with 16 if the
principles, largely compliant with eight others and materially non-compliant
one-that is money laundering.
- Supervision is generally effective and thorough. Most of the international
standards with respect to banking and insurance are met.
- The insurance sector is also supervised to a good standard. Maca SAR is
observant of eight of the Core Principles promulgated by the IAIS, largely
observant of six others, and materially non-observant of one that is on-site
supervision.
xii) Monaco (Aug. 2003):
- The Principality of Monaco has in place a comprehensive legal framework,
supervisory structure, and practices that support a well regulated financial
environment.
- The authorities have over the past two years adopted a strongly proactive
approach to supervision, especially in the AML/CFT area. Overall the
supervisory structure is relatively complex, current arrangements are generally
effective but may require strengthening to respond to new challenges.
xiii)

Montserrat (Nov. 2003)

- Montserrat is materially non-compliant or non-compliant with most of the
Basel Core Principles, particularly those relating to prudential requirements
and supervision. Nevertheless the legal framework relating to autonomy ansd
supervisory powers was found to be relatively sound particularly with regards
to licensing and information sharing.
- Primary money laundering legislation is comprehensive but significant gaps
can still be found (esp. implement counter-terrorism financing provisions).

xiv)

Palau (April 2002);

- 111 - 111 - 111 -

Palaus Government demonstrated a clear political commitment to AML. As a

result of which only 12 of 30 plus financial institutions known to be active in
Palau applied for a banking license under the new (AML influenced)
provisions.
Palau has a largely satisfactory legal and institutional framework for
preventing and detecting money laundering in the banking sector, while
implementation capabilities need strengthening.
Palaus overall degree of compliance with the Basel Core Principles was
found to be modest, particularly the supervising authoritys independence
needs strengthening.

xv) Panama (April 2001):

- Panama was assessed to be compliant or largely compliant with 23 of the 25
Basel Core Principles. The remaining two were considered materially noncompliant with efforts underway to achieve compliance (offsite monitoring
and investment activities).
- With regard to the AML criteria Panama is considered to be fully compliant
with the Core Principles (Basel) and well staffed (note: this assessment was
held shortly after panamas removal from the NCCT list)
xvi)

Samoa (Aug Sep. 2002):

- Offshore banks can still be licensed without the requirement of mainting a
physical presence. Onsite supervision of domestic banks is insufficient.
- AML/CFT legal framework has been created but is not yet in line with the
international standards for anti-money laundering and combating the financing
of terrorism.
- Company service providers operate under a relatively rigorous licensing
system with supervision being generally effective.
- With regard to the insurance sector it is noted that the licensing of general
insurance companies, which sell insurance products in other countries,
potentially gives rise to concern involving unlicensed solicitation in other
countries or causing problems with its customers.

xvii)

Vanuatu (Aug. 2003)

- The domestic banking sector is supervised to a reasonably competent level,
the entire offshore sector and the nonblank financial institutions within the
domestic market are subject to a low standard of supervision.
- Legal framework is insufficient and there is a lack of resources. Nevertheless
the staff in general is dedicated.
- Vanuatu has made important progress in combating money laundering and the
financing of terrorism, but still has some way to go in making the system
robust.

4) Blacklists:
- 112 - 112 - 112 -

The group observed that one way to facilitate the implementation of recommendation 21
would be to establish an internationally agreed black list of countries which do not or
insufficiently apply the recommendations. But the group felt, and law enforcement
authorities confirmed, that the FATF should not attempt to produce, for the time being, a
public common minimal list.
So far the statement of the FATF in its 1991 report.
There is still no such thing as an official black list but the List on Non-Cooperative Countries
(NCCT).
The NCCT list published by FATF:
The FATF is engaged in a major initiative to identify non-cooperative countries and
territories (NCCTs) in the fight against money laundering. Specifically, this has meant the
development of a process to seek out critical weaknesses in anti-money laundering systems
which serve as obstacles to international co-operation in this area. The goal of this process is to
reduce the vulnerability of the financial system to money laundering by ensuring that all
financial centres adopt and implement measures for the prevention, detection and punishment of
money laundering according to internationally recognised standards.
On 14 February 2000, the FATF published an initial report on NCCTs. The report sets out
twenty-five criteria, which help to identify relevant detrimental rules and practices and which
are consistent with the FATF Forty Recommendations. It describes a process whereby
jurisdictions having such rules and practices can be identified and encourages these
jurisdictions to implement international standards in
On 14 February 2000, the FATF published an initial report on NCCTs. (Non Cooperative
Countries).
The report sets out twenty-five criteria, which help to identify relevant detrimental rules and
practices and which are consistent with the FATF Forty Recommendations. It describes a
process whereby jurisdictions having such rules and practices can be identified and
encourages these jurisdictions to implement international standards in this area.
The next step in the NCCT initiative was the publication in June 2000 of the first Review
identifying specific NCCTs. (The first Blacklist). The report named 15 jurisdictions
(Bahamas, Cayman Islands, Cook Islands, Dominica, Israel, Lebanon, Liechtenstein,
Marshall Islands, Nauru, Niue, Panama, Philippines, Russia, St. Kitts and Nevis, and
St. Vincent and the Grenadines) as having critical deficiencies in their anti-money
laundering systems or a demonstrated unwillingness to co-operate in anti-money laundering
efforts.
Current List of Non-Cooperative Countries and Territories
The following list of non-cooperative countries was last changed on 2 July 2004:

OECD, Financial Action Task Force, Current NCCT List, (available at: http://www.fatfgafi.org/NCCT_en.htm#List ) (accessed Aug.08, 2004)

- 113 - 113 - 113 -

1. Cook Islands
2. Indonesia
3. Myanmar
4. Nauru
5. Nigeria
6. Philippines
5) What is the real meaning of such a Blacklist-are there any legal or economical consequences
for those countries?
a) Legal consequences:
The FATF can be described as a Transgovernmental Regulatory Organization (TRO).168 It has
no juridical means to enforce its recommendations, either by its own force or as part of an
international organization.169
The NCCT list can therefore be seen as a means of a Name and Shame-policy in order to
enforce the FATF recommendations with respect to non-members.170
b)Economical consequences:
The amount of economical consequences resulting from a NCCT-listing can be evaluated by
focusing on FATFs Members and affiliates:
FATF MEMBERS

OBSERVER BODIES AND ORGANISATIONS

The following list shows the countries, The following international bodies and organisations have
territories, and organisations that make upobserver status with the FATF. The regional FATF-style bodies
the membership of the FATF. For morehave similar form and functions to those of the FATF, and some
on the status of each jurisdictionFATF members are also members of these bodies. The
regarding compliance with anti-moneyinternational organisations listed are those which have, among
laundering measures, relevant legislation,other functions, a specific anti-money laundering mission or
and other related information, select thefunction. To access additional information on any of these
appropriate hyperlink.
bodies or organisations, select the appropriate hyperlink.
1. Argentina

FATF-Style Regional Bodies

2. Australia

Asia / Pacific Group on Money Laundering (APG)

3. Austria

Caribbean Financial Action Task Force (CFATF)

4. Belgium

Council of Europe Select Committee of Experts on the

Evaluation of Anti-Money Laundering Measures

5. Brazil

168 Anne Marie Slaughter, Governing the Global Economy through Government Networks, 2000 Michael Byres,
The role of law in international politics, 177 205 (2000)
169 Carsten Kremer, Die FATF und der internationale Kampf gegen die Geldwsche, REGEM Analysis No. 10,
May 2004, Trier University (available at: http://www.regem.org )(accessed Aug. 07, 2004)
170 Members are subject to a peer review program, ensuring the compliance with FATF recommendations

- 114 - 114 - 114 -

6. Canada

(MONEYVAL) (formerly PC-R-EV)

7. Denmark
8. European
Commission

Eastern and Southern Africa Anti-Money Laundering

Group (ESAAMLG)

Financial Action Task Force on Money Laundering in South

America (GAFISUD)
Other International Organisations

9. Finland
10. France

[The languages listed after each of the links indicate the

languages in which the sites are available.]

11. Germany
12. Greece

African Development Bank [English/French]

Asia Development Bank [English]

14. Hong Kong, China

The Commonwealth Secretariat [English]

15. Iceland

Egmont Group of Financial Intelligence Units [English]

16. Ireland

European Bank for Reconstruction and Development

(EBRD) [English/French/German/Russian]

European Central Bank (ECB) [English (full

site)//Danish/Dutch/Finnish/French/
German/Greek/Irish/Italian/Portuguese/Spanish/Swedish
(partially)]

Europol
[English
(full
site)//Danish/Dutch/Finnish/French/German/Greek/Irish
/Italian/
Portuguese/Spanish/Swedish (partially)]

Inter-American
Development
Bank
[English/French/Japanese/Portuguese/Spanish]

Intergovernmental Action Group

Laundering in Africa (GIABA)

International Association of Insurance Supervisors

(IAIS) [English]

International
Monetary
[English/German/Spanish]

International Organisation of Securities Commissions

(IOSCO) [English]

Interpol [English]

Organization of American States / Inter-American

Committee
Against
Terrorism
(OAS/CICTE)
[English/Spanish]

Organization of American States / Inter-American Drug

13. Gulf Co-operation

Council

17. Italy
18. Japan
19. Luxembourg
20. Mexico
21. Kingdom of
Netherlands

the

22. New Zealand

23. Norway
24. Portugal
25. Russian Federation
26. Singapore
27. South Africa
28. Spain
29. Sweden
30. Switzerland
31. Turkey
32. United Kingdom
33. United States

- 115 - 115 - 115 -

against

Fund

(IDB)
Money-

(IMF)

Abuse
Control
[English/Spanish]

Commission

(OAS/CICAD)

Organisation for Economic Co-operation

Development (OECD) [English/French]

Offshore Group of Banking Supervisors (OGBS)

United Nations Office on Drugs and Crime (UNODC)

[English]

World
Bank
[English/French/Japanese/Portuguese/Russian/Spanish]

World Customs Organisation (WCO) [English/French]

Countries listed as NCCT will suffer from serious economical an political pressure exerted
by these countries and organizations. For an example:
The USA PATRIOT Act provision that prohibits transactions (directly or indirectly)
between U.S. financial institutions and foreign shell banks played a key role in Naurus
decision to cancel the licenses of shell banks in its jurisdiction and, undoubtedly, was a
major factor contributing to the decrease noted globally in the number of offshore banks.
While the USA PATRIOT Act has had a dramatic impact in reducing the number of shell
banks globally, and more OFCs appear to be strengthening their regulatory capacity, the
lack of transparency that characterizes the offshore sector makes OFCs attractive places
for those who want to hide the movement of their funds. At a time when criminal and
terrorist organizations threaten political and economic stability, concerted efforts to
effectively supervise and regulate OFCs are essential.171
And a NCCT listing will be a handy excuse for any pariah treatment due to the fact that the FATF
is an internationally (rather) recognized independent authority. Any economical saction with
regard to the NCCT listing will therefore be widely respected as a means of ensuring a secure
financial global market.

I. Definition of Offshore Financial Centers

Offshore financial centers (OFCs) are typically segregated from the traditional banking structure
of the jurisdiction. At least 90 percent of all jurisdictions offering offshore financial services
restrict access to the offshore sector to non-residents, thereby creating a highly confidential and
parallel financial system within their own borders. Many jurisdictions with OFCs conduct
171 Bureau of Public Affairs, U.S. Department of State, International Narcotics
Strategy Report 2003INCSR 2003 (available at:
http://www.state.gov/g/inl/rls/nrcrpt/2003/vol2/html/29918.htm )(accessed
Aug.08, 2004)

- 116 - 116 - 116 -

and

financial transactions only in currencies other than the local currency. OFCs also differ from
onshore jurisdictions in their regulatory regimes and legal frameworks. Many OFCs lack the
stringent regulatory and supervisory regimes found in developed onshore jurisdictions. In the
majority of OFCs, banks are not required to adhere to a wide range of regulations normally
imposed on onshore banks. In most OFCs, non-bank financial industries, such as the insurance
and securities industries, are subject to even less, if any, regulation than is the banking industry.
OFCs provide business and financial planning options, including: sophisticated trade financing;
estate planning for high net worth individuals; tax mitigation for individuals and corporations;
avoidance of exchange controls; liability containment for ships and airplanes; sophisticated
insurance management options; investment opportunities that transcend home country marketing
regulations; preservation of assets; investment of overnight funds; and freedom from certain
home country regulatory requirements.
One of the reasons OFCs are so attractive are the existence of legal frameworks designed to
obscure the identity of the beneficial owner, to promote regulatory and supervisory arbitrage, and
to provide mitigation or evasion of home-country tax regimes. Additionally, OFCs are usually
reluctant to cooperate with regulators and law enforcement officials from other jurisdictions.
II. Identifying OFCs
The Financial Action Task Force comprised a list of 25 criteria for defining non-cooperative
countries or territories. These 25 criteria are broken down into four categories, as listed below:
A. Loopholes in Financial Regulations
1. Inadequate regulation or supervision of financial institutions.
2. Inadequate rules for the licensing or creation of financial institutions, including assessing the
backgrounds of their managers or beneficial owners.
3. Absence of measures to guard against the holding of management functions and control or
acquisition of a significant investment in a financial institution by criminals or their confederates.
4. Existence of anonymous accounts.
5. Lack of effective laws, regulations, or agreements between supervisory authorities and
financial institutions or self-regulatory agreements among financial institutions, and no know
your client rules.
6. Lack of record keeping laws or regulations for a sufficient time (5 years).
7. Legal or regulatory obstacles to access by regulatory or judicial authorities to records of
transactions, ownership, etc.
8. One-way secrecy laws that can be used against, but not lifted by, administrative authorities
investigating money laundering.
9. One-way secrecy laws that can be used against, but not lifted by, judicial authorities in
criminal investigations involving money laundering.
10. Absence of suspicious transactions reporting requirements.
11. Lack of monitoring any suspicious transaction reporting requirements in place.
B. Obstacles Raised by Other Regulatory Requirements
- 117 - 117 - 117 -

12. Inadequate commercial law requirements for registration of business and legal entities
(name, address, directors, articles of incorporation, etc.).
13. Obstacles to identification by financial institutions of the beneficial owner, director/officer
of a company or beneficiaries of a legal or business entity.
14. Existence of regulatory systems that allow financial institutions to carry on financial
business where the beneficial owner is unknown, or represented by an intermediary (attorney)
who refuses to divulge the information, and reporting to authorities is not required.
C. Obstacles to International Cooperation
15.
Laws or regulations prohibiting international exchange of information between
administrative anti-money laundering authorities.
16. Prohibiting relevant administrative authorities to conduct investigations or inquiries on
behalf of their foreign counterparts.
17. Unwillingness to respond constructively to requests for information (long delays, etc.).
18. Restrictive practices in international cooperation against money laundering between
supervisory authorities based upon grounds that such transactions may relate to tax matters.
19. Failure to criminalize laundering proceeds from serious crimes.
20. Laws prohibiting, or restrictive conditions, on the judicial exchange of information.
21. Unwillingness to respond constructively to mutual legal assistance requests.
22. Refusal to provide judicial cooperation in cases involving offenses recognized as such by the
requesting jurisdiction, especially on grounds that the information may relate to tax matters.
D. Inadequate Resources for Preventing and Detecting Money Laundering Activities
23. Failure to provide administrative and judicial authorities with the necessary financial,
human, or technical resources to exercise their functions or to perform their investigative duties.
24. Inadequate or corrupt professional staff in either governmental, judicial, or supervisory
authorities or among those responsible for anti-money laundering compliance in the financial
services industries.
25. Lack of a centralized unit (Financial Intelligence Unit) or similar organization for the
collection, analysis, and dissemination of suspicious transactions information to competent
authorities.
III. The OECDs Criteria
The OECD has also weighed in regarding harmful tax practices in various jurisdictions, all of
which are indicative of an Offshore Financial Center. There are four criteria outlined in 1998 to
identify preferential tax regimes. These are:
A. Low or No Taxes
B. Ring-Fencing from the Domestic Economy (separate rules for international finance)
C. Lack of Tax Regime Transparency
D. No effective Exchange or Information
IV. Conclusion
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Many of these criteria are based upon the 40 Recommendations, Basle Recommendations, and
other international criteria for detection of anti-money laundering regimes in other countries.
However, particular attention was paid to offshore financial centers due to their preferential tax
regimes that attract some of the more unsavory characters in the financial community. In a
nutshell, an offshore financial center will go easy on foreign investment by levying little or no
taxes, with ease of incorporation and financial transactions. Offshore does not necessarily
mean island, although a disproportionate number of Caribbean island nations have been
labeled OFCs.
Sources:
U.S. State Dept., INCSR 2001. http://www.state.gov/g/inl/rls/nrcrpt/2001/rpt/8487.htm
OECD, The OECDs Project on Harmful Tax Practices: The 2004 Progress Report, Feb. 4,
2004. http://www.oecd.org/dataoecd/60/33/30901115.pdf
FATF, Fourth Annual Review of Non-Cooperative Countries or Territories, June 20, 2003.
http://www1.oecd.org/fatf/pdf/NCCT2003_en.pdf.
Module 7A: Comparative Analysis of USA AML Regime and UK/Commonwealth AML
Written by: R. LEWAYNE JOHNSON, J.D.
Contents: [Introduction]; [FATF Recommendations]; [FATF Impact on Access to Financial
Services]; [U.S. Approach to Anti-Money Laundering Controls]; [U.K. Approach to Anti-Money
Laundering Controls]; [Conclusion]
Introduction
This report consists of three sections. Following this introduction the first section consists of an
overview of the essential criteria and the elements of the FATF Recommendations. The second
section contains a comparative analysis of the United States (U.S.) and United Kingdom (U.K.)
progress in accomplishing the FATF Recommendations. Finally, there is a conclusion to the
analysis and an assessment of FATFs requirements for future guidance.
FATF Recommendations
Nations are currently viewed through the scope of all the FATF recommendations. These
recommendations, nonetheless, set minimum standards for countries to use as a base to model
detailed procedures/systems based on the countries constitutional frameworks and particular
circumstances applicable to banks, non-bank financial institutions, or other businesses or entities
subjected to anti-money laundering obligations.
These instruments include the following measures:

Scope of the Criminal Offence of Money Laundering: Countries should used the UN
1988 Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances
and the UN 2000 Convention against Transnational Organized Crime as a threshold for
criminalizing money laundering.

Provisional measures and confiscation: Countries should ensure that their criteria for
establishing intent and knowledge in proving the offense of money laundering
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comports with the standards outlined in the 1988 and 2000 Conventions. Additionally,
countries should ensure that criminal liability or civil/administrative liability attaches
to all legal persons.

Customer due diligence and record keeping and Reporting of suspicious transactions
and compliance: Countries should ensure that secrecy laws imposed by financial
institutions do not inhibit the implementation of FATF recommendations. Additionally,
countries should ensure that due diligence is taken using FATF recommended CDD
measures as guidance.

Other measures to deter money laundering and terrorist financing: In relations to

politically exposed persons, countries should ensure that appropriate risk management
systems are in place to ascertain whether the individual is a politically exposed person.
Involve senior management in the conducting and monitoring of business relations
with the person. Countries should ensure that measures are in place that allow
financial institutions dealing with cross-border correspondent banking to gather
sufficient information about a respondent institution, assess the respondent institutions
anti-money laundering and terrorist financing controls, document the responsibilities of
each institution and as it applies to payable-through accounts, coordinate with the
respondent bank on due diligence.

Additional recommendations full under the following subjects:

o Measures to be taken by financial institutions and non-financial businesses and
professions to prevent money laundering and terrorist financing

Measures to be taken with respect to countries that do not or

insufficiently comply with the FATF recommendations
Regulatory and supervision

o Institutional and other measures necessary in systems for combating money

laundering and terrorist financing.

Competent authorities, their powers and resources

Transparency of legal powers and arrangements

o International Co-operation

Mutual legal assistance and extradition

Other forms of co-operation1

1 Financial Action Task Force on Money Laundering, http://www.pszaf.hu/english/aml/meth-2004_en.pdf.

(February 2004).

- 120 - 120 - 120 -

FATF Impact on Access to Financial Services

The implementation of the FATF AML standards throughout the world has placed the
international financial sector under great pressure. The methodology used in both the U.S. and
the U.K. campaigns to implement Anti-Money Laundering measures and to Combat Terrorist
Financing (AML/CTF). The methodology is used to guide the countries compliance with the
AML/CTF standards as contained in the FATF Forty Recommendations 2003 and the FATF
Eight Special Recommendations on Terrorist Financing 2001. The methodology compliments
the structure of the FATF Recommendations. Financial institutions in both the U.S. and U.K.
undertook extensive projects to prepare for implementation. Following are the methodologies
took by these countries and their financial institutes to implement anti-money laundering
measures and to combat terroist financing.

U.S. Approach to Anti-Money Laundering Controls

The United States remains particularly concerned about terrorist financing activity in a core set
of approximately two-dozen countries around the world. Accordingly, the bulk of U.S. antimoney laundering technical assistance is focused on making these countries less vulnerable to
the terrorist financing threat and on making terrorists and their assets more vulnerable to counter
attacks.
The U.S. State Department is funding most of this inter-agency effort and is coordinating and
leading the entire undertaking of technical assistance. So far, the Department has led
comprehensive vulnerability and needs assessments of, and produced training and technical
assistance implementation plans for, 17 of these priority countries. The remaining assessments
are planned for 2004, security and political conditions permitting. Assistance, pegged to the
implementation plans, is being provided to all of the assessed countries. The program takes a
systemic and comprehensive approach, with assistancetargeted at five core objectives
delivered in both sequential and parallel stages:

Countries must first have adequate anti-money laundering/antiterrorist financing laws.

They must comply with FATFs anti-money laundering and antiterrorist financing
recommendations including the criminalization of money laundering and terrorist
financing and the establishment of effective measures to block and freeze assets.

With appropriate laws in place, training and technical assistance can be focused to
simultaneously develop the three core entities responsible for implementing laws.
Training is provided for criminal investigators in customs and other law enforcement
services to assist them in detecting and tracking money laundering and terrorist financing
and in developing the evidence to support indictments and prosecutions against criminals
and terrorists; for regulators that supervise the financial sector so that they can ensure that
all relevant banking and non-banking financial institutions know and follow know your
customer, suspicious transaction reporting, and other record keeping and good practices
- 121 - 121 - 121 -

procedures; and for the prosecutors and judges who will be key to the criminal
prosecution of cases against criminals, terrorists and their supporters.

Typically, the capstone to this effort is the development of Financial Intelligence Units
(FIUs), which are often tasked with developing the regulations that banking and nonbanking financial organizations must follow and where suspicious transaction reports and
other intelligence is collected, analyzed and disseminated both to help develop cases
domestically and sharing internationally through FIUs in other countries as part of
transnational investigations.

The U.S. Government, however, is not the sole provider of such assistance. The United States
supports a number of regional training programs around the world in which officials from
neighboring countries are brought together for specialized anti-money laundering and
antiterrorist financing training. The global network of International Law Enforcement
Academies (ILEAs), funded and managed by the State Departments Bureau of International
Narcotics and Law Enforcement Affairs (INL), has enhanced its anti-money laundering curricula,
including the incorporation of new segments on terrorist financing. The State Departments
Anti-terrorist Assistance (ATA) Program similarly includes terrorist financing segments in the
curricula it delivers at various antiterrorism training centers around the world such as the
Malaysian-run Southeast Asia Regional Center for Counter-terrorism. These and other broadbased training initiatives allowed the U.S. to provide some form of anti-money laundering or
antiterrorist financing assistance to nearly 100 countries in 2003.
International efforts to identify, block, and freeze terrorist assets persevered in 2003; however,
the task is growing more challenging as the most vulnerable targets have been successfully
attacked and as terrorists employ countermeasures to further protect their funds. The U.S.
Treasury reports that at the end of 2003, some $140 million worth of terrorist assets worldwide
have remained blocked since the crackdown began shortly after September 11, 2001. This
represents approximately a 12 percent increase from the $125 million total at the end of 2002.
A number of factors help explain the slower pace in 2003. Most notably, assets were less
concealed and thus more vulnerable to detection and blocking when measures were suddenly
implemented in the immediate aftermath of 9/11; in short, the low hanging fruit has been picked.
Meanwhile, to avoid the successful targeting of the formal financial sector, terrorist organizations
appear to be placing more emphasis on traditional, ethnic-based alternative remittance systems,
including trade-based money laundering, and on nongovernmental organizations such a charities.
Identifying and tracking funds through these alternative networksa tough enough assignment
even for countries with sophisticated anti-money laundering regimesis a staggering challenge
for many of the key terrorist financing countries who are only now beginning to develop
competent anti-money laundering institutions. The FATF has sought to help overcome this
challenge by issuing various interpretative notes and best practices guidelines on its Special
Recommendations dealing with charities and the blocking and freezing of assets. Indeed, at its
2003 annual typologies meeting, which addressed such issues as money laundering trends and
enforcement and regulation best practices, FATF focused on the charities problem, particularly
the challenge of tracking and monitoring funds raised by charities when they are distributed in
- 122 - 122 - 122 -

areas that have no formal banking, accounting, or record keeping infrastructure and depend on
cash economies.
Finally, important substantive strides were made with regard to burden sharing in 2003. The
proliferation of terrorist attacks around the world brought the threat home to more and more
countries and underscored the fact that no one country has the sole obligation or wherewithal to
meet the entire challenge. Sharing the burden of anti-money laundering and antiterrorist
financing training and technical assistance is especially important because it is so labor intensive.
U.S. experts are particularly stretched because of their frequent need to undertake, nearly
simultaneously, assessment, training, and investigative missions. Efforts to identify priorities
and coordinate assistance by the major donor countries took an important step forward at the
June 2003 G-8 Summit in Evian. There the heads of state agreed to establish the Counterterrorism Action Group (CTAG) for these priority-setting and coordination purposes. CTAG
consists of the G-8 members (U.S., UK, France, Germany, Italy, Canada, Japan, and Russia), the
European Union, and representatives of the UN Counter-terrorism Center, as well as other
representatives, invited on a case-by-case basis, who have demonstrated a willingness and ability
to provide counter terrorism assistance. CTAGrecognizing the importance of the issue and the
potential for burden sharingfocused its first mission on terrorist financing. It has partnered
with FATF, providing that organization with a list of countries CTAG members are interested in
providing assistance to so that FATF can assess their antiterrorist financing technical assistance
needs. FATF will deliver these assessments to the CTAG in early 2004 enabling the donors for
the first time to follow through with coordinated, cost-saving and gap-closing counter terrorism
technical assistance programs.
As we look beyond the accomplishments of 2003 and into the future, we see that much still
remains to be done to combat money laundering and terrorist financing. There remain significant
challenges in the adoption and implementation of anti-money laundering and antiterrorist
financing standards worldwide. However, two new FATF-style regional bodies may be
established in 2004, bringing more rigorous anti-money laundering disciplines to two regions
especially critical in the war against terrorism: the Middle East and Central Asia. The U.S. will
significantly enhance its anti-money laundering programs in East Africa as part of the Presidents
counter terrorism initiative for this region. Operationally, the biggest challenge will be
countering moves by criminals and terrorists to conduct their transactions through alternative,
often underground, remittance systems. This will press intelligence collection and criminal
investigation skills to their limits as they struggle to be effective in very closed, often hostile
foreign environments. One of the means being considered to attack this challenge is the creation
of an international network of Trade Transparency Units (TTUs). Patterned after the international
network of Financial Intelligence Units (84 worldwide) that, among other missions, collect,
analyze and disseminate information on suspicious transactions, the TTUs would similarly focus
on detecting anomalies in trade datasuch as deliberate over and under-invoicingthat can be a
powerful predictor of trade-based money laundering. By focusing on commodities that often
serve as stores-of-value, such as gold and precious gems, and are used to settle accounts without
involving the formal financial sector, the TTUs would get to the heart of much of the alternative
remittance challenge and help expose the criminals, terrorists, and their associates and assets to
punitive and deterrent enforcement action.
- 123 - 123 - 123 -

These initiatives will be essential to achieving further progress against money laundering and
terrorist financing. Progress will continue to require strong, imaginative and well-resourced
leadership from the United States. But we need not go it alone. The gains the United States
made in 2003 through its diplomatic and technical assistance efforts show an increasing
willingness of the international community to cooperate in this fightto comply with the
measures needed to block, deter, and expose money laundering and terrorist financing, and to
provide the assistance needed to turn the political will to comply into the operational ability to
enforce the laws and regulations that lead to the confiscation of crime and terrorist-related assets
and the prosecution and conviction of money launderers and terrorist financers.

U.K. Approach to Anti-Money Laundering Controls

Similar to the U.S. economy being a target for money laundering and terrorist financing, the
United Kingdom (UK) in playing a leading role in European and world finance remains
attractive to money launderers because of the size, sophistication, and reputation of its financial
markets. Although drugs are still a major source of illegal proceeds for money laundering, the
proceeds of other offenses, such as financial fraud and the smuggling of people and goods, have
become increasingly important both in the U.S. and U.K. The past few years have witnessed the
movement of cash placement away from High Street banks and mainstream financial institutions.
Criminals continue to use bureaux de change, cash smuggling into and out of the U.K.,
gatekeepers (including solicitors and accountants), and the purchase of high-value assets as
disguises for illegally obtained money.
In an effort to prevent the use of the financial system of the U.K. from being exploited by money
laundering and terrorist financing the U.K. has implemented the provisions of the European
Unions two Directives on the prevention of the use of the financial system for the purpose of
money laundering and the Financial Action Task Force (FATF) Forty Recommendations on
Money Laundering.
Further, the U.K. has since 1986 criminalized narcotics-related money laundering. The
laundering of proceeds from other serious crimes is criminalized by subsequent legislation.
Similar to the U.S. requirements banks and other non-financial institutions to submit Suspicious
Activities Reports (SAR), banks and non-bank financial institutions in the U.K. must report
suspicious transactions.
In November 2001, money-laundering regulations were extended to money service bureaus (e.g.,
bureaux de change, money transmission companies). As of January 1, 2004, more sectors are
subject to formal suspicious transaction reporting (STR) requirements, including attorneys,
solicitors, accountants, real estate agents, and dealers in high-value goods such as cars and
jewelry. Sectors of the betting and gaming industry that are not currently regulated are being
encouraged to establish their own codes of practice, including a requirement to disclose
suspicious transactions.

- 124 - 124 - 124 -

The U.K. legislation on July 24, 2002, enacted the Proceeds of Crime Act 2002. The act went
into force on January 1, 2003. The final regulations will take effect on March 1, 2004. The
specific of this act is that it creates, for the regulated sector, a new imprisonable offense of failing
to disclose suspicious transactions. This offense is in respect to all crimes, not just narcotics- or
terrorism-related crimes. This was not the case previously prior to the enactment of the act.
Along with the Act came an expansion of investigative powers relative to large movements of
cash in the U.K. In light of this, Her Majestys (HM) Customs has increased its national
priorities to include investigating the movement of cash through money exchange houses, and
identifying unlicensed money remitters. A total of $28.5 million in cash seizures was made
under the new act in 2003.
The U.K.s banking sector provides accounts to residents and nonresidents, who can open
accounts through private banking activities and various intermediaries that often advertise on the
Internet and also offer various offshore services. Private banking constitutes a significant portion
of the British banking industry. Both resident and nonresident accounts are subject to the same
reporting and record keeping requirements. Individuals typically open nonresident accounts for
a tax advantage or for investment purposes.
Bank supervision falls under the Financial Services Authority (FSA). The FSAs primary
responsibilities are in areas relating to the safety and soundness of the institutions in its
jurisdiction. The FSA also plays an important part in the fight against money laundering through
its continued involvement in the authorization of banks, and investigations of money laundering
activities involving banks. The FSA administers a civil-fines regime and has prosecutorial
powers. The FSA has the power to make regulatory rules with respect to money laundering, and
to enforce those rules with a range of disciplinary measures (including fines) if the institutions
fail to comply.
In December 2003, the FSA fined Abbey National, the U.K.s sixth largest bank, 2.3 million
British pounds (approximately $4.2 million), for extremely serious failings in its anti-money
laundering procedures during the period 2001-2003. According to the FSA, Abbey National was
cited for failure to report suspicious banking transactions in a timely manner, as well as failure to
carry out proper identity checks on new customers.
STRs are filed with the Financial Intelligence Division (FID), formerly the Economic Crime
Bureau, of the National Criminal Intelligence Service (NCIS). The NCIS serves as the UKs
financial intelligence unit (FIU). The FID analyzes reports, develops intelligence, and passes
information to police forces and HM Customs and Excise for investigation. In 2001, the FID
received approximately 32,000 STRs, and 65,000 STRs in 2002. The FID estimates it will
receive roughly 100,000 STRs in 2003.
Another initiative passes by the U.K. legislative body aimed at fighting money laundering and
terrorism financing is that to The Terrorism (United Nations Measures) Order 2001. This Order
makes it an offense for any individual, without a license from the Treasury, to make any funds
for financial or related services available, directly or indirectly, to, or for the benefit of, a person
who commits, attempts to commit, facilitates, or participates in the commission of acts of
terrorism. Further, the Order makes it an offense for a bank or building society to fail to disclose
to the Treasury a suspicion that a customer or entity, with whom the institution has had dealings
- 125 - 125 - 125 -

since October 10, 2001, is attempting to participate in acts of terrorism. The Anti-Terrorism,
Crime, and Security Act 2001 provides for the freezing of assets.
As a direct result of the events of September 11, 2001, the FID established a separate Terrorist
Finance Team (TFT) to maximize the effect of reports from the regulated sector. The TFT chairs
a law enforcement group to provide outreach to the financial industry concerning requirements
and typologies. The operational unit that responds to the work and intelligence development of
the TFT has seen a threefold increase in staffing levels directly due to the workload. The
Metropolitan Police responded to the growing emphasis on terrorist financing by expanding the
focus and strength of its specialist financial unit dedicated to this area of investigations. This
unit is now called the National Terrorist Financing Investigative Unit (NTFIU).
The activity in the U.K.s fight against money laundering and terrorism financing has netted
results. In 2003, the U.K. issued 21 terrorist asset freeze orders on 72 individuals and 16
organizations. Two of the orders implemented the European Unions September 2003 decision to
freeze all funds, other financial assets, and economic resources of Hamas. On November 19,
2002, Chancellor Gordon Brown ordered financial institutions in the U.K. to freeze funds
belonging to the Benevolence International Foundation (BIF). BIFs Chief Executive, Enaam
Arnaout, a Syrian-born U.S. citizen, was indicted in the United States for running a racketeering
enterprise, conspiracy to launder money, money laundering, wire and mail fraud, and providing
material support to organizations, including Usama Bin Ladins terror network.172

Conclusion
Both the U.S. and the U.K. campaign to implement anti-money laundering measures and to
combat terrorist financing has provided positive movements toward compliance with the
AML/CFT Standards as contained in the FATF. Both countries have comprehensive approaches
to combating money laundering and combating terrorist financing. Additionally, both countries
cooperate with foreign law enforcement agencies investigating narcotics-related financial crimes.
Both the U.S. and the U.K. are members of the FATF. The NCIS is an active member of the
Egmont Group and has information sharing arrangements in place with the FIUs of the United
States, Belgium, France, and Australia. The Mutual Legal Assistance Treaty (MLAT) between
the U.K. and the U.S. has been in force since 1996. The U.S. and U.K. recently negotiated an
asset sharing agreement that is awaiting signature by the appropriate parties. The UK also has
an MLAT with the Bahamas. Additionally, there is an MOU between the U.S. Customs Service
and HM Customs and Excise.
The U.S. and the U.K. should continue the strong enforcement of their comprehensive antimoney laundering/counter terrorist financing program and their active participation in
international organizations to combat the domestic and global threat of money laundering and the
support and financing of terrorists and their organizations.
172 United Kingdom, http://www.state.gov/g/inl/rls/nrcrpt/2003/vol2/html/29931.htm.
- 126 - 126 - 126 -

Module 6A Assignment
Samuel Frankel
AML II Summer 2004
9/9/04
Anti-Money Laundering Requirements in General
The FATF has issued a revised list of the 40 Recommendations in 2003, addressing the measures
all countries should take to combat money laundering. The recommendations include
criminalizing money laundering and certain predicate crimes to money laundering, provide
methods of confiscating or forfeiture of property and proceeds, practicing due diligence and
record keeping by financial and non-financial institutions, reporting suspicious transactions and
enforcing compliance with anti-money laundering laws, implementation of appropriate sanctions
for failing to comply, prohibit shell banks, cross-border transport of currency, establish
procedures for dealing with countries that do not comply with anti-money laundering protocols,
regulate financial and non-financial businesses to ensure compliance, require certain designated
non-financial businesses to comply with anti-money laundering rules (casinos, lawyers,
accountants, etc.), provide for the establishment of a financial investigative unit, cooperation
within a countrys law enforcement branches and judicial branches, as well as international
cooperation and enforcement, avoid bank secrecy or abuse of trusts an other financial tools, and
provide for mutual cross-border assistance, enforcement, confiscation, and forfeiture. Eight
additional recommendations were written dealing with terrorist financing as well, and mainly
address non-profit organizations and money wiring of funds, in addition to criminalizing terrorist
acts.
FATF conducts yearly reviews, and certain members provide the FATF with selfassessments on a regular basis. The stated goal, however unrealistic, is to have all member
countries implement each of the 40 Recommendations to the fullest extent possible.
U.S.A. AML Scheme
The United States is a member of FATF, and regularly submits mutual evaluations to the
organization. According to the Second Round of Mutual Evaluation, as outlined in the VIII
FATF Annual Report (1996-1997), the United States began strengthening its anti-money
laundering regime by implementing the following:
$

introducing new suspicious activity reporting (SAR) system and more comprehensive
civil safe harbour provisions;

the modification of the currency transaction reporting system so as to reduce regulatory

burdens on the U.S. banking industry by the expansion of exemptions, and the use of a
simplified currency transaction reporting (CTR) forms;

extending the list of money laundering predicate offences to cover terrorism, health care
and immigration offences;

improved co-operation between government and financial industry representatives in

- 127 - 127 - 127 -

meeting anti-money laundering objectives through the establishment of various coordinatory groups;
$

the implementation of Project Gateway which provides on-line financial intelligence to

state and local government authorities;

new funds transfer record keeping rules; and

the efforts to encourage the states to enact laws and co-ordinate law enforcement and
regulatory activity against money laundering.

According to the X FATF Annual Report (1998-1999), the United States proposed certain
know Your Customer laws, that were subsequently withdrawn from consideration. However,
the climate changed as a result of the attacks of September 11, 2001, and new legislation dealing
with, among other things, money laundering and terrorist financing, was passed in the form of
the USA PATRIOT Act (referred to as the Act). Some of the pertinent sections of the Act are
sections 314(a) and 314(b), which refer to the exchange of information between the government
and financial institutions, and between financial institutions themselves. Section 314(a) requires
the Secretary of the Treasury to adopt regulations to encourage authorities and law enforcement
authorities to share with financial institutions information regarding individuals, entities, and
organizations engaged in or reasonably suspected, based on credible evidence, of engaging in
terrorist acts or money laundering activities.
The contact agency is the Financial Crimes Enforcement Network (FinCEN), the
United States FIU. The FinCEN enacted regulations allowing law enforcement agencies to
provide information, through FinCEN, to various points of contact in the financial industry in
order to locate accounts and transactions of persons that may be involved in terrorism or money
laundering. This process is not a substitute for subpoenas or other legal avenues of obtaining
information. It merely allows a process for authorities to conduct a quick nationwide canvass of
activities of certain individuals within the past 12 months of the request. Financial institutions
have two weeks to respond if any matches were found.
In order for one of these 314(a) Information Requests to be sent, FinCEN requires
evidence that a certain case is significant through documentation showing the size or impact of
the case, the seriousness of the underlying criminal activity, the importance of the case to other
agencies, and proof of exhaustion of other traditional means of investigation.
Section 314(b) allows financial institutions to share information with each other
regarding individuals, institutions, organizations, or countries for a period of one year after
notifying FinCEN. The financial institution must have established adequate procedures to
safeguard the security and confidentiality of any information. Information received by financial
institutions pursuant to section 314(b) can not be used for any purpose other than identifying and
reporting on activities that may involve terrorist or money laundering activities.

- 128 - 128 - 128 -

The Act contains many other provisions regarding the fight against money laundering,
such as section 352, which requires all financial institutions to implement comprehensive antimoney laundering policies and procedures programs. In addition to the USA PATRIOT Act,
financial institutions must comply with the Bank Secrecy Act of 1982 (the "BSA") and cooperate
with the Office of Foreign Asset Control. The USA PATRIOT Act augments BSA by requiring
financial institutions to establish anti-money laundering programs and by providing enhanced
civil liability immunity for financial institutions that file suspicious activity reports. Through
FinCEN, certain non-financial entities must comply with the provisions of the Act, including
broker dealers, futures commission merchants, and casinos, as well as travel agencies, vehicle
sales, and dealers in precious metals and stones.
U.K. AML Scheme
Like the United States, the United Kingdom is a member of FATF, and regularly submits
mutual evaluations to the organization. According to the Second Round of Mutual Evaluation, as
outlined in the VIII FATF Annual Report (1996-1997), the United Kingdom began strengthening
its anti-money laundering regime by implementing the Money Laundering Regulations of 1993.
These regulations lay down requirements as to customer identification, record-keeping,
supervision and the reporting of suspicious transactions for a wide range of businesses. Active
measures have also been taken with respect to international co-operation and many new bilateral
confiscation agreements have been entered into. These measures have been complemented by
administrative steps such as improving the guidance notes for financial institutions and the
procedures relating to the reporting and investigation of suspicious transaction reports,
improving feedback to financial institutions, and increasing the awareness of money laundering
for non-financial businesses.
Most recently, the United Kingdom implements the Proceeds of Crime Act of 2002 (the
Act), prior to which there were five different pieces of primary and secondary legislation
dealing with money laundering. The Act consolidated this legislation by creating a set of general
offenses relating to dealings with proceeds of all crimes. Particularly important was the creation
of a new offense of failure to report suspicions of money laundering of any proceeds of crime,
rather than just suspicions in relation to the proceeds of terrorism or drugs offenses, as under the
prior legislation.
The Act created three new principal money laundering offenses - concealing, arranging,
and acquiring and using criminal property. The definition of criminal property in the Act means
that all three new principal money laundering offenses will apply to the laundering of a
criminals own proceeds of crime, as well as those of someone else. An explanation of
concealing, arranging, and acquiring and using is as follows: A person commits an offense if
they conceal, disguise, convert or transfer criminal property or remove criminal property from
England and Wales or from Scotland or from Northern Ireland. If a person enters into or
becomes concerned in an arrangement which they knew, or suspected, would facilitate another to
acquire, retain, use or control criminal property and that the person concerned also knew or
suspected that the property constituted or represented benefit from criminal conduct, he is guilty
of an offense. Lastly, a person commits an offence where a person knows or suspects that the
property which is acquired, used or possessed constitutes or represents a benefit from crime.
- 129 - 129 - 129 -

One of the things the Act does, as opposed to the United States laws regarding money
laundering, is require lawyers to report suspicious activities. The Act repeals and replaces
certain sections of the Drug Trafficking Act 1994, and creates in its place an obligation on those
in the regulated sector to report suspicions of any money laundering to the authorities. This
section widens the scope of the offense so that the obligation will now be to report the laundering
of the proceeds of any criminal conduct, not just drugs. Additionally, there are reporting
requirements under the Terrorism Act of 2000 and the Anti-terrorism, Crime and Security Act of
2001, relating to the reporting of suspicious activities regarding terrorist funds.
Additionally, the United Kingdom implemented new Money Laundering Regulations of
2003, covering matters such as know your customer, record keeping and training, and Customs
& Excise licensing regimes for bureaux de change check cashiers, and money transmitters.
These new regulations pertain to estate agents, casinos, dealers in high value goods, and certain
professional services (legal, accounting, etc.).
Conclusions
Both the United States and the United Kingdom have strengthen their anti-money
laundering regimes since 2001, although neither nation is (nor should) in total compliance with
each and every recommendation issued by FATF. The United Kingdom has been more willing to
expand the anti-money regulations to businesses that traditionally have the protections of
privilege, such as the legal field. However, both systems have greatly increased the predicate
crimes, and international cooperation, concerning money laundering.
Resources:
FATF, http://www1.oecd.org/fatf/Ctry-orgpages/ctry-uk_en.htm and
FinCEN,
http://www.fincen.gov/314afactsheet083120042.pdf
and
http://www.fincen.gov/fi_infoappb.html.
Irwin Mitchell, Money Laundering and the Proceeds of Crime Act 2002, The Legal 500,
September 2002, available at http://www.icclaw.com/devs/uk/cc/ukcc_002.htm.
Money Laundering: The UKs New Regime and Other Recent International Developments,
Norton Rose, March 2003, available at:
http://www.nortonrose.com/publications/1412-Money%20laundering%20briefing.pdf.

- 130 - 130 - 130 -

Module 6A Assignment
Samuel Frankel
AML II Summer 2004
9/9/04
Anti-Money Laundering Requirements in General
The FATF has issued a revised list of the 40 Recommendations in 2003, addressing the
measures all countries should take to combat money laundering. The recommendations include
criminalizing money laundering and certain predicate crimes to money laundering, provide
methods of confiscating or forfeiture of property and proceeds, practicing due diligence and
record keeping by financial and non-financial institutions, reporting suspicious transactions and
enforcing compliance with anti-money laundering laws, implementation of appropriate sanctions
for failing to comply, prohibit shell banks, cross-border transport of currency, establish
procedures for dealing with countries that do not comply with anti-money laundering protocols,
regulate financial and non-financial businesses to ensure compliance, require certain designated
non-financial businesses to comply with anti-money laundering rules (casinos, lawyers,
accountants, etc.), provide for the establishment of a financial investigative unit, cooperation
within a countrys law enforcement branches and judicial branches, as well as international
cooperation and enforcement, avoid bank secrecy or abuse of trusts an other financial tools, and
provide for mutual cross-border assistance, enforcement, confiscation, and forfeiture. Eight
additional recommendations were written dealing with terrorist financing as well, and mainly
address non-profit organizations and money wiring of funds, in addition to criminalizing terrorist
acts.
FATF conducts yearly reviews, and certain members provide the FATF with selfassessments on a regular basis. The stated goal, however unrealistic, is to have all member
countries implement each of the 40 Recommendations to the fullest extent possible.
U.S.A. AML Scheme
The United States is a member of FATF, and regularly submits mutual evaluations to the
organization. According to the Second Round of Mutual Evaluation, as outlined in the VIII
FATF Annual Report (1996-1997), the United States began strengthening its anti-money
laundering regime by implementing the following:
$

introducing new suspicious activity reporting (SAR) system and more comprehensive
civil safe harbour provisions;

the modification of the currency transaction reporting system so as to reduce regulatory

burdens on the U.S. banking industry by the expansion of exemptions, and the use of a
simplified currency transaction reporting (CTR) forms;

extending the list of money laundering predicate offences to cover terrorism, health care
and immigration offences;

improved co-operation between government and financial industry representatives in

meeting anti-money laundering objectives through the establishment of various co- 131 - 131 - 131 -

ordinatory groups;
$

the implementation of Project Gateway which provides on-line financial intelligence to

state and local government authorities;

new funds transfer record keeping rules; and

the efforts to encourage the states to enact laws and co-ordinate law enforcement and
regulatory activity against money laundering.

According to the X FATF Annual Report (1998-1999), the United States proposed certain
know Your Customer laws, that were subsequently withdrawn from consideration. However,
the climate changed as a result of the attacks of September 11, 2001, and new legislation dealing
with, among other things, money laundering and terrorist financing, was passed in the form of
the USA PATRIOT Act (referred to as the Act). Some of the pertinent sections of the Act are
sections 314(a) and 314(b), which refer to the exchange of information between the government
and financial institutions, and between financial institutions themselves. Section 314(a) requires
the Secretary of the Treasury to adopt regulations to encourage authorities and law enforcement
authorities to share with financial institutions information regarding individuals, entities, and
organizations engaged in or reasonably suspected, based on credible evidence, of engaging in
terrorist acts or money laundering activities.
The contact agency is the Financial Crimes Enforcement Network (FinCEN), the
United States FIU. The FinCEN enacted regulations allowing law enforcement agencies to
provide information, through FinCEN, to various points of contact in the financial industry in
order to locate accounts and transactions of persons that may be involved in terrorism or money
laundering. This process is not a substitute for subpoenas or other legal avenues of obtaining
information. It merely allows a process for authorities to conduct a quick nationwide canvass of
activities of certain individuals within the past 12 months of the request. Financial institutions
have two weeks to respond if any matches were found.
In order for one of these 314(a) Information Requests to be sent, FinCEN requires
evidence that a certain case is significant through documentation showing the size or impact of
the case, the seriousness of the underlying criminal activity, the importance of the case to other
agencies, and proof of exhaustion of other traditional means of investigation.
Section 314(b) allows financial institutions to share information with each other
regarding individuals, institutions, organizations, or countries for a period of one year after
notifying FinCEN. The financial institution must have established adequate procedures to
safeguard the security and confidentiality of any information. Information received by financial
institutions pursuant to section 314(b) can not be used for any purpose other than identifying and
reporting on activities that may involve terrorist or money laundering activities.
The Act contains many other provisions regarding the fight against money laundering,
- 132 - 132 - 132 -

such as section 352, which requires all financial institutions to implement comprehensive antimoney laundering policies and procedures programs. In addition to the USA PATRIOT Act,
financial institutions must comply with the Bank Secrecy Act of 1982 (the "BSA") and cooperate
with the Office of Foreign Asset Control. The USA PATRIOT Act augments BSA by requiring
financial institutions to establish anti-money laundering programs and by providing enhanced
civil liability immunity for financial institutions that file suspicious activity reports. Through
FinCEN, certain non-financial entities must comply with the provisions of the Act, including
broker dealers, futures commission merchants, and casinos, as well as travel agencies, vehicle
sales, and dealers in precious metals and stones.
U.K. AML Scheme
Like the United States, the United Kingdom is a member of FATF, and regularly submits
mutual evaluations to the organization. According to the Second Round of Mutual Evaluation, as
outlined in the VIII FATF Annual Report (1996-1997), the United Kingdom began strengthening
its anti-money laundering regime by implementing the Money Laundering Regulations of 1993.
These regulations lay down requirements as to customer identification, record-keeping,
supervision and the reporting of suspicious transactions for a wide range of businesses. Active
measures have also been taken with respect to international co-operation and many new bilateral
confiscation agreements have been entered into. These measures have been complemented by
administrative steps such as improving the guidance notes for financial institutions and the
procedures relating to the reporting and investigation of suspicious transaction reports,
improving feedback to financial institutions, and increasing the awareness of money laundering
for non-financial businesses.
Most recently, the United Kingdom implements the Proceeds of Crime Act of 2002 (the
Act), prior to which there were five different pieces of primary and secondary legislation
dealing with money laundering. The Act consolidated this legislation by creating a set of general
offenses relating to dealings with proceeds of all crimes. Particularly important was the creation
of a new offense of failure to report suspicions of money laundering of any proceeds of crime,
rather than just suspicions in relation to the proceeds of terrorism or drugs offenses, as under the
prior legislation.
The Act created three new principal money laundering offenses - concealing, arranging,
and acquiring and using criminal property. The definition of criminal property in the Act means
that all three new principal money laundering offenses will apply to the laundering of a
criminals own proceeds of crime, as well as those of someone else. An explanation of
concealing, arranging, and acquiring and using is as follows: A person commits an offense if
they conceal, disguise, convert or transfer criminal property or remove criminal property from
England and Wales or from Scotland or from Northern Ireland. If a person enters into or
becomes concerned in an arrangement which they knew, or suspected, would facilitate another to
acquire, retain, use or control criminal property and that the person concerned also knew or
suspected that the property constituted or represented benefit from criminal conduct, he is guilty
of an offense. Lastly, a person commits an offence where a person knows or suspects that the
property which is acquired, used or possessed constitutes or represents a benefit from crime.
- 133 - 133 - 133 -

One of the things the Act does, as opposed to the United States laws regarding money
laundering, is require lawyers to report suspicious activities. The Act repeals and replaces
certain sections of the Drug Trafficking Act 1994, and creates in its place an obligation on those
in the regulated sector to report suspicions of any money laundering to the authorities. This
section widens the scope of the offense so that the obligation will now be to report the laundering
of the proceeds of any criminal conduct, not just drugs. Additionally, there are reporting
requirements under the Terrorism Act of 2000 and the Anti-terrorism, Crime and Security Act of
2001, relating to the reporting of suspicious activities regarding terrorist funds.
Additionally, the United Kingdom implemented new Money Laundering Regulations of
2003, covering matters such as know your customer, record keeping and training, and Customs
& Excise licensing regimes for bureaux de change check cashiers, and money transmitters.
These new regulations pertain to estate agents, casinos, dealers in high value goods, and certain
professional services (legal, accounting, etc.).
Conclusions
Both the United States and the United Kingdom have strengthen their anti-money
laundering regimes since 2001, although neither nation is (nor should) in total compliance with
each and every recommendation issued by FATF. The United Kingdom has been more willing to
expand the anti-money regulations to businesses that traditionally have the protections of
privilege, such as the legal field. However, both systems have greatly increased the predicate
crimes, and international cooperation, concerning money laundering.
Resources:
FATF, http://www1.oecd.org/fatf/Ctry-orgpages/ctry-uk_en.htm and
FinCEN,
http://www.fincen.gov/314afactsheet083120042.pdf
and
http://www.fincen.gov/fi_infoappb.html.
Irwin Mitchell, Money Laundering and the Proceeds of Crime Act 2002, The Legal 500,
September 2002, available at http://www.icclaw.com/devs/uk/cc/ukcc_002.htm.
Money Laundering: The UKs New Regime and Other Recent International Developments,
Norton Rose, March 2003, available at:
http://www.nortonrose.com/publications/1412-Money%20laundering%20briefing.pdf.
FRANKEL 6A
I. Anguilla
Criminal Aspects: The UK government is ultimately responsible for the external relations
of Anguilla, as a Overseas Territory (colony) and therefore for ensuring financial stability, good
governance in relation to financial affairs, anti-money laundering legislation and other measures.
The courts are a Magistrates Court and the Eastern Caribbean Supreme Court.
Underlying (predicate) Crimes: The Proceeds of Criminal Conduct Act of 2000 extends
the predicate offenses of money laundering to all indictable offenses.
Common Crimes:

- 134 - 134 - 134 -

1. It is an offence for any person to provide assistance to a criminal to obtain, conceal,

retain or be able to invest funds, if that person knows or suspects or, in some cases, should have
known or suspected that those funds are the proceeds of criminal conduct;
2. It is an offence for any person to disclose information to anyone that is likely to
prejudice an investigation into money laundering;
3. It is an offense for any person who acquires knowledge or a suspicion of money
laundering in the course of their trade, profession, business or employment not to report the
knowledge or suspicion as soon as it is reasonably practical after the information comes to his
attention.
Seizure and Forfeiture: The PCCA allows for the forfeiture of criminally-derived funds.
FIU: Creation of the Financial Services Commission in November 2003. This is an
autonomous regulatory board empowered to approve appointment of compliance officers of
licensees, conduct compliance inspections, monitor activity within the financial sector, and
undertake enforcement actions against persons involved in unlawful activity. It will also monitor
compliance with the Anti-Money Laundering Regulations of 2000, and guidance notes, and
recommend new laws of legislative amendments.
Additionally, the MLRAA established the Money Laundering Reporting Authority as the
FIU, which receives suspicious transactions reports and is empowered to disclose information to
an Anguillan or foreign law enforcement agency. The Criminal Justice Act of 2000 enables
Anguilla to directly cooperate with other jurisdictions through mutual legal assistance.
Obligated Subjects under the Law: The DTOA and PCCA apply to all individuals and
businesses, which are subject to the jurisdiction of the court in Anguilla and not just to financial
services businesses. The legislation protects those who report suspicions of money laundering
from claims in respect of any alleged breach of client confidentiality or in respect of any
restrictions upon disclosure imposed by statute or contract.
Civil Aspects: The Money Laundering Reporting Authority Act of 2000, amending the
Drug Trafficking Offences Ordinance of 1988, requires persons involved in the provision of
financial services to report any suspicious transactions derived from drugs or criminal conduct.
Know Your Customer policy: The MLRAA establishes requirements for customer
identification, record keeping, reporting, and training procedures. The PCCA provides for
suspicious activities reporting and a safe harbor for this reporting.
There are no residency requirements for company formation in Anguilla, with no local
presence required for directors, shareholders, meetings, etc. Bearer and redeemable shares are
issued. Disclosure of beneficial owners is not required except for bearer shares.
Banking Secrecy: Banking confidentiality does exist in Anguilla.
II. Argentina
Criminal Aspects: Although Argentinas official financial sectors remain weak due to
instability, transactions conducted through non-bank sectors and professions remain viable
mechanisms to launder money. As such, the Government of Argentina (GOA) in 2003 made
efforts to implement the regulations of anti-money laundering law 25.246 of May 200.
Underlying (predicate) Crimes: Law 25.246 expands the predicate offenses for money
laundering to include all crimes listed in the Penal Code.
- 135 - 135 - 135 -

Seizure and Forfeiture: The Narcotics Law of 1989 authorizes the seizure of assets and
profits, and provides that these or the proceeds of sales will be used in the fight against illegal
narcotics trafficking.
Pending legislation will criminalize terrorist financing and provides for penalties for
violating international conventions, including the UN International Convention for the
Suppression of the Financing of Terrorism.
FIU: Law 25.246 created the Unidad de Informacion Financiera (UIF), under the
Ministry of Justice and Human Rights.
Civil Aspects: Law 25.246 sets a stricter regulatory framework for the financial sectors.
Under this law, requirements for customer identification, record keeping, and reporting of
suspicious transactions by all financial entities and businesses are supervised by the Central
Bank, the Securities Exchange Commission (Comision Nacional de Valores or CNV), and the
Superintendence of Insurance (Superintendancia de Seguros de la Nacion or SSN).
The law forbids the institutions to notify their clients when filing suspicious financial
transactions reports, and provides a safe harbor from liability for reporting such transactions.
Resolutions 6, 7, 8, 9, 11, 15, and 17 issued by the UIF in 2003 outline procedures for the
reporting of suspicious or unusual transactions by: the Central Bank, CNV, SSN, the tax
authority, banks, currency exchange houses, casinos, securities dealers, registrars of real estate,
dealers in art, antiques and precious metals, insurance companies, issuers of travelers checks,
credit card companies, postal money transmitters, notaries, and CPAs.
Reporting of suspicious or unusual transactions exceeding 50,000 pesos, and obligated
entities required to keep reports of suspicious or unusual transactions for a period of 5 years, and
provide documents within 48 hours of a request from the UIF.
Banking Secrecy: Customer identification and identification of beneficial owners are
required.
III. Jamaica
Criminal Aspects: Due to banking scandals in the mid to late 1990s, Jamaicas banking
system has been under strict scrutiny. Since Jamaica is a large producer of marijuana, and a
major transit country for South American cocaine, unlawful gains are laundered by purchase of
tangible assets, such as luxury cars and real estate, as well as large shipments of cash to South
American countries. Additionally, criminals in Jamaica launder money through investment in
front companies or through high-cash businesses such as restaurants, nightclubs, fast food
outlets, taxi companies or car sales and repair companies, with high cash turnovers. Also, they
often use money service businesses, cambios, and remittance services and of course, banks, if
they can get around the suspicious activity reports.
The law underlying Jamaicas anti-money laundering system is the Money Laundering
Act (MLA) approved by Parliament in 1996, and implemented in 1998.
In 2003 the Jamaican government introduced a new Customs arrival form that
incorporates a requirement to declare currency or monetary instruments over $10,000.00 or
equivalent, in order to combat the movement of large amounts of cash through Jamaica.
Underlying (predicate) Crimes: The MLA criminalizes narcotics-related money
laundering. In 2000 the MLA was amended to add fraud, firearms trafficking, and corruption as
predicate offenses for money laundering. Acts of terrorism have not been added as a predicate
offense, and the government has no authority at this time under the MLA to identify, freeze, and
seize terror finance-related assets.
- 136 - 136 - 136 -

Under the Money Laundering Act, the offence of money laundering is committed when a
person engages in a transaction that involves property that is derived from the commission of a
specified offence; or acquires, possesses, uses, conceals, disguises, disposes of or brings into
Jamaica, any such property; or converts or transfers that property or removes that property from
Jamaica and the person knows at the time he engages in the transaction that the property is
derived or realized directly, or indirectly from the commission of a specified offence.
Seizure and Forfeiture: Jamaica has no civil forfeiture laws, and under the 1994 Drug
Offenses (Forfeiture of Proceeds) Act, a criminal narcotics-trafficking conviction is required as a
pre-requisite to forfeiture. In other words, most illicit funds must be returned to the criminal. A
court may order, under MLA, that suspected terrorist assets be frozen, but a court order is
necessary.
FIU: Financial Investigations Division of the Ministry of Finance (as of 2003). It
comprises of four police officers with arrest powers.
Obligated Subjects under the Law: Under the MLA, exchange bureaus and cambios have
a report threshold of $8,000.00. In 2002, the law was amended and imposed a reporting
requirement on money transfer and remittance agencies for transactions over $50,000.00
Institutions, which are authorized to take deposits within the Jamaican financial sector,
are commercial banks, licensed financial institutions (merchant banks), building societies and
credit unions. All of the above entities, except for credit unions, are supervised by the Bank of
Jamaica.
Civil Aspects: The MLA introduces record keeping and reporting requirements for
financial institutions on all currency transactions over $10,000.00 (raised to $50,000.00 in 1998
due to complaints from financial sector institutions). Additionally, suspicious transactions of any
amount are required to be reported to the Director of Public Prosecutions.
Bank of Jamaica requires all banks and financial institutions to abide by the Guidance
Notes for Financial Institutions in Detecting Terrorist Financing issued by the FATF in 2002.
Jamaica and the U.S. have a Mutual Legal Assistance Treaty in force since 1995, and
Jamaica is party to the 1988 UN Drug Convention. There is no statutory provision in place to
facilitate the sharing of assets confiscated as a result of cooperative efforts of mutual assistance.
A bill to remedy this situation has been passed by both Houses of Parliament and is awaiting the
assent of the Governor General.
Administrative Sanctions: In carrying out its supervisory function the Bank of Jamaica
does not differentiate between the anti-money laundering aspect of a financial institutions
operations and the normal areas that would be of concern to supervisors. Testing for anti-money
laundering compliance is done in conjunction with other prudential assessment procedures. This
includes mandatory annual on-site examinations and on-going off-site review of prudential
returns submitted on a weekly, monthly, quarterly and annual basis. Failure to adhere to the
provisions of the Money Laundering Act may be indicative of unsafe banking practices. Such a
finding can lead to regulatory action being taken under the relevant institutions governing
statute in addition to penalties provided by the Money Laundering Act.
Banking Secrecy: Jamaica is not an OFC with strict bank secrecy laws. Under the MLA,
a financial institution is required to establish and implement programs, policies, procedures and
controls as may be necessary for preventing and detecting money laundering, including the
establishment of procedures to ensure high standards of integrity of employees, the development
of a system to evaluate the personal employment and financial history of employees, and training
of employees on a continuing basis with respect to their responsibilities under the Act.
- 137 - 137 - 137 -

IV. U.S.A.
Criminal Aspects: In 1970 the United States began its fight with money laundering with
the enactment of the Bank Secrecy Act, which established reporting standards and requirements
aimed at creating a paper trail for transactions involving large amounts of currency. Banks were
required to file a currency transaction report for transactions greater than $10,000.00
In 1986 Congress enacted the Money Laundering Control Act, which criminalized money
laundering itself. Beginning in 1987, Congress required all FDIC depository institutions and
credit unions to establish anti-money laundering policies with enactment of 31 U.S.C. 5313.
The Suspicious Activity Reporting System (SARS) was adopted as a nationwide method
for filing suspicious activity reports with the Treasury Department and for distribution of these
reports to certain sectors of the law enforcement community.
In 2001, the United States enacted the USA PATRIOT Act, which strengthen the MLCA
of 1986. The PATRIOT Act authorizes the Secretary of the Treasury to require domestic financial
institutions and domestic financial agencies to take any of five new special measures if, after
consultation with the Secretary of State and the Attorney General, the Secretary of the Treasury
finds that such action is warranted to deter a primary money laundering concern imposed by
sources outside the United States.
Underlying (predicate) Crimes: Due to the PATRIOT Act, the list of underlying crimes
includes drug trafficking, bank fraud, and certain crimes of violence such as murder, robbery,
extortion, and the use of explosives. It also includes bribery of a public official, or the
misappropriation, theft, or embezzlement of public funds by or for the benefit of a public official,
smuggling or export control violations involving an item listed on the U.S. Munitions List, or an
item controlled under regulations under the Export Administration Regulations, and an offense
for which the United States would be obligated by a multilateral treaty, either to extradite the
alleged offender or to submit the case for prosecution, if the offender were found within the
territory of the United States.
Thus, individuals or groups caught using the proceeds of any of the above activities in a
U.S. financial transaction will be guilty of money laundering provided there is the requisite intent
(or if more than $10,000 is exchanged).
Seizure and Forfeiture: The PATRIOT Act gives the U.S. jurisdiction over foreign
persons who convert property to their own use after such property has been ordered to be
forfeited as a result of a violation of U.S. money laundering laws. It also allows U.S. courts to
issue restraining orders to preserve property in the U.S. and appoint a receiver to collect and take
possession of assets in satisfaction of criminal or civil money laundering or forfeiture judgments.
The U.S. can also seize funds and bring a forfeiture action on accounts deposited in a
foreign bank that has a correspondent account in the United States when there is reasonable
cause to believe the funds are derived from criminal activity.
FIU: In 1990, the Department of the Treasury created the Financial Crimes Enforcement
Network (FinCEN) to provide an analytical intelligence network focused on financial crimes.
FinCEN maintains a database of currency transaction reports and suspicious activity reports and
makes them available to local, state, federal and foreign law enforcement officials. The USA
PATRIOT Act directed FinCEN to assist law enforcement authorities in combating underground
banking networks used by terrorists involved in illegal activities.
- 138 - 138 - 138 -

Civil Aspects: The five new special measures in the PATRIOT Act require domestic
financial institutions and financial agencies to (1) perform additional record-keeping and
reporting relative to transactions identified as posing a primary money laundering concern,
including tracking the name and address of parties to such transactions and identifying the legal
capacity in which a party acts; (2) identify the beneficial owner(s) of an account opened or
maintained in the United States by a foreign person; (3) maintain records of customers who make
use of payable-through accounts connected to any foreign jurisdictions, financial institutions,
or classes of transactions that are of primary money laundering concern; (4) identify customers
who use inter-bank correspondent accounts opened by a foreign bank at a U.S. bank; and (5)
prohibit the opening or maintenance of correspondent and payable-through accounts involving a
primary money laundering concern. Additionally, financial institutions must enact anti-money
laundering programs that develop internal policies, procedures, and controls, designate a
compliance officer, implement an ongoing employee training program, and create an
independent audit function to test programs.
Failure to comply with the above special measures can result in stiff penalties totaling
not more than two times the amount of the transaction, but not more than $1,000,000.
Banking Secrecy: The PATRIOT Act requires financial institutions to verify customers
identities, maintain records relating to identify verification, and consult lists of known or
suspected terrorists. Banks are still required to file a currency transaction report for transactions
greater than $10,000.00, which has not changed since the Bank Secrecy Act.
Information taken substantially from the following resources:
INCSR,
U.S.
Department
of
State,
March
http://www.state.gov/g/inl/rls/nrcrpt/2003/vol2/html.

1,

2004,

available

at

John D.K. Lawrence, Combating Money Laundering: Developments in Anguilla, Anguilla

Financial Services Department, available at http://www.anguillafsc.com/feature_money.htm.
Lloyd Williams, Laundering Drug Money, The Jamaican Gleaner, April 20, 2004, available at
http://www.jamaica-gleaner.com/gleaner/20040420/news/news3.html.
CFATF, 1998-1999
99.html#mute13.

Annual

Report,

available

at

http://www.cfatf.org/eng/annrep/98-

George A. Lyden, The International Money Laundering Abatement and Anti-Terrorist Financing
Act of 2001: Congress Wears a Blindfold While Giving Money Laundering Legislation a
Facelift, 8 FORDHAM J. CORP. & FIN. L. 201 (2003).
Rebecca Gregory, The Lawyers Role: Will Uncle Sam Want You in the Fight Against Money
Laundering and Terrorism?, 72 UMKC L. Rev. 23 (2003).
COMPARATIVE ANALYSIS OF THE CRITERIA AND PROGRESS IN THE AML REGIMES
OF PERU, VENEZUELA AND ECUADOR WITH THE UNITED STATES
Peru
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The primary money laundering issue relating to Peru involves the narcotics trade. Key
excerpts from the 2003 International Narcotics Control Strategy Report provide the following
outline of current conditions there:
Peru is not a major regional financial center nor an offshore money laundering
haven. Narcotics-related and other money laundering does occur, but existing
laws do not provide reliable or adequate mechanisms to estimate its scale in
Peru.
Peru has no formal agreement with the United States on a general mechanism for
exchanging records in connection with narcotics investigations and proceedings,
and the United States has not requested negotiations with Peru on such an
agreement. In 1992, Peru and the United States concluded an agreement for
exchange of information on cash transactions (Kerry Amendment). The
Superintendency of Banking and Insurance has published regulations to
implement this agreement; the US has made no formal requests for information
thereunder, and it is not know how well those regulations are implemented in
practice. National police authorities responsible for narcotics investigation
maintain good liaison relationships for informal exchange of information with
DEA on narcotics investigations, including money laundering cases. Peru has a
formal agreement with the United Kingdom for mutual assistance in narcotics
enforcement, including asset sharing, and has provided information under that
agreement. It has general agreements for counternarcotics cooperation with other
countries, with some of whom it also exchanges drug investigative information.
No specific information is available on the extent of such exchanges, nor how
many countries may be involved.
Legislation adopted in 1992 made money laundering a criminal offense.
Narcotics-related money laundering is an aggravated offense calling for additional
penalty.
Corruption. As a matter of policy, the GOP does not encourage or facilitate the
illicit production or distribution of narcotic or psychotropic drugs or other
controlled substance, or the laundering of the proceeds from illegal drug
transactions.
Peru created a Financial Intelligence Unit in 2002 and established reporting requirements
for banks and other financial institutions. It has regulatory controls and laws authorizing the
seizure of assets, although they appear to be rarely enforced.
Venezuela
The 2002 International Narcotic Control Strategy Country Report stated that the
Government of Venezuela does not as a matter of policy or practice encourage or facilitate drug
trafficking or money laundering, nor are its senior officials proven to engage in, encourage, or
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facilitate such activities. The GOV recognizes corruption as a problem of major magnitude and
has focused considerable attention on combating it, especially in the law enforcement and
judicial sectors.
The 2003 International Narcotics Control Strategy Report contains a number of
observations relevant to money laundering in Venezuela:
Venezuela is not a regional financial center, nor does it have an offshore financial
sector. The relatively small but modern banking sector, which consists of 52
banks, primarily serves the domestic market. Venezuelas proximity to drug
producing countries, weaknesses in its anti-money laundering system, and
corruption, continue to make Venezuela particularly vulnerable to money
laundering. The main source of money laundering in Venezuela stems from
proceeds generated by Colombias cocaine and heroin trafficking organizations.
Reportedly, some money is laundered through the real estate market in its
Margarita Island free trade zone.
Although the GOV, as a matter of government policy, does not encourage or
facilitate illicit drug production or trafficking, nor the laundering of proceeds from
the same, there have been accusations that the current administration has turned a
blind eye to such activities. Venezuelas sometimes practice of assigning
temporary stand-in judges to narcotics trafficking cases at key points of the trial
has resulted in the release of numerous narcotics traffickers under suspicious, if
not farcical, circumstances.
Petty corruption, such as the taking of small bribes to facilitate exportation
processing, is widespread and tolerated with ambivalence. This in turn creates an
atmosphere of ambiguity where larger scale corruption may also be accepted.
Venezuela placed 100th out of 133 countries in Transparency Internationals 2003
report, falling from its position of 83 in 2002. Venezuela now ranks among the six
most corrupt countries in Latin America.
While the country has asset seizure, the 2003 report points out that Venezuela has failed
to pass the laws needed to streamline asset forfeiture processes there.
It also notes that:
The GOV has introduced three antiterrorism bills, but much of their content is
highly politicized (e.g., defining various forms of non-violent political protest to
be forms of terrorism). These bills do not fulfill the requirements of either the UN
International Convention for the Suppression of the Financing of Terrorism
(1999) nor the UN International Convention Against Transnational Organized
Crime (AKA the Palermo Convention 2000).
In 1998, the government created a central Venezuelan Financial Intelligence Unit (FIU).
Ecuador
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The 2003 INCS report contains several findings relating to money laundering activities in
Ecuador and the nations anti-AML efforts.
Ecuador, a major drug transit country, lacks an effective anti-money laundering
regime. Ecuadors dollarized economy increases the attractiveness of Ecuador as a
money laundering site. Proximity to Colombia and Peru, increases Ecuadors
vulnerability to drug money laundering. Laundering may also occur in the real
estate market and through sales of businesses or commercial contraband.
The Narcotics and Psychotropic Substance Act of 1990 (Law 108) provides for
the following money laundering crimes, but only in connections with illicit drug
trafficking: illegal enrichment (Article 76), conversion or transfer of assets
(Article 76, 77), and prosecution of front men (figureheads) (Article 78). Law 108
currently is being revised. However, there is broad agreement that Law 108 is an
inappropriate vehicle for money laundering provisions that extend beyond drug
offenses. In November 2003, an interagency group completed a draft of a standalone law criminalizing the laundering of proceeds of any crime. The draft law
was submitted to the President for transmittal to the Congress early in 2004.
Regulations issued pursuant to Law 108, the 1994 Financial System Law, and a
1996 Banking Superintendency Resolution require financial institutions to report
to the National Drug Council (CONSEP) any transaction in cash or stocks over
$5,000, as well as suspicious financial transactions. Mutual societies are required
to report transactions of $5,000 and above. Financial cooperatives must report
transactions of $22,000 and higher. Electronic reporting of this information was
implemented in 1999. Banks operating in Ecuador are required to maintain
financial transaction records for six years. There are no due diligence or banker
negligence laws that hold individual bankers responsible if their institutions
launder money. However, a banks board of directors can be held legally
responsible if drug money laundering occurs in their institution.
Corruption. Ecuadorian government policy opposes the illicit production or
distribution of drugs or other controlled substances, as well as the laundering of
drug money. The 1990 drug law (Law 108) provides for prosecution of any
government official, including a judge, who deliberately impedes the prosecution
of anyone charged under that law. Some elements of other official corruption are
criminalized in Ecuadorian laws but there is no comprehensive anticorruption law
to address the problem per se.
Agreements and Treaties. Ecuador and the United States signed a customs
mutual assistance agreement in 2002. Ecuador signed and ratified the United
Nations Convention against Transnational Organized Crimes and its protocols
dealing with migrant smuggling and trafficking in persons.

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Asset Seizure. By law, seized assets cannot be forfeited until the owner is
convicted of a drug offense. Problems arise in relation to the safeguarding of
assets pending forfeiture. Real estate, vehicles and other personal property are
often used by government agencies or officials.
Ecuador lacks a Financial Intelligence Unit (FIU), but has proposed to create one during
2004.
United States
The International Monetary Fund site provides the following report on the anti-money
laundering practices of the United States:
1. At the July 27, 2001, Executive Board Meeting to discuss the 2001 Article IV consultation
with the United States,1 Executive Directors raised questions about anti-money laundering
practices in the United States. Directors requested that the staff conduct follow-up discussions
with the U.S. authorities on (i) the reasons why the United States was not in full compliance with
the Financial Action Task Force on Money Laundering (FATF) Forty Recommendations; (ii)
what efforts were underway to reach full compliance; and (iii) what additional steps were being
considered to enhance anti-money laundering practices.
2. The Annual Report 2000-2001 of the Financial Action Task Force on Money Laundering finds
that the United States is in full compliance with 17 out of the 28 FATF Recommendations
requiring specific country actions with respect to key legal, financial, and international
cooperation measures.2 The United States is not fully in compliance with Recommendations 8,
10-12, 14-15, 19-20, 26, and 29 because necessary anti-money laundering measures have not
been extended to insurance companies. The United States also is not fully in compliance with
Recommendations 14-15, 28-29, because not all obligations have been imposed on bureaux de
change and money transmitters, in particular with respect to reporting of suspicious activities.
3. The U.S. authorities indicated that they attach great importance to the implementation of a
comprehensive anti-money laundering system in the United States. The United States has
developed an annual National Money Laundering Strategy since 1999 and has taken significant
steps forward to strengthen anti-money laundering procedures, including passage of
comprehensive anti-money laundering legislation, adoption of enhanced regulatory measures,
stronger domestic law enforcement efforts, increased collaboration between federal, state and
local governments, and enhanced international cooperation and efforts. As part of the
international effort to foster the adoption of standards and codes as well as to promote effective
anti-money laundering strategies, in June 2001 the United States published its 2000 selfassessment against the FATF Forty Recommendations (see www.treas.gov/standards).
4. Regarding the specific issues involving insurance, neither U.S. assessments nor the FATF
exercises have revealed substantial money laundering through this sector within or outside of the
United States. Nevertheless, U.S. authorities recognize that a potential vulnerability exists, and
consequently, the insurance industry is subject to important anti-money laundering provisions
under U.S. criminal money laundering laws. The authorities explained that under U.S. law,
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insurance companies are treated as financial institutions for purposes of certain laws. Therefore,
they are required to report to the Internal Revenue Service receipts of cash or certain monetary
instruments totaling $10,000 or more from clients, and the identify of the persons conducting
those transactions and the persons on whose behalf those transactions are conducted must be
obtained, verified, recorded, and reported. In addition, a number of insurance companies
voluntarily file reports on suspicious activities. These practices are considered to be working
well, and without indications of money laundering abuses within the industry, the authorities see
little basis for imposing additional federal regulations on what is largely a state-regulated
industry in the United States. The authorities would continue to closely monitor the effectiveness
of anti-money laundering practices. They indicated that there is a growing awareness within the
insurance industry of the importance of due diligence in opening and handling accounts, and the
need for close attention to money laundering prevention measures.
5. In the case of bureaux de change and monetary transmitters, key aspects of U.S. anti-money
laundering laws apply to these institutions, as well as other nonblank financial institutions
(NBFIs). For this reason, the U.S. authorities said that deficiencies in full compliance with FATF
recommendations do not have significant macroeconomic implications, including in terms of
reputation risk or financial stability. All NBFIs in the United States are required to obtain
information about the true identity of a person on whose behalf an account is opened or when a
transaction is conducted if it involves the receipt of currency or certain other monetary
instruments over $10,000, the transfer of funds over $3,000, or the cross-border movement of
currency or certain negotiable instruments over $10,000. In addition, many NBFIs obtain
information on whose behalf a transaction is conducted in order to protect themselves against
potential liability under existing criminal money laundering provisions and suspicious activity
reporting rules.
6. While many NBFI transactions are relatively small in value, the U.S. authorities recognize the
need to detect and deter money laundering and to combat the financing of terrorism. Therefore,
the U.S. authorities have recently taken steps to strengthen regulations requiring that NBFIs
report suspicious transactions. The U.S. Department of the Treasurys Financial Crimes
Enforcement Network issued a rule in March 2000 (to become effective in early 2002) requiring
money transmitters and money order and travelers check businesses to report suspicious
transactions. Currency exchangers are not generally required to report suspicious transactions
under this new rule, but must do so to the extent that they redeem or sell money orders or
travelers checks for currency or other monetary instruments, or offer money transmission
services.
7. The U.S. authorities also reported that further anti-money laundering rules for various
nonblank financial institutions are under consideration. In The National Money Laundering
Strategy for 2001, the U.S. Treasury announced a proposed rule requiring securities
brokers/dealers to file suspicious activity reports.3
8. Since the September 11 attacks, the United States has stepped up its focus on anti-money
laundering issues, and particularly terrorist financing issues. The United States enacted an antiterrorist and anti-money laundering bill in October that provides for broad new investigative and
information-sharing powers with respect to terrorist financing. It expands the scope of U.S.
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counter-money laundering regulations, such as requiring broker/dealers in the securities industry

to file suspicious activity reports. The law also gives new powers to take action against money
laundering havens. In addition, the Financial Action Task Force decided in late October to
expand its focus to include terrorist financing issues and adopted an action plan to implement
eight new special recommendations directly related to terrorist financing. The United States
looks forward to participating in the FATF self-assessment exercise on the new special
recommendations, which is to be completed by the end of December 2001.
9. As discussed in the paper for IMP Board discussion on November 12, IMF staff propose that
the IMF extend its standard surveillance activities in the money laundering area. In this context,
staff propose to conduct a more extensive evaluation of the U.S. efforts in these areas in the
course of the 2002 U.S. Article IV review, based on the anti-money laundering questionnaire
described in Annex VI.
The United States is a primary consumer of illicit drugs produced by or shipped through
Peru, Venezuela and Ecuador. It has in place Financial Information Exchange Agreements
(FIEAs) with each of those nations to facilitate the exchange of currency transaction information
between the U.S. Treasury Department and other finance ministries.
CRIMINAL ENTREPRENEURS IN AFRICA*
OVERVIEW
18 U.S.C.S. 1961 provides that enterprise includes any individual, partnership, corporation,
association, or other legal entity, and any union or group of individuals associated in fact
although not a legal entity.
Further, 18 U.S.C.S. 1962 makes it unlawful for any person employed by or associated
with any enterprise engaged in, or the activities of which affect, interstate or foreign commerce,
to conduct or participate, directly or indirectly, in the conduct of such enterprises affairs through
a pattern of racketeering activity or collection of unlawful debt.
In the furtherance of this concept, the U.S. Supreme Court ruling in U.S. v. Turkette, 452
U.S. 576 (1981), where an individual and several others were indicted, among other things, on
the charge that they conspired to conduct and participate in the affairs of an enterprise engaged in
interstate commerce through a pattern of racketeering activities. The indictment described in
interstate commerce through a pattern of racketeering activities. The indictment described the
enterprise as a group of individuals associated in effect for the purpose of illegally trafficking in
narcotics and other dangerous drugs, committing arsons, utilizing the United States mails to
defraud insurance companies, bribing and attempting to bribe local police officers, and corruptly
influencing and attempting to corruptly influence the outcome of state court proceedings. This
description of the group being ruled upon by the Supreme Court paralleled the statutory
definition put forward by 18 U.S.C.S. 1961.
The Defendant was convicted under the Racketeer Influenced and Corrupt Organizations
Act (RICO), 18 U.S.C.S. 1961-1968, for conspiracy to conduct and participate in the affairs
of an enterprise, engaged in interstate commerce, through a pattern of racketeering activities. The
* R. LeWayne Johnson.
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enterprise conducted illegal activities. Where the appellate court reversed the judgment and held
that the term enterprise as used in RICO applied to legitimate enterprises, not illegitimate
enterprises, the Supreme Court reversed the appellate courts judgment. The Court ruled that the
language and structure of RICO did not limit its application to legitimate enterprises. Further, the
Turkette Court ruled that the legislative history indicated that Congress intended the term
enterprise to include legitimate as well as illegitimate enterprises.
Committee on International Relations Views of Crime Enterprises in Africa
Using the statutory and case law definition provided only as a backdrop while realizing
that U.S. statutes and court decisions are not controlling in Africa, we proceed.
International crime in todays society commands an estimated $1 trillion in business
revenue. While the Mafia, cocaine cartels, and other criminal organizations may be better known,
crime organizations are becoming big business in Africa. African criminal organizations
including the Nigerian drug cartels which are among the most sophisticated in the world are
wreaking havoc throughout the world. South African police estimate that their country is home to
more than 190 criminal organizations, many of which are sophisticated and international in
scope.
Swaziland is becoming a haven for drug traffickers and for gunrunners.173
As the integration of African nations into the world economy become more prevalent and nations
move closer together in what is truly a world market, the fact that many African nations have
simultaneously developed significant international crime organizations that participate in drug
trafficking, diamond smuggling, money laundering, counterfeiting, document fraud, and the
infamous 419 scam, cannot go unattended. Africa has emerged as a major intermediate transit
point for drugs destined for markets in Europe and North America. Tanzania and Mozambique
serve as transit points for heroin coming from the Far East. Angola and Namibia are transit
points for cocaine coming from the Americas to the European market. The Nigerian crime
syndicates have emerged as the primary organizers of these trans-shipments. Evidence even
exists of alliances between the Colombian cartels and the Nigerian crime syndicates.
Moreover, South Africa is struggling with the growth of international crime syndicates
thriving on South Africas geographic location. More than 190 crime syndicates currently operate
in South Africa.
Factors such as poverty, government disorganization, low-paid and unpaid civil servants,
lax banking laws, non-existent customs services, and insufficient and often corrupt law
enforcement establishments have made Africa an ideal location for the operation of international
crime and drug syndicates.
The most significant identified international African crime group having an impact on
international commerce, or the activities of which affect, interests or foreign commerce as
outlines in 18 U.S.C.S. 1962, thus affecting the United States and other countries are the West
African Nigerian criminal groups commonly referred to as Nigerian criminal enterprises. The
Nigerian criminal enterprises scheme is to exploit financial institutions, insurance companies,
government entitlement programs, and individual citizens of the international community. Law
enforcement officials in the United Kingdom, Canada, Germany, Australia, South Africa, Russia
173 Combating International Crime in Africa,
http://www.commdocs.house.gov/committees/intlrel/hfa50884.000/hfa50884_0./htm. (1997).

- 146 - 146 - 146 -

and other countries have experienced high crime rates attributable to the Nigerian criminal
enterprises.
Such criminal endeavors as drug trafficking, especially heroin and cocaine, financial
crimes, money laundering, counterfeiting, and altered documents seem to be this enterprises
mode of operation. The Nigerian criminal enterprises are seldom if ever engaged in drug
trafficking to the exclusion of other types of crimes. The Nigerian criminal enterprises typical
structure is to operate in a small inter-related cell. They have international contacts of Nigerian
criminal enterprises operating in other foreign countries.
Involvement in white-collar crime involved, i.e., utilizing false documents to gain
identities and then to take these new identities to open bank accounts, to incorporate businesses,
to start getting government entitlement programs, particularly in the healthcare fraud are also
methods that have been associated with this enterprise.
Listed below are additional information/sites on this enterprise:
Site

Description

Nigeria The 419

Coalition Web Site

Extensive information on Nigerian advance fee fraud

schemes; includes links to media clippings, U.S.
government reports, congressional testimony, and law
enforcement contacts.

Nigerian Crime

Jonathan Winer, Deputy Assistant Secretary for

International Narcotics and Law Enforcement Affairs.
Statement before the Subcommittee in Africa of the House
International Relations Committee, Washington, DC,
September 11, 1996. Outlines the Nigerian crime threat
and U.S. enforcement strategies.

Combating International
Crime in Africa

Hearing Before the Subcommittee on Africa of the

Committee On International Relations House of
Representatives. Examines organized crime in West Africa
and its impact on the United States.

Nigerian Schemes,
Scams, Frauds

Overview of Nigerian-based organized fraud schemes,

including examples of letters and proposals for advance fee
fraud.

Useful information
On advance fee fraud

Web site includes Samples of Nigerian Advance Fee Fraud

letters

Additional information on Africa and the international communitys efforts to curve

criminal corruption in Africa includes the following sites:
1. Boosting Africas Agricultural Trade, www.scolar.vac.edu/vsccat/*united%. (June
2003).
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2. Regional Traffick, Towards Understanding of West Africa Criminal,

http://www.iss.co.za/pubs/ASR/10no4/Shaw.html.
3. Nathanson Centre for the Study of Organized Crime and Corruption,
http://www.yorku.ca/nathanson/lonks/links.htm.
Summary
In summary, Criminal Enterprises in Africa have continued to establish an effective
foothold in the international economy. This development has increased drastically since the
1980s. The expansions of these enterprises have been mainly due to the globalization of the
worlds economies and the great advances in communications technology. Moreover, the ease of
international travel, expanded world trade, and financial transactions that cross national borders
have enabled African Criminal Enterprises to expand their roles from more traditional local and
regional criminal groups to that of targeting international victims and developing criminal
networks within countries and regions of the world with greater prosperity. Additionally, the
political, social and economic conditions in African countries such as Nigeria, Ghana, and
Liberia have contributed significantly to some criminal ethnic groups from these countries
developing criminal enterprises worldwide, and within the United States.174
There is no argument that the construction and the activities of these groups fall squarely under
the definitions provided by both 18 U.S.C.S. 1961 and 18 U.S.C.S. 1962. As such,
individuals indicted and prosecuted in the U.S. courts for violation of RICO will find Turkette
controlling.
CHAPTER 5: INTERNATIONAL AND REGIONAL AML CONFIGURATIONS: THE
GROWTH OF THE AML/CTFE REGIME
I. Learning Objectives
1. To learn about anti-money laundering organizations such as the Financial Action Task Force
and its regional organizations.
2. To understand the importance of alliances between these AML international
organizations and foreign nations.
3. To understand the international AML standards such as the FATFs Recommendations in the
context of the international AML regime.
4. To understand the history, purpose and strategies of the international organizations in the
struggle against financial crimes.
5. To understand the relationships between the emerging international AML regime and the
regime against terrorist financing.
174 Federal Bureau of Investigation Investigative Programs Organized,
http://www.fbi.gov/hq/cid/orgcrime/aace/africacrim.htm. (2004).

- 148 - 148 - 148 -

II. International and Regional Organizations

Asian Development Bank (ADB), http://www.adb.org
Contact: ADB, Headquarters, 6 ADB Avenue, Mandaiuyong City, 1550 Metro Manila,
Philippines/P.O. Box 789, 0980 Manila, Philippines; Telephone: + 632 632 4444; Fax: + 632 636
2444; E-mail: information@adb.org
Asia-Pacific Economic Cooperation, http://www.apec.org
Asia-Pacific Economic Cooperation, or APEC, is a forum for facilitating economic growth,
cooperation, trade and investment in the Asia-Pacific region. APEC is the only intergovernmental grouping in the world operating on the basis of non-binding commitments, open
dialogue and equal respect for the views of all participants. Unlike the WTO or other multilateral
trade bodies, APEC has no treaty obligations required of its participants. Decisions made within
APEC are reached by consensus and commitments are undertaken on a voluntary basis.
APEC has twenty-one members referred to as Member Economies which account for more
than a third of the worlds population, approximately 60% of the world GDP and about 47% of
world trade. APECs 21 Member Economies are Australia, Brunei Darussalam, Canada, Chile,
Peoples Republic of China, Hong Kong, China, Indonesia, Japan, Republic of Korea, Malaysia,
Mexico, New Zealand, Papua New Guinea; Peru; The Republic of the Philippines, The Russian
Federation, Singapore, Chinese Taipei, Thailand, United States of America and Viet Nam.
Contact: APEC Secretariat, 35 Heng Mui Keng Terrace, Singapore, 119616; Telephone: (65)
6775 6012: Fax: (65) 6775 6013; E-mail: info@apec.org.
Asia/Pacific Group on Money Laundering, http://www.apgml.org
Contact:
Association of Southeast Asian Nations (ASEAN), http://www.aseansec.org
Contact: The ASEAN Secretariat, 70A, Jalan, Sisingamangaraja, Jakarta 12110, Indonesia;
Telephone: (6221) 7262991, 7243372; Fax: (6221) 7398234, 7243504; E-mail:
public@aseansec.org.
Bank for International Settlements (BIS), http://www.bis.org
The Bank for International Settlements (BIS) is an international organization which .
Contact: BIS, Centralbahnplatz 2, Basel Switzerland; Postal Address: CH-4002 Basel;
Telephone: (+41d 61) 280 8080; Fax: (+41 61)280 8100; E-mail: email@bis.org.
Basle Committee on Banking Supervision, http://www.bis.org/bcbs/
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The Basle Committee, established by the central bank Governors of the Group of Ten countries
at the end of 1974
Contact: BIS, Centralbahnplatz 2, Basel Switzerland; Postal Address: CH-4002 Basel;
Telephone: (+41d 61) 280 8080; Fax: (+41 61)280 8100; E-mail: email@bis.org.
Caribbean Financial Action Task Force (CFATF), http://www.cfatf.org
The Caribbean Action Task Force (CFATF) is an organization of thirty states of the Caribbean
Basin, which have agreed to implement common counter-measures to address the problem of
money laundering and the financing of terrorism. It was established as a result of meetings
convened in Aruba in May 1990 and Jamaica in November 1992. In Aruba representatives of
Western Hemisphere countries, in particular from the Caribbean and Central America, convened
to develop a common approach to the phenomenon of the laundering of the proceeds of crime.
Nineteen recommendations constituting this common approach were formulated. These
recommendations, which have specific relevance to the region, are complementary to the
additional forty recommendations of the Financial Action Task Force established by the Group of
Seven at the 1989 Paris Summit. The Jamaica Ministerial Meeting was held in Kingston in
November 1992. Ministers issued the Kingston Declaration in which they endorsed and affirmed
their governments commitment to implement the FATF and Aruba recommendations, the OAS
Model Regulations and the 1988 U.N. Convention. They also mandated the establishment of the
Secretariat to co-ordinate the implementation of the measures in the CFATF member countries.
The main objective of the Caribbean Financial Action Task Force is to achieve effective
implementation of and compliance with its recommendations to prevent and control money
laundering and to combat the financing of terrorism. The Secretariat has been established as a
mechanism to monitor progress to ensure full implementation of the Kingston Ministerial
Declaration.
Currently, CFATF members are Antigua and Barbuda, Anguilla, Aruba, The Bahamas, Barbados,
Bermuda, The British Virgin Islands, The Cayman Islands, Costa Rica, Dominica, Dominican
Republic, El Salvador, Grenada, Guatemala, Guyana, Republic of Haiti, Honduras, Jamaica, The
Netherlands Antilles, Nicaragua, Panama, St. Kitts and Nevis, St. Lucia, St. Vincent &
Grenadines, Suriname, The Turks and Caicos Islands, Trinidad & Tobago and Venezuela.
Representatives of the governments of Canada, the Kingdom of the Netherlands, France, the
United Kingdom and the United States of America (the Cooperating and Supporting Nations)
meeting together in San Jose, Costa Rica, October 9-10, 1996, considered the work of the CFATF
since 1990, the benefits of effective implementation to prevent and control money laundering;
and the need for expertise and training, and cooperation among nations to assure such
implementation in the Caribbean region.
The Cooperating and Supporting Nations are members of the FATF Task Force on Money
Laundering and are committed to the 1988 UN Convention Against Illicit Traffic in Narcotic
- 150 - 150 - 150 -

Drugs and Psychotropic Substances and the implementation of the 40 FATF Recommendations
concerning anti-money laundering measures.
At Council of Ministers Meeting in October 1999 and October 2000, both Spain and Mexico,
respectively, joined the CFATF Group of Cooperating and Supporting Nations.
The CFATF Secretariat monitors members implementation of the Kingston Ministerial
Declaration through the following activities:
Self-Assessment of the implementation of the recommendations.
An on-going program of mutual evaluation of the members.
Co-ordination of, and participation in, training and technical assistance programs.
Bi-annual plenary meetings for technical representatives.
Annual Ministerial meetings.
CFATF has been conducting a number of Typology Exercises on money laundering. These
exercises have explored money laundering activity in domestic financial institutions, the casino
and gaming industry, through international financial transactions conducted in domestic and
offshore institutions and the emerging cyberspace technologies. The CFATF in October 2000
conducted Part 1 of a Typology Exercise into the possibilities of money laundering in free trade
zones. Part II was undertaken during March 2001. The Exercise led to the formulation of Money
Laundering Prevention Guidelines for CFATF member governments, Free Trade Zone
Authorities and Merchants and a Model Free Zone Compliance Program and a Model Code of
Conduct.
In April 2002, the CFATF and GAFISUD, the Financial Action Task Force of South America
organized in Tobago, Trinidad & Tobago, a Joint Hemispheric Typology Exercise on Terrorism
and Terrorist Financing.
The CFATF works with the OAS/CICAD, CARICOM, the Caribbean Customs Law
Enforcement Council (CCLEC), the Caribbean Development Bank (CDB), APG Secretariat, the
Commonwealth Secretariat, E.C./E.U., E.C.D.C.O., ECCB, FATF Secretariat, GAFISUD,
GPML, IADB, Interpol, OGBS, Jersey, the United National International Drug Control Program
(UNDCP) and the World Customs Organization (WCO).
The CFATF Secretariat is hosted by the government of Trinidad & Tobago. The CFATF
Chairman is The Honorable Justin L. Smith, Attorney General and Minister of Justice and Legal
Affairs, Antigua and Barbuda. Calvin E. J. Wilson, the CFATF Executive Director, is a national
of Trinidad and Tobago, and a member of the bar of England and Wales and Trinidad and
Tobago. He was a former Senior Crown Prosecutor of the United Kingdom for eight years and
is a member of Lincolns Inn.
Commonwealth Secretariat, http://www.thecommonwealth.org
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The Commonwealth is a unique family of fifty-three developed and developing nations around
the world. It is a voluntary association of independent states which encompass many religions,
races, languages and cultures.
The Commonwealth Secretariat is the principal organization of the Commonwealth
implementing the decisions taken by the fifty-three member governments. It was established by
Heads of Government in 1965 and is located at Marlborough House in London.
Contact: The Commonwealth Secretariat, Marlborough House, Pall Mall, London, SW1Y 5HX;
Telephone: +44 (0)20 77476500; Fax: +44 (0)20 7930 0827; E-mail: info@commonwealth.int.
Council for Europe (COE), http://www.coe.org
The Council of Europe is the continents oldest political organization, founded in 1949. It groups
together 45 countries, including 21 countries from Central and Eastern Europe. It has granted
observer status to five more countries (the Holy See, the United States, Canada, Japan and
Mexico). It is distinct from the 25-nation European Union, but no country has ever joined the
Union without first belonging to the Council of Europe. The Council of Europe is headquartered
in Strasbourg in north-eastern France.
The main component parts of the Council of Europe are as follows:
The Committee of Ministers, composed of the forty-five Foreign Ministers or their Strasbourgbased deputies (ambassadors/permanent representatives), which is the organizations decisionmaking body.
The Parliamentary Assembly, grouping 626 members (313 representatives and 313 substitutes)
from the forty-five national parliaments and Special Guest Delegations from the two candidate
states.
The Congress of Local and Regional Authorities, composed of a Chamber of Local Authorities
and a Chamber of Regions.
The 1,800-strong Secretariat.
The Council of Europe has produced 196 legally binding European treaties or conventions many
of which are open to non-member states on topics ranging from human rights to the fight against
organized crime and from the prevention of torture to data protection or cultural co-operation.
Contact: Council of Europe, Avenue de lEurope, 67075 Strasbourg Cedex, France; Telephone:
+33 (0)3 88 41 20 00; Fax: +33 (0)3 88 41 27 45; E-mail: infopoint@coe.int
Eastern and Southern African Money Laundering Group (ESAAMLG), http://www.esaamlg.org

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Finance and Law Ministers from nine countries in the Eastern and Southern Africa Region, on
behalf of their Governments, agreed on August 27, 1999 at Arusha, Tanzania to establish the
Eastern and Southern Africa Anti-Money Laundering Group.
The aim of this group, which is governed by Ministers representing each of the member
countries, is to combat the laundering of the proceeds of serious crime. Like other regional group
already in existence, the ESAAMLG will, both at Ministerial and Senior Officer level, bring
together representatives from the legal, financial and law enforcement fields to ensure the
development of comprehensive national and regional anti-money laundering strategy.
The aims of ESAAMLG are as follows:
to work towards the highest international standards in the fight against the laundering of the
proceeds of those crimes referred to in relevant multilateral agreements and initiatives which
deal with combating serious crime and to implement the 40 Recommendations of the Financial
Action Task Force on money laundering.
to improve co-operation with other relevant international organizations concerned with
combating money laundering.
to study emerging regional trends in money laundering and to share member states experiences
in order to address those trends.
to institute an evaluation process, including mutual evaluation, to access the measure in place in
each member state and their effectiveness, and to identify the gap between the existing measure
and the endorsed standards.
The ESAAMLG comprises the Ministerial Council (the Council), the Task Force of Senior
officials and the Secretariat. The Ministerial Council is the key decision-making body within
ESAAMLG and consists of at least one ministerial representative from each member country.
The Council meets at least once a year. The Council elects a President and Vice-President from
among its members.
Contact: Executive Secretary, ESAAMLG EX-KAMATA Building, Msimbazi, Nyerere junction,
Box 9923, Dar es Salaam Tanzania, United Republic of: Telephone: 255 22 2180560-4; Fax:
255 22 2180553; E-mail: charleslengalenga@esaamlg.tz.
The Egmont Group, http://www.egmontgroup.org
The Egmont Group (Financial Intelligence Units of the World) has the following members:
Albania, Andorra, Anguilla, Antigua and Barbuda, Argentina, Aruba, Australia, Austria,
Bahamas, Bahrain, Barbados, Belgium, Belize, Bermuda, Bolivia, Brazil, British Virgin Islands,
Bulgaria, Canada, Cayman Islands, Chile, Colombia, Cook Islands, Costa Rica, Croatia, Cyprus,
Czech Republic, Denmark, Dominica, Dominican Republic, Egypt, El Salvador, Estonia,
Finland,
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Contact: E-Mail: egmont.administrator@ncis.x.gsi.gov.uk.

European Bank for Reconstruction, Development, http://www.ebrd.org
Contact: EBRD, One Exchange Square, London EC2A 2JN, United Kingdom. Telephone: +44
20 7338 6000; Fax: +44 20 7338 6100.
European Central Bank, http://www.ecb.int
The ECB is the central bank for Europes single currency, the euro. The ECBs main task is to
maintain its purchasing power and thus price stability in the euro area. The euro area comprises
the European Union countries that have introduced the euro since 1999.
Contact: European Central Bank, Postfach 16 03 19, D-60066 Frankfurt am Main, Germany;
Telephone: +49 69 13 44 0; +49 69 13 44 60 00; E-mail: info@ecb.int.
European Commission, http://www.europa.eu/int/comm/index_en.htm
Contact:
European Union (EU), http://www.eurunion.org
The European Union (EU) is a family of democratic European countries, committed to working
together for peace and prosperity. The member states have set up common institutions to which
they delegate some of their sovereignty so that decisions on specific matters of joint interest can
be made democratically at European level. There are five EU institutions: European Parliament
(elected by the peoples of the member states), Council of the European Union (representing the
governments of the member states); European Commission (driving force and executive body);
Court of Justice (ensuring compliance with the law) and the Court of Auditors (controlling sound
and lawful management of the EU budget).
Contact: E-mail: public.info@consilium.eu.int
Europol, http://www.europol.eu.int
The member states of the European Union created EUROPOL to increase safety within European
space. EUROPOL is an office of criminal police force intergovernmental which facilitates the
exchange of information between national police forces as regards narcotics, terrorism,
international criminality and pedophilie. It treats fields where the safety of Europeans is
threatened: traffic of drugs or radioactive materials, dies of clandestine, milked immigration of
human beings, traffics of vehicles, bleaching of the capital, terrorism and serious international
crime (Mafia). EUROPOL began its mission in July 1999.
Contact: EUROPOL, Raamweg 47, P.O. Box 90850, NI-2509 LW Che Hague; Telephone:
00.31.70.302.50.00; Fax: 00.31.70.345.58.96; E-mail: info@europol.eu.int.
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Financial Action Task Force (FATF), http://www.oecd.org/fatf/

Since its creation, the Financial Action Task Force has spearheaded the effort to adopt and
implement measures designed to counter the use of the financial system by criminals. It
established a series of FATF Recommendations in 1990 that set out the basic framework for antimoney laundering efforts and are intended to be of universal application. Since then, the FATF
has revised the Forty Recommendations twice first in 1996 and then more recently in 2003 to
ensure that they remain up to date and relevant to the evolving threat of money laundering.
Indeed, the FATF Recommendations are now the principal standard in this field.
Following the terrorist attacks in the United States on September 11, 2001, the FATF expanded
its mission beyond money laundering in order to focus its energy and expertise on a world-wide
effort to combat terrorist financing. The FATF issued new international standards to combat
terrorist financing the Eight Special Recommendations and it calls on all countries to adopt
and implement these measures. The objective of these measures is to deny terrorists and their
supporters access to the international financial system.
To reduce the vulnerability of the international financial system to misuse by criminals, the FATF
is also involved in examining and identifying the serious and systemic weaknesses in the antimoney laundering programs of certain jurisdictions (non-cooperative countries and territories or
NCCTs).
The FATF attempts to identify emerging methods and trends used for laundering money.
Terrorists finance their operations through criminal activity, or they may also use funding from
legal sources. In either case, terrorist groups utilize financial networks in the same way that other
criminal groups do. That is, they move funds and hide connections between the source of their
funding and the perpetrators, organizers, and sponsors of their activity.
Contact:
Financial Stability Forum, http://www.fsforum.org
The Financial Stability Forum (FSF) was convened in April 1999 to promote international
financial stability through information exchange and international co-operation in financial
supervision and surveillance. The Forum brings together on a regular basis national authorities
responsible for financial stability in significant international financial centers, international
financial institutions, sector-specific international groupings of regulators and supervisors, and
committees of central bank experts. The FSF seeks to co-ordinate the efforts of these various
bodies in order to promote international financial stability, improve the functioning of markets
and reduce systemic risk.
Contact: Secretariat to the Financial Stability Forum, Bank for International Settlements,
Centralbahnplatz 2, CH-4002 Basel. Switzerland; Telephone: +41 61 280 8298; Fax: +41 61 280
9100; E-mail: fsforum@bis.org.
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Grupo de Accion Financiera de Sudam Trica Contra el Lavado de Activos (GAFISUD),

http://www.gafisud.org
GAFISUD is a regional inter-governmental organization which brings together the countries of
South America in order to combat money laundering and terrorism financing by means of the
continuous improvement of national policies and the strengthening of different methods of cooperation between the member states.
It was formally established on December 8, 2000 in Cartagena de Indias, Columbia, by the
signatures of the founding Memorandum of Understanding by representatives of the
governments of nine countries: Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Paraguay,
Peru and Uruguay.
The group has legal personality and diplomatic status in the Republic of Argentina, where the
office of its Secretariat is located. GAFISUD has also received an offer from Uruguay, which has
placed its Training Center on money laundering issues, located in Montevideo, at the disposal of
the Group.
The following participate as observers: World Bank, Egmont, Germany, Inter-Development
Bank, Spain, United States of America, IMF, France, Mexico, Portugal and United Nations. The
following fellow organizations also attend the sessions: Financial Action Task Force on Money
Laundering (FATF); Financial Action Task Force of the Caribbean (CFATF) and the Organization
of American States, through the Inter-American Commission against Drug Abuse (CICAD).
GAFISUD has been created on the model of the Financial Action Task Force (FATF) and has
adopted the Forty Recommendations issued by FATF as the most widely recognized international
standards countering money laundering and the Special Recommendations against terrorism
financing. At the same time, the Group expects to develop its own recommendations for the
improvement of national policies against both offences.
GAFISUD has added to its aims the fight against the financing of terrorism, which has been
included in its mission as stated in the Memorandum of Understanding, and has developed a plan
of action against terrorist financing. Incorporated into the plan are the commitments made
through the United Nations, the Special Recommendations issued by FATF on this matter and a
number of lines of activity developed from a regional perspective.
Our action encompasses the creation of the offence of laundering not only of the underlying
offence of drug trafficking but also to other serious activities; the development of a crime
prevention system that includes obligations for the financial system to identify the client and to
report suspicious transactions; the incorporation in the legal system of measures to effectively
support the investigation and prosecution of these offenses; the development of the most
advanced co-operation mechanisms between states and the investigation and prosecution of
criminal acts.
Contact: Apartado Postal, Interno N 21, Sucursal 1485, Buenos Aires, Argentina, Telephone:
(+54 11) 4816-3131) contacto@gafisud.org
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International Monetary Fund (IMF), http://www.imf.org

The IMF is an organization of 184 countries, working to foster global monetary cooperation,
secure financial stability, facilitate international trade, promote high employment and sustainable
economic growth, and reduce poverty. Since the IMF was established its purposes have remained
unchanged but its operations which involve surveillance, financial assistance and technical
assistance have developed to meet the changing needs of its member countries in an evolving
world economy.
Contact: International Monetary Fund, 700 19th Street, N.W., Washington, DC 20431;
Telephone: (202) 623-7000; Fax: (202) 623-4661; E-mail: publicaffairs@imf.org
The IMF and the Fight against Money Laundering and the Financing of Terrorism
Inter-American Development Bank (The IDB Group), http://www.iadb.org
The IDB Group is the main source of multilateral financing for economic, social and institutional
development in Latin America and the Caribbean. It also plays a leading role in regional
integration. Headquartered in Washington, D.C., the IBD Group includes three institutions:
The Inter-American Development Bank supports economic and social development and regional
integration in Latin America and the Caribbean. It does mainly through lending to public
institutions, but it also funds some private projects typically in infrastructure and capital markets
development.
The Inter-American Investment Corporation (IIC) is a multilateral financial organization that
promotes economic development in Latin America and the Caribbean by financing small and
medium-scale private companies.
The Multilateral Investment Fund (MIF) is an autonomous fund that supports private sector
development, mainly in the micro-enterprise sector.
Contact: Inter-American Development Bank, 1300 New York Avenue, NW, Washington, D.C.
20577; Tel: 202-623-1000; Fax: 202-623-3096. E-mail: pic@iadb.org.
International Money Laundering Information Network (IMoLIN), http://www.imolin.org
IMoLIN is an Internet-based network assisting governments, organizations, and individuals in
the fight against money laundering. IMoLIN has been developed with the co-operation of the
worlds leading anti-money laundering organizations. It has a database on legislation and
regulations throughout the world (AMLID), an electronic library, and a calendar of events in the
anti-money laundering field. Certain aspects of IMoLIN are secured and not available for public
use.
In 1996, the leading international organizations involved in the fight against money laundering
endorsed the idea of producing a common Internet web through which information could be
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shared for the benefit of all national and international anti-money laundering agencies. IMoLIN
was the outcome of this agreement. This multi-faceted website serves the global anti-money
laundering community by providing information about national money laundering laws,
regulations and contacts for inter-country assistance. Policy practitioners, lawyers and law
enforcement officers all regularly use IMoLIN as a key reference point in their daily work. The
information on IMoLIN is freely available to all Internet users, with the exception of AMLID,
which is a secured database.
The key features of the IMoLIN system are:
The Anti-Money Laundering International Database (AMLID) which is a compendium of
analyses and anti-laundering laws and regulations including two general classes of money
laundering control measures (domestic laws and international cooperation) as well as
information about national contacts and authorities. AMLID is a secure, multi-database and is an
important reference tool for law enforcement involved in cross-jurisdictional work;
The Reference section that contains details of the UNs latest research abstracts of the best new
research from governments and international organizations and a bibliography;
A click-on map that takes users to regional lists of national legislation together with links to the
websites of related regional and financial intelligence units (FIUs). Eventually, this section will
contain the full text of all national anti-money laundering legislation through the world;
International Standards: model laws for common law and civil law systems, standards,
conventions and legal instruments;
A calendar of events that lists current training events and conferences at the national, regional
and international level.
The Caribbean Financial Action Task Force and the World Customs Organization have become
contributing members next to the Commonwealth Secretariat, Interpol, OAS-CICAD, Financial
Action Task Force, Asia/Pacific Group on Money Laundering and the United Nations.
Contact: Global Programme Against Money Laundering, United Nations Office on Drugs and
Crime, Vienna International Centre, P.O. Box 500, A-1400 Vienna, Austria: Telephone: + (43) (1)
26060-4222; Fax: + (43) (1) 26060-6878.
Interpol, http://www.interpol.com
Interpol is the worlds pre-eminent police organization in support of all organizations, authorities
and services whose mission is preventing, detecting, and suppressing crime. Interpol provides
both a global perspective and a regional focus, exchanges information that is timely, accurate,
relevant and complete, facilitates international co-operation, co-ordinates joint operational
activities of its member countries and makes available know-how, expertise and good practice.
Contact: INTERPOL, General Secretariat, 200, quai Charles de Gaulle, 69006 Lyon, France;
Fax: (33) 4 72 44 71 63.
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International Organization of Securities Commission (IOSCO), http://www.iosco.org

The purposes of the member agencies of the IOSCO are as follows: to cooperate together to
promote high standards of regulation in order to maintain just, efficient and sound markets; to
exchange information on their respective experiences in order to promote the development of
domestic markets; to unite their efforts to establish standards and an effective surveillance of
international securities transactions; to provide mutual assistance to promote the integrity of the
markets by a rigorous applications of the standards and by effective enforcement
Contact: IOSCO, General Secretariat, C/Oquendo 12, 28006 Madrid, Spain; Telephone: (34) 91
41755 49; Fax: (34) 91 555 93 68; E-mail: mail@oicv.iosco.org.
LACEA, http://www.lacea.org
The Latin American and Caribbean Economic Association (LACEA) was founded in July 1992
in order to encourage greater professional interaction and foster increased dialogue among
researchers and practitioners who focus their work on the economies of Latin America and the
Caribbean. LACEA has five hundred active members.
Contact: Nancy Hsieh, UCLA Anderson School of Management, 110 Westwood Plaza, Suite
C502, Los Angles, CA. 90095-1481; Tel: 310-206-8518; Fax: 310-825-4011; E-mail:
nancy.hsieh@anderson.ucla.edu.
MONEYVAL
Committee,
http://www.coe.int/T/E/Legal_affairs/Legal_cooperation/Combating_economic_crime/Money_laundering/
The Select Committee of Experts on the Evaluation of Anti-Money Laundering Measures (PC-REV) uses a mutual evaluation and peer pressure system to review the laws and practices
employed by those Council of Europe member states which are not members of the Financial
Action Task Force (FATF). Its aim is to harmonize legal, financial and punitive measures in these
member states, relying on the relevant international standards for this purpose.
It gives every state highly detailed recommendations on ways of optimizing its anti-laundering
measures. Its work is based in particular on the forty recommendations of the FATF and the
Convention on laundering, search, seizure and confiscation of the proceeds from crime (ETS No.
141).
Contact: Council of Europe, Avenue de lEurope, 67075 Strasbourg Cedex; Telephone: +33 (0)3
88 41 20 00; Fax: +33 (0)3 88 41 27 45; E-mail: infopoint@coe.int
Offshore Group of Banking Supervisors, http://www1.oecd.org/fatf
The members are Aruba, Bahamas, Bahrain, Barbados, Bermuda, Cayman Islands, Cyprus,
Gibraltar, Hong Kong, Isle of Man, Jersey, Labuan, Macau, Mauritius, Netherland Antilles,
Panama, Singapore and Vanuatu.
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Contact: Chairman, Offshore Group of Banking Supervisors, Jersey Financial Services

Commission, P.O. Box 267, Nelson House, David Place, St. Helier, Jersey JE4 8TP
Organization of American States (OAS), http://www.oas.org and http://www.cicad.oas.org
The core mission of Inter-American Drug Abuse Control Commission (CICAD), an agency of
the OAS, is to harness the collective energy of its member states to reduce the production,
trafficking and use and abuse of drugs in the Americas. In 1992, CICAD formulated model
regulations on money laundering offenses connected to illicit drug trafficking. In 1996, the OAS
member countries adopted the Inter-American Convention against Corruption, the first treaty of
its kind in the world.
The members of the OAS are Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Cuba,
Dominican Republic, Ecuador, El Salvador, Guatemala, Haiti, Honduras, Mexico, Nicaragua,
Panama, Paraguay, Peru, United States, Uruguay, Venezuela, Barbados, Trinidad and Tobago,
Jamaica, Grenada, Suriname, Dominica, Saint Lucia, Antigua and Barbuda, Saint Vincent and
the Grenadines, The Bahamas, Saint Kitts and Nevis, Canada, Belize and Guyana.
Contact: Mr. James F. Mack, Executive Secretary, Inter-American Drug Abuse Control
Commission, Organization of American States, 1889 F St. NW, Washington, D.C. 20002.
Pacific Islands Forum Secretariat (PIFS), http://www.forumsec.org
The sixteen members of the Pacific Island Forum are: Australia,
Contact: Director, Political, International and Legal Affairs Division, Pacific Islands Forum
Secretariat, Private Bag, Suva, Fiji; Telephone: (679) 3312 600; Fax: (679) 3305 554.
Transparency International, http://www.transparency.org.
Transparency International, the only international non-governmental organization devoted to
combating corruption, brings civil society, business and governments together in a global
coalition. TI, through its International Secretariat and more than eighty-five independent national
chapters around the world, works at both the national and international level.
Contact: Transparency International, Otto-Suhr Allee 97-99, 10585 Berlin, Germany, Telephone:
+49-30-3438 2061/19, Fax: +49-30-3470 3912, E-mail: press@transparency.org
United Nations (UN), http://www.un.org
The 1999 International Convention for the Suppression of the Financing of Terrorism (Dec. 9,
1999, 39 I.L.M. 270 (2000) (entered into force Apr. 10, 2002)

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The 2000 Palermo Convention Against Transnational Organized Crime, Dec.12, 2000, U.N. Doc.
A/55/383 (entered into force Sept. 29, 2003)
Model Legislation on Laundering, Confiscation and International Cooperation in Relation to the
Proceeds of Crime (1999)
Model Money-Laundering, Proceeds of Crime and Terrorist Financing Bill (2003)
Contact: UN Headquarters, First Avenue at 46th Street, New York, NY 10017.
United Nations Office on Drugs and Crime, http://www.unodc.org.
Contact: United Nations Office on Drugs and Crime, Vienna International Centre, P.O. Box 500,
A-1400 Vienna, Austria; Telephone: +43 1 26060 0; Fax: +43 1 26060 5866; E-mail:
unodc@unodc.org.
Wolfsberg AML Principles, http://www.wolfsberg-principles.com
Contact: info@wolfsberg-principles.com
World
Bank,
http://www.worldbank.org
http://www1.worldbank.org/finance/html/amlcft/index.htm

and

Contact: The World Bank, 1818 H Street, N.W., Washington, D.C. 20433; Telephone: 202-4731000; Fax: 202-477-6391. E-mail: amlcft@worldbank.org
World Customs Organization (WCO)
Contact:
III. Discussion Questions
1. Identify the history, purpose and strategies of each of the AML international organizations.
2. Identify the alliances between the international organizations and foreign nations.
3. Discuss how the international AML regime relates to the growing international regime against
terrorist financing.
4. Compare and contrast the international legal and regulatory AML standards of the
international and regional international organizations.

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CHAPTER 6: TERRORIST FINANCING: LAW, POLICY AND STRATEGIES

I.

Learning Objectives

1. To understand the variety and range of world terrorist organizations and their cooperative and
support institutions.
2. To understand how world terrorist organizations function, how they raise money and how they
use money laundering to finance their activities.
3. To understand the money laundering methods used by terrorists and their supporters.
4. To compare and contrast traditional money laundering by organized crime with the money
laundering used in terrorist financing.
5. To understand judicial decisions under the USA Patriot Act and other national legislation.
6. To understand and evaluate the effectiveness of the standards, laws, conventions, regulations,
polices and strategies against the financing of terrorism.

II.

Research Resources

FATF 8 Special Recommendations on Terrorist Financing

1999 UN Convention for the Suppression of the Financing of Terrorism
UN Resolution 1373
Wolfsberg Statement on the suppression of the financing of terrorism
ECOFIN meeting on October 16 2001
Council of the EU Decision on combating terrorism
[annalise put here the material marked SAMAIA which you will find in an email that I sent
you]
I.

THE UNITED STATES POSITION*

* R. Lewayne Johnson, J.D.

- 162 - 162 - 162 -

1.Executive Summary
a key element of terrorist networks that was largely undisturbed prior to 9/11
is the global financial infrastructure that facilitates the rise of groups such as alQaida and funds attacks against the United States and our global partners. The
work to track and shut down the financial network of terror is one of the most
critical efforts facing us today, and we have achieved important successes in the
mission to bankrupt the financial underpinnings of terrorism. Raising and moving
money is now harder, costlier, and riskier for al-Qaida and like-minded terrorist
groups. We have frozen and seized terrorist assets, exposed and dismantled known
channels of funding, deterred donors, arrested key facilitators, and built higher
hurdles in the international financial system to prevent abuse by terrorist.175
Terrorist groups like al-Qaida and Hamas have an arsenal of tools at their disposal to raise
and move money. In additional to using methods such as front companies, attorneys and
accountants, they have taken advantage of charities, deep-pocket donors, and crime of all types
to raise money. Moreover, they have relied on banks, informal remittance networks known as
hawalas, wire remitters, currency exchangers, and couriers to move money or value across
national borders.
This report focuses on several actions employed by the U.S. and the international
communities to detect, dismantle, and deter terrorist financing networks. Specific focus will be
on the U.S. efforts to provide terrorist finance training to foreign allies, the U.S. outlined
approach for the international community to develop processes for providing resources to build
anti-money laundering and counter terrorist finance (AML/CTF) and finally, a brief look at how
the U.S. and the international community have forged systemic interests internationally through
the work of the FATF, the FATF-style regional bodies, the International Monetary Fund (IMF)
and World Bank, and other multilateral organizations to detect, dismantle and deter terrorist
financing.
2. Introduction
Globalization has rapidly encouraged the cross-border movement of people, products, and
capital. Alone with this expansion terrorist financing has expanded. This second expansion,
unwelcome by many countries, must be addressed on a worldwide scale. The U.S. government
and the U.K. have been among the leaders to seek early on to promote international cooperation
on the counterterrorism capacity-building front as a component of the global war on terrorism.
Strategies used by the international community to combat the expansion of terrorist financing has
required systemic approaches to enhance the transparency and accountability of the international
financial system. In the U.S. these interests are being advanced by the implementation of the
USA PATRIOT Act. Resulting from this act the Treasury Department has issued regulations that
175 John Snow, U.S. Secretary of Treasury introduction to The Global War on Terrorist
Finance.http://usinfo.state.gov/journals/itcs/0904/ijee/ijee0904.htm. (September 2004).

- 163 - 163 - 163 -

strengthen existing customer identification, recordkeeping, reporting, and information-sharing

obligations in various financial sectors. Additionally, these obligations have been expanded to
new financial sectors such as money service businesses, which are vulnerable to abuse. The U.S.
is promoting the above-mentioned systemic interests internationally through the work of the
FATF, the FATF-style regional bodies, the International Monetary Fund (IMF) and World Bank,
and other multilateral organizations.176
3. U.S. Backed Terrorist Finance Training and Assistance to Foreign Allies
Countries such as Africa, Asia, Europe, Latin America, and the Middle East on a bilateral and
multilateral basis have been provided counterterrorism finance assistance by the U.S. This
coordinated effort with the U.S. Counterterrorism Committee and U.N. Office of Drug Control
Policy has filled both requests and offers of technical assistance. The United States has supported
key initiatives by the FATF to strengthen anti-money laundering and counterterrorist finance
regimes. Additionally, the U.S. through the G8 Counterterrorism Action Group, the Organization
of American States, Asia Pacific Economic Cooperation (APEC), and Organization for Security
and Cooperation in Europe has worked to raise awareness of possible abuses by terrorist
financiers.
On the international financial front, the U.S. is coordinating and cooperating with the
international financial institutions, including the IMF, World Bank, and Asian Development
Bank, on counterterrorist finance projects that contribute to the economic development and
integrity of international markets. One prevalent example of this effort was with the Bangkok
Leader. An October 2003, meeting with APEC and the Bangkok Leader launched a
counterterrorism capacity-building initiative to secure the safe movement of people, goods, and
money. The regional Trade and Financial Security Initiative was established under the auspices
of the Asian Development Bank to provide capacity building in the areas of anti-money
laundering and counterterrorist financing and aviation, port, and maritime security.
Further assistance by the U.S. government is aid to foreign allies to assist in their
building capacity to prevent terrorists from using the international financial system to further
their plots. The Interagency Terrorist Finance Working Group identifies those countries most
needing such U.S. training and technical assistance. To fight terrorism successfully each country
must develop the necessary legal framework, banking regulation, financial intelligence unit, law
enforcement and judicial process.
Several groups have been spearheaded by the State Department as a result of the
September 11 attacks.
Terrorist Finance Working Group (TFWG): coordinates, develops, and provides training
and technical assistance to our foreign partners deemed most vulnerable to terrorist financing.
The TFWG, co-chaired by the State Departments Office of the Coordinator for Counterterrorism
(S/CT) and the Bureau for International Narcotics and Law Enforcement Affairs (INL), includes
various U.S. government agencies from the departments of State, Treasury, Justice, and
176 Juan C. Zarate, Assistant Secretary of the Treasury for Terrorist Financial. Bankrupting Terrorist,
http://usinfo.state.gov.journals/ites/0904/ijec/zarate.htm. (September 2004).

- 164 - 164 - 164 -

Homeland Security and meets biweekly to receive intelligence briefings, schedule assessment
trips, review country reports, and discuss the development and implementation of technical
assistance and training programs. This interagency group leveraged the U.S. governments
existing expertise in its efforts to combat money laundering and organized crime and was aimed
at addressing terrorist financing.
Treasury Department Financial Crimes Enforcement Network: provides training and
technical assistance to foreign FIUs. Included in this assistance are provisions of equipment,
information technology assessments, and specialized analytical software and analyst training for
fledgling FIUs. The United States is an active member of the Egmont Group of FIUs and
regularly sponsors aspiring members.
Legal Framework to Criminalize Terrorist Financing. To comply with the U.S. Security
Council Resolution 1373 and the FATF eight Special Recommendations on Terrorist Financing,
each state is required to criminalize terrorist financing and money launderings. Legislation
should establish effective measures to clock and seize assets of terrorist financiers and their
supporters. Each country should provide its law enforcement agents and judicial branch with
ample authority to pursue and prosecute terrorist financing cases. Every country should ratify the
U.S. instruments related to terrorism at the earliest opportunity. Robust counterterrorist financing
and anti-money laundering legislation provides a country with the requisite legal foundation to
combat money laundering and terrorist financing.
The United States may provide technical assistance on drafting legislation that
criminalizes terrorism and terrorist financing to countries that request such assistance through the
Department of Justice and U.S. Agency for International Development. In certain cases, the
United States can arrange for resident legal advisors to provide assistance to judicial officials in
their own country.
Financial Regulatory Supervision to Protect Integrity of the Banking System. Protecting
the financial sector from terrorist financing and criminal abuse is a key element in our CT
Finance Training and Technical Assistance strategy. Under international standards, each country
must determine which regulatory agency will be responsible for banks and non-bank financial
institutions compliance with measures to combat terrorist financing. Governments should
develop strict regulatory and anti-money laundering compliance measures and create a formal
system for financial institutions to report suspicious activities to the regulatory agencies. Each
country should establish penalties such as monetary fines to ensure the effectiveness of the
compliance regime. The central bank, investment regulators, and other supervisory agencies need
to educate the private sector as to possible abuse by terrorists.
The United States may provide assistance to strengthen the financial regulatory regimes
of countries that request such assistance through our regulators including the Federal Reserve,
Federal Deposit Insurance Corporation, and Office of the Comptroller of the Currency. Training
includes courses for bank examiners on reporting suspicious activity reports and detecting
terrorist financing and money laundering schemes.

- 165 - 165 - 165 -

Financial Intelligence Unit as the Link Between the Private and Public Sectors. Each
country should establish a financial intelligence unit (FIU) to collect, analyze, and disseminate
financial intelligence and pass legislation to authorize such data collection. The FIU should
develop an efficient system for financial institutions and government regulatory agencies to
report suspicious activities related to terrorist financing and money laundering to the FIU. The
FIU should be responsible for analyzing these suspicious activities reports and refer cases to lawenforcement agencies for investigation. The FIU should establish appropriate channels to share
financial intelligence with its foreign counterparts to assist with financial crime investigations.
The United States, through the Treasury Department Financial Crimes Enforcement
Network, provides training and technical assistance to foreign FIUs. Such assistance includes
provision of equipment, information technology assessments, and specialized analytical software
and analyst training for fledgling FIUs. The United States is an active member of the Egmont
Group of FIUs and regularly sponsors aspiring members.
Law Enforcement Investigations to Track Down Terrorist Financiers. Law enforcement
agencies must be granted adequate legal authority to pursue financial crimes including terrorist
financing cases. Such authority may include the power to conduct undercover operations and
electronic surveillance to investigation financial crimes. Governments should establish
specialized units and interagency task forces to pursue terrorist financing cases. Law
enforcement agencies should coordinate investigations and prosecutions of terrorist financing
cases with the judiciary branch.
The United States provides assistance programs in the form of financial investigative
training to foreign law-enforcement agents who request such assistance. U.S. agencies
including the FBI, State Departments Diplomatic Security Anti-Terrorism Assistance Programs,
Internal Revenue Service Criminal Investigations Division, and Bureau of Immigration and
Customs Enforcement conduct training courses for their foreign counterparts to develop the
skills necessary to investigate financial crimes including terrorist financing.
Judicial/Prosecutorial Process to Bring Terrorist Financiers to Justice. Each government
must determine which judicial unit will be responsible for prosecuting terrorist financing cases.
Due to the complex technical nature of terrorist financing cases, a well-trained team of
prosecutors familiar with financial crimes should be assembled to pursue these investigations.
Judges and magistrates need to familiarize themselves with terrorist financing cases because they
may not have tried such cases in the past.
The United States may provide technical assistance through the Department of Justice to
foreign allies judicial authorities using case studies to demonstrate how new counterterrorism
finance legislation can be applied and cases prosecuted successfully.
In response to the 9/11 attacks, the U.S. government launched a global war on terrorism
on five fronts: military, intelligence, law enforcement, financial, and diplomatic. The U.S. has
conducted law enforcement and intelligence operations that bring terrorist financiers to justice.
In addition, the U.S. has began to employ public designations measures to name, shame, and
block the assets of terrorist groups and their supporters. Further, the U.S. has developed capacity- 166 - 166 - 166 -

building programs to reinforce the institutions of foreign allies to proactively combat terrorist
financing.
4. Coalition Planning to Counter Terrorist Financing
The TFWG has development the following process to prioritize the use of financial and
human resources to build comprehensive anti-money laundering and counterterrorist finance
(AML/CTF) regimes through U.S. foreign assistance:
1. Identify and prioritize countries needing the most assistance to deal with terrorist
financing with input from the intelligence and law enforcement communities.
2. Evaluate priority countries CTF regimes with a Financial Systems Assessment Team
(FSAT) comprising legal, financial and law enforcement experts. The FSAT team usually spends
one week in country to meet with host government authorities from the ministries of justice,
interior, and finance; law-enforcement authorities; the central bank, and the private sector to see
how they address money laundering and terrorist financing crimes.
3. Prepare a formal assessment report on vulnerabilities to terrorist financing and make
recommendations for training and technical assistance to address these weaknesses. The team
delivers its report in about a month. The formal report is shared with the host government to
gauge its receptivity to and coordinate U.S. offers of assistance.
4. Develop a training implementation plan based on these recommendations. Assistance
programs from U.S. government experts may include legal drafting assistance to ensure that the
host nations legal regime meets international standards, financial regulatory training, financial
intelligence unit development, investigative training to follow the money, and judicial and
prosecutorial training.
5. Provide training and technical assistance to priority countries on establishing the legal
framework to criminalize AML/CTF and then train law-enforcement agents and prosecutors to
apply the law. This assistance can be provided in the country, in the region, or in the United
States.
6. Encourage burden sharing in capacity building with our allies, international financial
institutions (International Monetary Fund or IMP, World Bank, regional development banks), and
through international organizations such as the U.N. Counterterrorism Committee, Financial
Action Task Force (FATF), on money laundering, and G-8.
The September 11 attacks prompted the U.S. and its allies to quickly recognize the urgent
need to detect, dismantle, and deter terrorist financing networks around the world. To this end,
each country has embarked upon the development of its legal, financial regulatory, financial
intelligence, law-enforcement, and prosecutorial capabilities and institutions to effectively

- 167 - 167 - 167 -

combat terrorist financing and money laundering. Counterterrorism financial legislation can be
applied and cases prosecuted successfully.177
5. Conclusion
In order to curtail funds reaching terrorists, countries must address the threat of terrorism. This
action must be conducted on various fronts, e.g., financing domestically and internationally to
deny terrorist networks financing and safe haven. The international community must prescribe to
capacity building. This technique will allow a country to reinforce its legal, financial regulatory,
financial intelligence, law enforcement, and judicial capabilities to combat terrorist financing. By
leveraging its resources to assist countries with meeting the challenges posed by terrorist
financing, the international community can better safeguard financial systems against abuse by
terrorist financiers around the world.

177 Building a Counterterrorist Finance Regime, http://usinfo.state.gov/journals/ites/0904/ijee/realugo.htm.

(September 2004).

- 168 - 168 - 168 -

II. THE UNITED NATIONS POSITION

1. Terrorist Financing
Terrorist financing is a part of the so-called war on terror aimed at preventing terrorists
and supporters of terrorism access to the financial system. Conventional wisdom is that denial of
access to the financial system that further attacks hinders further terrorist attacks. However, a
recent United Nations report178 questions that reasoning.
The report was compiled by the United Nations Analytical Support and Sanctions
Monitoring Team for the Security Council, pursuant to the authority of 8 of Security Council
resolution 1526 (2004).179 The essential elements of the report are that the current sanction
regime has either run its course or nearly so, Al Qaida has decentralized and is able to finance its
activities on very little money, and advocates greater international cooperation. 180 In particular,
the report discusses the various international efforts against terrorism and terrorist financing and
the methodologies used to finance terrorism.
The report states there are currently 32 organizations working to develop standards and
policies against terrorist financing.181 The report states that the most comprehensive regulatory
regimes are those in compliance with the Financial Action Task Forces (FATFs) 40
recommendations on anti-money laundering and the eight special recommendations regarding
terrorist financing.182 The only criticism of the FATF is that it does not attract universal
178 First Report of the Analytical Support and Sanctions Monitoring Team
Appointed Pursuant to Resolution 1526 (2004) Concerning Al-Qaida and the
Taliban and Associated Individuals and Entities, S/2004/679 available at
http://daccess-ods.un.org/access.nsf/Get?Open&DS=S/2004/679&Lang=E.
(Requires Acrobat Reader.)
179 Letter dated 23 August 2004 from the Chairman of the Security Council Committee established pursuant to
resolution 1267 (1999) concerning Al-Qaida and the Taliban and associated individuals and entities addressed to the
President of the Security Council available at http://daccess-ods.un.org/access.nsf/Get?
Open&DS=S/2004/679&Lang=E. (Requires Acrobat Reader.)
180 Peter Heinlein, UN Report Says Sanctions on Al-Qaida are Obsolete available at
http://www.voanews.com/article.cfm?objectID=DA3168E4-9523-4BE5-96619D3C20AE7244&title=UN%20Report
%20Says%20Sanctions%20on%20al-Qaida%20Obsolete.
181 Id. at 13.
182 Id.

- 169 - 169 - 169 -

international support and and cannot by itself achieve a properly supervised global regime for
the financial sector.183 Reading between the lines, the report seems to imply that the United
Nations is in a better position to fill in the gaps184 of recognized standards.
The report describes that 90 (of the 192) nations participating in the United Nations have
established Financial Intelligence Units (FIUs).185 The FIUs collect and analyze Suspicious
Transaction Reports submitted by financial businesses in search of prohibited transactions. 186 In
essence, the FIUs provide a link between regulatory agencies and financial businesses to gather
information for law enforcement and to provide training for financial businesses as to what may
be unlawful activity.187 The report warns that while the focus of the international community is
to counter terrorist financing by tracking individual transactions, this will only force Al Qaida,
and by implication similar groups, to use alternative means less susceptible to tracking. 188 Thus,
merely tracking financial transactions is already obsolete.
One of the most interesting aspects of the paper was it described the level of financing to
carry out Al Qaidas terrorist activities. By far the most expensive operation was the attacks on
new York and Washington, D.C. The exact figure was not stated, but it was in excess of $100
thousand.189 The Madrid train bombings cost about $50 thousand. 190 The attack on the U.S.S.
Cole cost about $30 thousand. The point is that these terror operations cost so little to carry out
it is probably not possible to track individual financial transactions to identify them before hand.
The report emphasizes three ways terrorists move funds: alternative remittance systems,
cash couriers, and charities and non-profit organizations.191 Licensing and regulating nonbanking financial businesses have addressed alternative remittance systems, such as hawala. 192
However, the report expresses concern that over regulation will just lead to other systems that are
less susceptible to regulation.193 Cash couriers are used to physically carry cash outside of the
banking system.194 The United Nations has urged all states to establish reporting requirements. 195
Similarly, charitable organizations are used to raise and transfer money around the world. 196 This
has led to better monitoring and accounting of the accounts of such organizations. 197 Of course,
all of this leads to questions about how such restrictions are compatible with free societies.
183 Id.
184 Id.
185 Id.
186 Id.
187 Id.
188 Id. at 12-13.
189 Id. at 12.
190 Id.
191 Id. at 14-15.
192 Id. at 14.
193 Id.
194 Id.
195 Id.
196 Id. at 15.
197 Id.
- 170 - 170 - 170 -

For example, alternative remittance systems are manifestations of the right of parties to
enter contracts. In the United States, the states are prohibited from impairing the obligation of
contracts198 and the authority of the federal government is typically limited to regulation of
interstate and foreign commerce. So swapping contractual liabilities are now a threat to
government. As for transporting cash, it is analytically no different than transporting any other
kind of moveable property. In fact, the public was sold paper money for the relative ease of
transport over precious metals. Now people are not supposed to even carry too much cash
around because it is indicative of a threat to the government. Similarly, strict regulation of
charities makes less money available to address the needs the charities were formed to meet. In
other words, charities are a threat to government. Yet, these are all basic rights of human beings
everywhere. If the basic rights of the vast majority of people must be expended to preserve the
current system, one must wonder whether it is the current governmental system that has become
obsolete.
To the extent that modern government directs its efforts at self-preservation at the
expense of the rights of the people, government is no different than religious organizations that
use fear of hell fire and damnation to control people. Carrying the comparison further, the
various policy organizations (particularly the FATF) are akin to television evangelists attempting
to exercise the devil of terrorism. It is a lot of show for something as fleeting as the weather.
The UN report makes this point quite clear.
Despite the fact that the UN and many world governments have taken to listing people
and organizations considered related to terrorism, the effort has had little impact on terrorist
financing. There appear to be several reasons for this, the most important being that the
Security Council has, inevitably, reacted to events, while Al-Qaida has shown great flexibility
and adaptability in staying ahead of them. The structure of Al-Qaida has evolved from its
original form as an office offering support to fighters in Afghanistan, through its role as an
initiator and sponsor of terrorism from an established base, to its current manifestation as a loose
network of affiliated underground groups with certain goals in common. It will always be
difficult to design, let alone enforce, sanctions against diverse groups of individuals who are not
in one location, who can adopt different identities, and who need no special equipment to launch
their attacks.199 The mere fact that people may do things that destabilize governments are
considered threats. This is a long way from the government Thomas Jefferson described where,
A little revolution is a good thing.200
The Monitoring team sees its future in studying how Al-Qaida is now raising, holding
and moving money in order to identify ways in which the financial measures might be made
more effective. It will seek to identify ways in which investigating bodies can pass to the relevant
regulatory authorities new information on Al-Qaida associated terrorist financing as early as
possible. The Monitoring Team will also continue its engagement with other international
organizations dealing with terrorist financing with a view to making recommendations to the
1267 Committee for possible further measures.201 In other words, the Monitoring team offers
198 U.S. Const. Art. I 10.
199 First Report at 9.
200 Cool Quotes Collection available at http://www.coolquotescollection.com/cat/wisdom/94/.
201 First Report at 15.
- 171 - 171 - 171 -

the same old solution: more bureaucracy. History will probably show that the terrorist element
has always been present but the government is only reeling under its own weight.

- 172 - 172 - 172 -

III. PATTERNS OF GLOBAL TERRORISM -- 2003

Released by the Office of the Coordinator for Counterterrorism
April 29, 2004
Introduction
By Ambassador Cofer Black
Coordinator for Counterterrorism
"Weve come to this moment through patience and resolve and focused action. And that is our
strategy moving forward. The war on terror is a different kind of war, waged capture by capture,
cell by cell, and victory by victory. Our security is assured by our perseverance and by our sure
belief in the success of liberty. And the United States of America will not relent until this war is
won."
President George W. Bush
on 14 December 2003
following the capture of Saddam Hussein
In 2003, terrorists struck at targets around the world, even as Iraq became a central front
in the global war against terrorism and the focus of so many deadly attacks against civilians. AlQaida and other terrorist groups made clear once again their relentless pursuit of evil in defiance
of any law -- human or divine. The year saw heinous crimes against the international community,
humanitarian organizations, and people dedicated to helping mankind:
*A bomb in a cement truck exploded at the United Nations headquarters in Baghdad in August,
killing special UN representative Sergio Vieira de Mello and 22 other persons.
*

The Baghdad International Committee for the Red Cross was bombed in October.

*
The Catholic Relief Services headquarters in Nassiryah was destroyed in a
bombing on 12 November.
*
An explosion occurred near Save the Children USAs offices in Kabul in November; the
agency has been providing education, health, and economic assistance to children and families in
Afghanistan for more than 20 years.
Churches, synagogues, and mosques were all targeted by terrorists in 2003. Among the
items captured from al-Qaida terrorists last year were copies of the Koran containing bombs.
Clearly, these actions show the terrorists to be enemies of all people, regardless of faith.
The world must remain united against the terrorist threat. The United States, for its part,
remains committed to implementing the National Strategy for Combating Terrorism. We will:

- 173 - 173 - 173 -

*
Defeat terrorist organizations of global reach by attacking their sanctuaries; leadership;
command, control, and communications; material support; and finances.
*

Deny further sponsorship, support, and sanctuary for terrorists.

Diminish the underlying conditions that terrorists seek to exploit.

Defend the United States, our citizens, and our interests at home and abroad.

*
Use all the tools at our disposal: diplomatic, law enforcement, intelligence, financial, and
military.
Diplomacy
Through diplomacy, the Department of State promotes international counterterrorism
(CT) cooperation that serves our own interests as well as those of our partners. We enhance the
capabilities of our allies to fight the terrorist threat and facilitate the disruption of terrorist
networks and the apprehension of terrorist suspects.
During the year, nations around the world continued to increase their counterterrorism
efforts and to cooperate both bilaterally and regionally to deter attacks. The OAS, the European
Union, the OSCE, ASEAN, APEC, and other organizations took concrete steps to combat
terrorism more effectively and to cooperate with each other in the fight. Since September 11,
NATO has made great strides in transforming its military capabilities to make the Alliance more
expeditionary and deployable against terrorist threats. NATO currently makes a major
contribution to the global war on terrorism by leading the International Security Assistance Force
(ISAF) in Afghanistan. Additional Alliance counterterrorism contributions include a maritime
terrorism monitoring presence in the Mediterranean Sea, a Chemical-Biological-RadiologicalNuclear defense unit, and a terrorism threat intelligence unit to enhance sharing of intelligence.
At the 2003 G-8 Summit in Evian, France, leaders established a Counterterrorism Action
Group of donor countries to expand and coordinate training and assistance for countries with the
will -- but not the capabilities -- to combat terror, focusing on critical areas such as terrorist
financing, customs and immigration controls, illegal arms trafficking, and police and law
enforcement. During the fourth regular session of the Inter-American Committee Against
Terrorism (CICTE), member states agreed to a comprehensive work plan not only to strengthen
border and financial controls but also to address threats to seaport and aviation security as well as
cybersecurity. In June, President Bush announced a $100 million Eastern Africa
Counterterrorism Initiative to expand and accelerate CT efforts with Kenya, Ethiopia, Djibouti,
Uganda, Tanzania, and other countries.
Law Enforcement
The greatly increased law enforcement cooperation among nations that followed the 9/11
attacks continued to expand throughout 2003.
- 174 - 174 - 174 -

Al-Qaida is no longer the organization it once was, largely due to such cooperation. Most
of the groups senior leadership is dead or in custody, its membership on the run, and its
capabilities sharply degraded. More than 3,400 al-Qaida suspects have been arrested or detained
worldwide. In the United States, international terrorist suspects repeatedly faced the rule of law:
*
In February, the Department of Justice (DOJ) announced the indictment of the alleged
North American leader of the Palestine Islamic Jihad, Sami Al-Arian, and seven co-conspirators.
The indictment charges them with operating a racketeering enterprise that has supported
numerous violent terrorist activities since 1984. Al-Arian and three others were placed under
arrest.
*
In March, DOJ announced the indictment and arrest of three members of the Army for the
Liberation of Rwanda for the brutal murder in 1999 of two American tourists in Uganda.
*
In May, a naturalized American citizen, Iyman Faris, pled guilty to surveilling a New
York City bridge for al-Qaida, and in October he was sentenced to 20 years for providing
material support to that group and conspiring to give them information about possible US targets
for attack.
*
Also in May, the Justice Department unsealed a 50-count indictment against two Yemeni
nationals for the bombing in October 2000 of the USS Cole that killed 17 American sailors and
wounded more than 40.
*
In November, two Yemeni suspects were extradited from Germany to the United States
on federal charges of conspiring to provide material support to al-Qaida and HAMAS.
*
Throughout the year, numerous members of terrorist cells that were disrupted in
Detroit, Portland, Buffalo, and Seattle pled guilty to or were convicted of charges of
conspiracy to provide material support to terrorists, including al-Qaida and the Taliban.
Intelligence
With enhanced intelligence sharing among nations, terrorists are being tracked down, and
plots are being thwarted.
In March, al-Qaida operational leader and mastermind of the 9/11 terrorist attacks, Khalid
Sheikh Mohammed, was captured in Pakistan and turned over to US authorities.
In August, his associate -- Riduan bin Isomuddin, or Hambali -- was arrested in Thailand
and also turned over to US authorities. Hambali is believed to have been largely responsible for
the terrorist attacks in Bali that killed more than 200 people.
Information gained from captured enemy combatants and imprisoned terrorist suspects
continues to be exploited effectively around the world.

- 175 - 175 - 175 -

In January 2003, President Bush announced the creation of the Terrorist Threat
Integration Center, which began operations last May. The center analyzes threat-related
information collected domestically and abroad to form a comprehensive threat picture and to
ensure information sharing among US agencies.
In September, Attorney General John Ashcroft, Secretary of Homeland Security Tom
Ridge, Secretary of State Colin Powell, FBI Director Robert Mueller, and Director of Central
Intelligence George Tenet announced the creation of the Terrorist Screening Center to
consolidate terrorist watch lists and provide 24/7 operational support for the thousands of federal
screeners across the country and around the world.
Financial
The world community is waging an unprecedented campaign to disrupt the flow of
money to terrorist networks and cripple their ability to operate on a global scale. The United
States is working closely with other governments and international institutions to block terrorist
assets overseas, take preventive measures to keep assets out of terrorist hands, and offer training
and assistance to governments that seek to improve their institutional ability to carry out antimoney laundering strategies.
Virtually every country in the world has expressed support for the war on terrorist
financing: 173 nations have issued orders to freeze terrorist assets, more than 100 countries have
introduced new legislation to fight terrorist financing, and 84 countries have established financial
intelligence units to share information.
The 31-member Financial Action Task Force (FATF), the worlds standard setter for
fighting money laundering, has adopted recommendations for countries that seek to protect their
financial systems from terrorist financiers. More than 90 non-FATF countries and jurisdictions
have already submitted self-assessment reports to FATF on their compliance with these
recommendations.
Some 350 terrorist entities and individuals have been designated under Executive Order
13224, signed by President Bush on 23 September 2001, which freezes the assets of terrorists
and their supporters and authorizes the government to identify, designate, and freeze the USbased assets of those who offer financial support to terrorist groups.
The Department of States Counterterrorism Finance Unit and the interagency Terrorist
Financing Working Group coordinate the delivery of technical assistance and training to
governments around the world that seek to improve their ability to investigate, identify, and
interdict the flow of money to terrorist groups.
The United States has blocked some $36 million in assets of the Taliban, al-Qaida, and
other terrorist entities and supporters; approximately $26 million of this has been turned over to
the Government of Afghanistan. Other nations have blocked more than $100 million in terrorist
assets.
- 176 - 176 - 176 -

Military
In Iraq and Afghanistan, military force is being brought to bear against terrorists with real
success.
The capture of Saddam Hussein in December 2003 was a major defeat for the thugs and
terrorists who supported him. Through Operation Iraqi Freedom, the United States and its
Coalition partners defeated the Saddam regime, effectively neutralizing a state sponsor of
terrorism and removing a government that had used weapons of mass destruction against its own
people. Iraq could no longer be used as a sanctuary by the network run by Abu Musab alZarqawi, whose relationships with senior al-Qaida leaders helped establish a poison-andexplosives training camp in northeastern Iraq.
During Operation Enduring Freedom, the United States has built a worldwide Coalition
that dismantled the oppressive Taliban regime in Afghanistan and denied al-Qaida a safehaven.
The Coalition remains engaged there.
(Most of the attacks that have occurred during Operation Iraqi Freedom and Operation
Enduring Freedom do not meet the longstanding US definition of international terrorism because
they were directed at combatants, that is, American and Coalition forces on duty. Attacks against
civilians and against military personnel, who at the time of the incident were unarmed and/or not
on duty, are judged as terrorist attacks.)
Conclusion
We have made significant progress in the two and one-half years since the global war on
terrorism began. But the ultimate success of this global counterterrorism campaign will hinge, in
large part, on two factors: sustained international political will and effective capacity building.
First, we must sustain and enhance the political will of states to fight terrorism. The key
to maintaining a coalition is underscoring to its members every day that the fight is not over and
that sustained effort is clearly in their long-term interests. We have made tremendous progress on
that score.
I would cite Saudi Arabia as an excellent example of a nation increasingly focusing its
political will to fight terrorism. Saudi Arabia has launched an aggressive, comprehensive, and
unprecedented campaign to hunt down terrorists, uncover their plots, and cut off their sources of
funding. The horrific bombings in Riyadh in May and November served to strengthen Saudi
resolve, hasten existing counterterrorism efforts, and open new avenues of cooperation. I have
made numerous trips to the Kingdom during the past year and met with the highest levels of the
Saudi Government, and I have been greatly impressed with the strides they have made and their
seriousness of purpose.
Second, we need to enhance the capacity of all states to fight terrorism. The United States
cannot by itself investigate every lead, arrest every suspect, gather and analyze all the
intelligence, effectively sanction every sponsor of terrorism, prevent the proliferation of weapons
of mass destruction, or find and fight every terrorist cell.
- 177 - 177 - 177 -

I would cite Malaysia as a nation that is helping others increase their counterterrorism
capacities while also increasing its own. Malaysia opened the Southeast Asia Regional Center for
Counterterrorism in August. Participants from 15 nations from South and Southeast Asia
received US-provided training at the center in ways to cut off sources of terrorist financing.
Malaysia is a key partner in the war on terrorism, and its role in creating a regional center for
building counterterrorism capacity and sharing information about terrorism in Asia is most
welcome.
The United States shares that goal of assisting governments to become full and selfsustaining partners in the global fight against terrorism.
This fight will be of uncertain duration, but additional deadly attacks are certain.
As Secretary Powell reminded us on the second anniversary of the September 11 attacks:
Led by the United States, nations all around the globe have come together in an historic effort to
wipe terrorism from the face of the Earth. Faithful friends and former foes alike have united
against terror, and we are bringing every tool of statecraft to bear against it -- military,
intelligence, law enforcement, financial, and most certainly diplomatic."
Note
Adverse mention in this report of individual members of any political, social, ethnic,
religious, or national group is not meant to imply that all members of that group are terrorists.
Indeed, terrorists represent a small minority of dedicated, often fanatical, individuals in most
such groups. It is those small groups -- and their actions -- that are the subject of this report.
Furthermore, terrorist acts are part of a larger phenomenon of politically inspired
violence, and at times the line between the two can become difficult to draw. To relate terrorist
events to the larger context, and to give a feel for the conflicts that spawn violence, this report
will discuss terrorist acts as well as other violent incidents that are not necessarily international
terrorism.
Legislative Requirements
This report is submitted in compliance with Title 22 of the United States Code, Section
2656f(a), which requires the Department of State to provide Congress a full and complete annual
report on terrorism for those countries and groups meeting the criteria of Section (a)(1) and (2) of
the Act. As required by legislation, the report includes detailed assessments of foreign countries
where significant terrorist acts occurred and countries about which Congress was notified during
the preceding five years pursuant to Section 6(j) of the Export Administration Act of 1979 (the
so-called terrorist-list countries that have repeatedly provided state support for international
terrorism). In addition, the report includes all relevant information about the previous years
activities of individuals, terrorist organizations, or umbrella groups known to be responsible for
the kidnapping or death of any US citizen during the preceding five years and groups known to
be financed by state sponsors of terrorism.
In 1996, Congress amended the reporting requirements contained in the above-referenced
law. The amended law requires the Department of State to report on the extent to which other
- 178 - 178 - 178 -

countries cooperate with the United States in apprehending, convicting, and punishing terrorists
responsible for attacking US citizens or interests. The law also requires that this report describe
the extent to which foreign governments are cooperating, or have cooperated during the previous
five years, in preventing future acts of terrorism. As permitted in the amended legislation, the
Department is submitting such information to Congress in a classified annex to this unclassified
report.
Definitions
No one definition of terrorism has gained universal acceptance. For the purposes of this
report, however, we have chosen the definition of terrorism contained in Title 22 of the United
States Code, Section 2656f(d). That statute contains the following definitions:
The term terrorism means premeditated, politically motivated violence
perpetrated against noncombatant202 targets by subnational groups or clandestine
agents, usually intended to influence an audience.

For purposes of this definition, the

term noncombatant is interpreted to
include, in addition to civilians,
military personnel who at the time of
the incident are unarmed and/or not
on duty. For example, in past reports
we have listed as terrorist incidents
the murders of the following US
military personnel: Col. James Rowe,
killed in Manila in April 1989; Capt.
William Nordeen, US defense attache
killed in Athens in June 1988; the two
servicemen killed in the Labelle
discotheque bombing in West Berlin
in April 1986; and the four off-duty
US Embassy Marine guards killed in a
202

- 179 - 179 - 179 -

The term international terrorism means terrorism involving citizens or the

territory of more than one country.
The term terrorist group means any group practicing, or that has significant
subgroups that practice, international terrorism.
The US Government has employed this definition of terrorism for statistical and
analytical purposes since 1983.
Domestic terrorism is probably a more widespread phenomenon than international
terrorism. Because international terrorism has a direct impact on US interests, it is the primary
focus of this report. However, the report also describes, but does not provide statistics on,
significant developments in domestic terrorism.
II.

Discussion Questions

1. Discuss the specific statutory definition of a terrorist activity.

2. Discuss by region and terrorist group the financing methods and methods of

money laundering.
3. Discuss the role of non-profit organizations, such as charities, in the financing of

terrorism.
4. Discuss the USA Patriot Acts provisions on the financing of terrorism.
5. Discuss the international standards on the financing of terrorism.

cafe in El Salvador in June 1985. We

also consider as acts of terrorism
attacks on military installations or on
armed military personnel when a
state of military hostilities does not
exist at the site, such as bombings
against US bases in Europe, the
Philippines, or elsewhere.
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6. Discuss the legislations and regulations enacted by the United Kingdom and other

nations on the financing of terrorism.

7. How effective is the international regime against money laundering and the

financing of terrorism? Which methods and controls been most effective?

8. Discuss the Eight Special Recommendations of the FATF.

CHAPTER 7: THE UNITED STATES LAW OF MONEY LAUNDERING AND

FORFEITURE

I. Learning Objectives

1. To learn the three primary cycles to the money laundering process, the three categories of
offenses under Section 1956 and two categories of offenses under Section 1957, the basic outline
of the USA Patriot Act

2. To learn the definition of terms under the Money Laundering Control Act of 1986 and Sections
1956 and 1957.

3. To learn the offenses that are prosecutable under Sections 1956 and 1957 and the burden of
proof required.

4. To learn the similarities and differences of Sections 1956 and 1957.

5. To learn about the meanings and concepts of specified unlawful activities (predicate offenses)
and proceeds of crime.

6. To learn the different treatment of proceeds of crime under Sections 1956 and 1957, and the
requirements of various judicial circuits of the federal courts.
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7. To learn how the proceeds of crime relate to Sections 1956 and 1957 and how the case law,
under various circuits, differs.

8. To learn how extraterritorial jurisdiction is obtained by the U.S. government and the U.S.
district courts with respect to international money laundering matters.

9. To learn the criminal fines and civil penalties for money laundering transactions.

10. To learn when criminal forfeitures and civil asset forfeitures apply.

11. To learn how the USA Patriot Act allows the U.S. government to obtain funds at interbank
accounts established by foreign banks.

12. To learn about the John Doe Summonses cases and how this can lead the Internal Revenue
Service to finding crimes of money laundering.

II. Money Laundering Control Act of 1986. The Money Laundering Control Act of 1986 is
codified under the United States Code at 18 U.S.C. 1956203 and 1957204 (hereinafter referred to
as Section 1956 and Section 1957).
A. Money Laundering Defined. Money laundering may be defined as The process by which one
conceals the existence, illegal source, or illegal application of income, and then disguises that
income to make it appear legitimate.205
B. Introduction to Money Laundering. To understand the concept of money laundering, the
primary cycles to the money laundering process must be understood:
1. Pre-Washing Phase. This phase involves the introductions of the proceeds of crimes into the
financial system;
203 See http://www4.law.cornell.edu/uscode/18/1956.html.
204 Id.
205 Presidents Commission on Organized Crime, Interim Report to the President and the Attorney General, The
Cash Connection: Organized Crimes, Financial Institutions and Money Laundering, p. 7.

- 182 - 182 - 182 -

2. The Washing Phase. The second phase involves hiding the proceeds of crimes through a
variety of financial transactions, usually designed to eliminate the ability to trace the proceeds;
and
3. The Recycling Phase. The third phase involves the washed funds that provide benefit to the
criminal without further taint.
C. Introduction to Section 1956 and Section 1957. Prior to Sections 1956 and 1957, it was
difficult for the U.S. Government to successfully control the movement of illegal income through
financial institutions. Sections 1956 and 1957 add the goal of focusing on the act of converting
funds derived from illegal activities into spendable assets. The following is a brief history:206
The CIDs [Criminal Investigation Divisions] Anti-Money Laundering Program
is the compliance effort to address criminal violations of the Bank Secrecy Act
(BSA), the Money Laundering Control Act of 1986, and IRC 6050I (Form 8300
filing requirements). In 1970, Congress enacted legislation to enable law
enforcement officials to detect and prosecute narcotics trafficking and other
criminal activities that generate illegal proceeds and the laundering of those
proceeds. The BSA authorizes the Treasury Department to require the filing of
reports and the maintenance of records concerning various types of transactions
where they have a high degree of usefulness in enforcement of criminal, tax, or
regulatory proceedings.207
The Treasury Department has enacted regulations that impose four major
reporting requirements. The currency transaction report (CTR) requires
designated financial institutions to report cash transactions exceeding $10,000.
The Report of International Transportation of Currency or Monetary Instruments
(CMIR) requires that all persons report the import or export of currency and
certain other monetary instruments in excess of $10,000 into or out of the United
States. The Report of Foreign Bank and Financial Accounts (FBAR) requires that
each person subject to U.S. jurisdiction file an annual report of her interest in
designated foreign accounts that exceed $10,000.
In 1984, Congress enacted IRC 6050I, which requires any person who is
engaged in a trade or business and who, in the course of such trade or business,
receives more than $10,000 to report the transaction on Form 8300. Structuring
transactions to evade the reporting requirements of the BSA or IRC 6050I are
felonies, which can also result in civil penalties and forfeiture. The Money
Laundering Control Act of 1986 created the offense of money laundering (18
USC 1956) and the offense of knowingly engaging in monetary transactions in
property derived from specified criminal activity (18 USC 1957); both offenses
carry severe criminal penalties and can result in forfeiture.
206 Ian M. Comisky, Lawrence S. Feld and Steven M. Harris, TAX FRAUD AND EVASION
1.02 (6th ed. 1994).
207 31 U.S.C. 5311.

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The CID has devoted approximately 35 percent of its investigative resources to its
Anti-Money Laundering Program. Between fiscal years 1987 and 1992, the CID
increased its initiated money-laundering and currency-reporting investigations
from 507 to 2525 and increased its prosecution recommendations from 258 to
1745, and convictions for such offenses increased from 148 to 927.208
D. Three Categories of Offenses Under Section 1956. Section 1956 consists of three categories:
(i) domestic money laundering;209 (ii) international money laundering;210 and (iii) government
sting operations, involving property represented by a law enforcement officer to be the proceeds
of illegal activity.211 Section 1956 criminalizes, among other things, commercial transactions
where goods or services are provided in exchange for dirty money with certain knowledge or
intent. Section 1956 also prohibits transporting or transmitting dirty monetary instruments,
including U.S. currency, into or out of the U.S. with certain knowledge or intent.212
E. Two Categories of Offenses Under Section 1957. Section 1957 consists of two categories of
offenses where: (i) the offense takes place in the U.S. or in the special maritime and territorial
jurisdiction of the U.S.;213 or (ii) the offense takes place outside the U.S. and the person
perpetrating the offense is a U.S. person.214 Section 1957 prohibits engaging in monetary
transactions with dirty money.215
F. Basic Outline of the Act. Before looking at the details of the Money Laundering Control Act of
1986, it is important to understand the basic outline or format of the two statutes.
1. Section 1956. Section 1956(a)(1) deals with financial transactions involving the proceeds of
some specified unlawful activity. Section 1956(a)(2) deals with cross border transfers of
monetary instruments or funds from a place in the U.S. to or through a place outside the U.S.
Section 1956(a)(3) deals with: (i) promoting or carrying on specified unlawful activities; (ii)
concealment; or (iii) avoiding a transaction reporting requirement under state or federal law.
2. Section 1957. Section 1957(a) deals with a monetary transaction that involves engaging in a
monetary transaction in criminally derived property of a value greater than $10,000 that is
derived from funds from some specified unlawful activity.
G. Definition of TermsSection 1956.
208 Miyahara & Orth, Criminal Investigation Division Anti-Money Laundering Program, 10th Natl Inst. on Crim.
Tax & Money Laundering B-4 (1993). TFE WGL 1.02.
209 18 U.S.C. 1956(a)(1).
210 18 U.S.C. 1956(a)(2).
211 18 U.S.C. 1956(a)(3).
212 Ian M. Comisky, Lawrence S. Feld and Steven M. Harris, TAX FRAUD AND EVASION
V. II, 11.021 (6th ed. 1994).
213 18 U.S.C. 1957(d)(1).
214 18 U.S.C. 1957(d)(2).
215 Ian M. Comisky, Lawrence S. Feld and Steven M. Harris, TAX FRAUD AND EVASION V. II, 11.021 (6th ed.
1994).

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1. Transaction. The term transaction means:

[A] purchase, sale, loan, pledge, gift, transfer, delivery, or other disposition, and
with respect to a financial institution includes a deposit, withdrawal, transfer
between accounts, exchange of currency, loan, extension of credit, purchase or
sale of any stock, bond, certificate of deposit, or other monetary instrument, use
of a safe deposit box, or any other payment, transfer, or delivery by, through, or to
a financial institution, by whatever means effected.216
2. Financial Institution. The term financial institution means:
Financial institution is defined by reference to 31 USC 5312(a)(2),217 and an
individual, as well as a bank, can be considered a financial institution. The USA
Patriot Act amended the definition of financial institution to specifically include
any financial institution as defined in 31 USC 5312(a)(2) or the regulations
promulgated thereunder, and any foreign bank as defined in Section 1 of the
International Banking Act of 1978, 12 USC 3101.218 Financial institutions
include securities brokers or dealers, operators of credit card systems, insurance
companies, travel agencies, car dealers, and individuals involved in real estate
closings.219 The Secretary of the Treasury may designate any business whose
cash transactions have a high degree of usefulness in criminal, tax or regulatory
matters as a financial institution.220 According to the Money Laundering
Prosecution Manual (MLPM), amendments to the money-laundering statute
clarified that the definition of financial institution includes both the categories
provided by regulation or as defined under 31 USC 5312(a)(2).221
3. Financial Transaction. The term financial transaction means a transaction which in any way
or degree affects interstate or foreign commerce involving the movement of funds by wire or
other means or involving one or more monetary instruments or involving the transfer of title to
any real property, vehicle, vessel, or aircraft or a transaction involving the use of a financial
institution which is engaged in, or the activities of which affect, interstate or foreign commerce
in any way or degree.222
4. Monetary Instruments. The term monetary instruments means (i) coin or currency of the
U.S. or of any other country, travelers checks, personal checks, bank checks, and money orders;
216 18 U.S.C. 1956(c)(3).
217 18 U.S.C. 1956(c)(6).
218 USA Patriot Act, Pub. L. No. 107-56, tit. III, 318, 115 Stat. 311 (Oct. 26, 2001).
219 31 U.S.C. 5312(a)(2)(A)5312(a)(2)(Z).
220 31 U.S.C. 5312(a)(2)(Z).
221 The Money Laundering Prosecution Manual is published at USAM 9-105-200B, USAM 9-4108-55. Under this
interpretation, a car dealer would be considered a financial institution.
222 18 U.S.C. 1956(c)(4).

- 185 - 185 - 185 -

or (ii) investment securities or negotiable instruments, in bearer form or otherwise in such form
that title thereto passes upon delivery.223
5. Conducts. The term conducts means:
initiating, concluding, or participating in initiating, or concluding a transaction.224
Concerning bank deposits, one court has defined conducts as occurring when a
deposit is made, not when the deposited check is processed.225 The term specified
unlawful activity is defined broadly to include all Racketeer Influenced and
Corrupt Organizations Act (RICO) predicate offenses, except Title 31 offenses.226
The term state includes any state, the District of Columbia and any
commonwealth, territory, or possession of the United States.227 Vagueness
challenges to the definitional framework have been rejected.228
6. Proceeds. Proceeds is not a defined term under 1956.
The earliest decision to consider a challenge was by a district court in United
States v. Ortiz, where the district court rejected a due process challenge to the
term. The court cited The Random House Dictionary definition as [s]omething
that results or accrues; the total amount derived from a sale or other
transaction ; [or] the profits or returns from a sale, investment, etc., and
Blacks Law Dictionary definition of proceeds as [i]ssues; income; yield;
receipts; produce; money or articles or other thing of value arising or obtained by
the sale of property; the sum, amount or value of property sold or converted into
money or into other property. 229 The court concluded that the term proceeds
had a commonly accepted meaning and provided sufficient notice of the
prohibited conduct.
The term was considered by another district court in United States v. Werber,
where the defendants used counterfeit cashiers checks to purchase automobiles
they later sold. Citing Phelps v. Harris, which stated that proceeds is a word of
great generality,230 and the dictionary definition of the term, the court found that

223 18 U.S.C. 1956(c)(5).

224 18 U.S.C. 1956(c)(2).
225 See United States v. Li, 55 F.3d 325 (7th Cir. 1995) (affirming judgment of acquittal on money-laundering
count on statute of limitations grounds).
226 18 U.S.C. 1956(c)(7), 1961(1).
227 18 U.S.C. 1956(c)(8).
228 See, e.g., United States v. Jackson, 935 F.2d 832 (7th Cir. 1991).
229 United States v. Ortiz, 738 F. Supp. 1394, 1400 (SD Fla. 1990). See also United States v. Gleave, 786 F. Supp.
258, 270 (WDNY 1992), affd in part, revd in part on other grounds, 16 F3d 1313 (2d Cir.), cert. denied, 513 US
1015 (1994).
230 Phelps v. Harris, 101 US (11 Otto) 370, 380381 (1879).

- 186 - 186 - 186 -

the automobiles represented proceeds of the specified unlawful activity (i.e., the
purchase of automobiles with counterfeit checks).231
Subsequently, a number of circuit courts have rejected vagueness challenges. For
example, in United States v. Haun, the Sixth Circuit rejected a vagueness
challenge, relying on the definition of proceeds in Websters Third New
International Dictionary: what is produced by or derived from something (as a
sale, investment, levy, business) by way of total revenue. The court found that
the term had a commonly accepted meaning.232 In United States v. Jackson, the
defendant argued that the term proceeds was vague because it failed to specify
what portion of the funds must include illegal proceeds. The Seventh Circuit
rejected this contention, noting that since the commingling of legal and illegal
funds violated the statute, the term was specific enough. 233 In United States v.
Monaco, the defendant objected to the application of proceeds to conduct
occurring before the statute was enacted. The Second Circuit held that conduct
occurring before the enactment of the statute nevertheless created proceeds of
an offense when financial transactions subsequently occurred after the enactment
date, and the conviction was affirmed.234
Beyond vagueness challenges, what constitutes proceeds has resulted in
significant appellate litigation with varying pronouncements. Proceeds need not
consist of currency or monetary instruments,235 and proceeds may be derived from
a specified unlawful activity committed by someone other than the defendant. 236
The Ninth Circuit, in United States v. Estacio, rejected the contention that
proceeds must consist of money or tangible assets, finding that proceeds were
created as a result of a fraudulently obtained line of credit that resulted in
artificially inflated bank balances.237 In United States v. Akintobi, this same circuit
held that proceeds of a credit card scheme included personal bank checks stolen
from the mails, which were used to pay down balances due on the credit card
accounts and resulted in an increase in the available credit. 238 In United States v.
Christo, however, the Eleventh Circuit, in a check-kiting scheme charged under
18 USC 1957, distinguished Estacio and held that the evidence was insufficient
231 United States v. Werber, 787 F. Supp. 353, 356357 (SDNY 1992).
232 United States v. Haun, 90 F.3d 1096, 1101 (6th Cir. 1996), cert. denied, 519 US 1059 (1997).
233 United States v. Jackson, 983 F.2d 757, 765 (7th Cir. 1993).
234 United States v. Monaco, 194 F.3d 381, 385386 (2d Cir. 1999) (effectively eliminating the statute of
limitations as a defense), cert. denied, 529 US 1028 (2000).
235 United States v. Rounsavall, 115 F.3d 561, 565566 (8th Cir. 1997) (real property constitutes proceeds); United
States v. Griffith, 17 F.3d 865, 879 (6th Cir. 1994) (inventory is proceeds).
236 United States v. Smith, 46 F.3d 1223, 1234 (1st Cir. 1995) (18 USC 1957 case holding that there is no
requirement that the defendant commit the predicate offense creating the proceeds).
237 United States v. Estacio, 64 F.3d 477, 480481 (9th Cir. 1995), cert. denied, 517 US 1121 (1996).
238 United States v. Akintobi, 159 F.3d 401, 403405 (9th Cir. 1998) (it was the custom of the credit card
companies to immediately honor the checks), cert. denied, 528 US 927 (1999).

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to show that the defendant had engaged in a transaction separate from the
underlying criminal offense sufficient to create proceeds.239
In a significant ruling, the Seventh Circuit has limited the concept of proceeds in a
case involving a video poker business. In United States v. Scialabba, the
defendants were convicted of money laundering predicated upon the distribution
of the gross receipts from video poker machines. The distributed funds were used
to pay the outlet owners, winning customers, and business expenses. The Seventh
Circuit rejected the contention that the proceeds included the gross receipts
obtained, stating that the governments theory was the equivalent of saying that
every drug dealer commits money laundering by using receipts from the sale to
purchase more stock in trade, that a robber commits money laundering by using
part of the loot to rent a get-a-way car, and that an embezzler commits money
laundering by spending part of the embezzled money for food and rent to stay
alive. The Seventh Circuit held that proceeds in this case consisted of business
profits, and the convictions of the defendants were reversed. While the court
attempted to distinguish United States v. Conley, the Seventh Circuits decision
conflicts with the Third Circuits view of the concept of proceeds.240
One issue that arises from a broad definition of proceeds is the possible use of
tax crimes to establish that a defendant knew the funds involved were the
proceeds of some form of unlawful activity. Under the dictionary definitions,
there arguably are no proceeds of tax offenses, since the unreported income in a
tax offense frequently comes from the operation of a taxpayers business, or some
other legitimate activity. The Senate Report to the Money Laundering Control Act
of 1986 noted that tax-evasion offenses did not have clearly identifiable
proceeds.241 Although it could be argued that the taxes due on the income omitted
from a tax return conceptually could be considered proceeds, it is, nonetheless,
difficult to employ tax violations to charge a money-laundering crime.
A second issue relating to the term proceeds is whether it includes funds
received from the original illegal activity, the subsequent disposition of assets
originally acquired from the illegal source, or both. Stated another way, the term
fails to specify whether direct or derivative proceeds of specified unlawful
activities constitutes proceeds. For example, assume a bookmaker receives funds
in payment of a bet from a customerhave proceeds been created? Arguably,
there are no proceeds until the underlying offense is completed. If the bookmaker
then uses the funds to buy a home, these could be considered proceeds. If the
bookmaker later sells the home and buys another, however, it is not clear whether
and to what extent the proceeds are tainted forever.
239 United States v. Christo, 129 F.3d 578, 580 (11th Cir. 1997).
240 United States v. Scialabba, 282 F.3d 475, 476478 (7th Cir.), cert. denied, 537 US 1071 (2002).
241 S. Rep. No. 433, 99th Cong., 2d Sess. 1112 (1986).
- 188 - 188 - 188 -

Title 18 USC 1956 does not directly address the issue of derivative proceeds. In
contrast, 18 USC 1957(a) specifically targets funds derived from specified
unlawful activity.242 Similarly, one asset-forfeiture statute applicable to 18 USC
1956 violations provides for forfeiture of property traceable to such
property.243 Commentators have suggested that the differing terms contained in
18 USC 1956, 1957, and 981 indicate that, absent unusual circumstances, 18
USC 1956 should apply to what are determined to be direct proceeds but not to
derivative proceeds of illegal activities.244
Several circuits, nonetheless, have held that derivative proceeds can be charged as
a money-laundering offense. In United States v. Mankarious, the Seventh Circuit
held that when a check is deposited in a bank account, and a second check is
written on the account, the second check constitutes proceeds even if the first
check had not cleared.245 The Fourth Circuit held that where property is purchased
in part with proceeds of fraudulent loans and with proceeds of legitimate assets,
and the property is then sold, the net returned to the defendant continues to be
proceeds of a specified unlawful activity up to the amount of the false loan
amount.246
Yet another issue exists with respect to the timing of the offense and the creation
of proceeds. The Justice Department has recognized that a timing issue exists with
respect to the relationship between the underlying offense and the moneylaundering violation. The MLPM notes:
Merger: The statute seems to contemplate a temporal progression of transactions
i.e., that the funds already have attained the status of unlawful proceeds when
the money laundering financial transaction is commenced. The same transaction,
in other words, cannot at once constitute the money laundering offense and the
underlying specified unlawful activity that generated the funds being laundered.
Thus it is critical to determine when funds become the proceeds of the
underlying crime. In many cases this will be simple to do: The money involved in
a drug transaction becomes proceeds when the transaction is consummated; any
subsequent transaction could be the subject of a money laundering offense. But
the issue is likely to be very complicated in cases involving complex, ongoing
242 18 USC 1957(a). Technical corrections to the statute by the Department of Justice Appropriation Act, tit. IV,
4002, 116 Stat. 1808 (Nov. 2, 2002).
243 18 U.S.C. 981.
244 See, e.g., Strafer, Money Laundering: The Crime of the 90s, 27 AM. CRIM. L. REV. 149, 182185 (1989);
Villa, Banking Crimes 8.03[3] (1992 Supp.).
245 United States v. Mankarious, 151 F.3d 694, 706707 (2d Cir.), cert. denied, 525 US 1056 (1998).
246 United States v. Moore, 27 F.3d 969, 976977 (4th Cir.), cert. denied, 513 US
979 (1994).

- 189 - 189 - 189 -

crimes like fraud where there may be no bright line between the transactions
constituting fraud and subsequent transactions constituting money laundering.247
The merger concept was first discussed in an 18 USC 1957 case.248 In United
States v. Johnson, the defendant convinced investors to fund a fraudulent pesotransfer scheme. The Tenth Circuit found that transfers to the defendants account
from investors did not involve proceeds, since the transaction occurred before
the criminal activity was completed. The court held, however, that transfers out of
the account once the funds were deposited did involve proceeds and sustained
the 18 USC 1957 convictions on these counts.249
The same concept was employed in another 18 USC 1957 case, United States v.
Piervinanzi, where the defendant fraudulently caused the transfer of funds from a
domestic bank to a bank in London. The scheme was detected almost
immediately, and the transfer was reversed. The court, citing Johnson, held that
while the defendant and his colleagues succeeded in transferring the funds, the
funds never came into their possession or control. The court held that there were
no proceeds for purposes of 18 USC 1957, and the conviction was reversed.250
While some convictions have been reversed, 251 in most cases the government is
careful to charge the second transaction so as not to run afoul of the merger
concept.252
247 MLPM 253 (Feb. 1992).
248 Section 1957 uses the term proceeds, as does 18 U.S.C. 1956, and therefore the merger concept is
applicable to both statutes.
249 United States v. Johnson, 971 F.2d 562, 570 (10th Cir. 1992).
250 United States v. Piervinanzi, 23 F.3d 670, 676677 (2d Cir.), cert. denied, 513 US 904 (1994).
251 See United States v. Puig-Infante, 19 F.3d 929, 938939 (5th Cir.) (money-laundering charges arising out of
transfer by defendants from Florida to Texas of funds from a narcotics sale; while the case focused on whether a
financial transaction occurred as a result of the transportation of the funds, the Fifth Circuit rejected the
governments argument that the exchange of the cash for narcotics was a financial transaction, stating that until the
sale was completed, there were no proceeds of the offense), cert. denied, 513 US 864 (1994) ; United States v.
McIntosh, 124 F.3d 1330, 13351336 (10th Cir. 1997) (18 U.S.C. 1956(a)(1)(A)(i) charges arising out of
bankruptcy fraud scheme; evidence held insufficient because government failed to prove that funds used in the
financial transactions at issue were proceeds of the fraud); United States v. LaBrunerie, 914 F. Supp. 340, 344347
(WD Mo. 1995) (defendant was charged with money laundering arising from transfer of funds intended to bribe a
city councilman; mere payment of funds to councilman held insufficient to create proceeds of offense).
252 See, e.g., United States v. Cefaratti, 221 F.3d 502, 509511 (3d Cir. 2000) (18 U.S.C. 1957 charge arising out
of scheme to defraud Department of Education of federal assistance funds; funds held to be proceeds as soon as
endorsed by student borrowers and prior to deposit into defendants account); United States v. Smith, 44 F.3d 1259,
12651266 (4th Cir.) (18 U.S.C. 1957 charges involving the transfer of funds from fraudulently obtained loan to
trust account; funds held to be proceeds, since the defendant obtained the funds using false financial statements and
false title documents prior to the transfer), cert. denied, 514 US 1113 (1995); United States v. Butler, 211 F.3d 826,
828830 (4th Cir. 2000) (18 U.S.C. 1957 charges arising out of bankruptcy fraud scheme; funds held to be
proceeds, since transactions involved concealment of funds arising from a settlement from a bankruptcy trustee),
cert. denied, 531 US 1149 (2001) ; United States v. Leahy, 82 F.3d 624, 634636 (5th Cir. 1996) (18 U.S.C. 1957
charge involving funds fraudulently obtained from the VA; funds held to be proceeds when they were deposited into
escrow account established to pay supplier for roofing contract); United States v. Davis, 226 F.3d 346, 355357 (5th
Cir. 2000) (18 U.S.C. 1957 charge arising out of advance fee scheme; funds held to be proceeds once received in

- 190 - 190 - 190 -

The government has sought to broaden the concept of proceeds in mail and wire
fraud cases by charging what appears to be the first funds transaction. In these
circumstances, a number of circuit courts have held that funds become proceeds
when derived from an already-completed offense, or a completed phase of an
ongoing mail or wire fraud scheme.253 While the cases are fact intensive, several
are instructive. In United States v. Kennedy, involving a Ponzi scheme selling
precious metals and coins to unsuspecting investors, the defendant contended that
the deposit of checks from the investors did not constitute proceeds because he
had not yet obtained control of the funds. The Tenth Circuit held that the central
inquiry was whether the underlying crime had been completed when the
transaction occurred and, distinguishing its earlier decision in Johnson, found that
the defendant had engaged in earlier mailings that established a completed mail
fraud offense. Since the scheme was operational, the deposited checks were found
to be proceeds of the offense.254 Separately, as to certain counts, the defendant
contended that because mailings to specific victims occurred after the financial
transactions charged, there was insufficient evidence to establish a transaction
after the commission of the predicate offense. Relying on its earlier opinion in
Massey,255 the court held that other mailings established the mail fraud offense,
and the financial transaction that followed the establishment of the scheme
fulfilled all elements of the offense.256
In United States v. Pretty, the Tenth Circuit followed Kennedy in a moneylaundering case involving a kickback to a state official, which was charged as a
violation of 18 USC 666. The court held that since the statute criminalized an
attempt to influence a public official, the payment of the kickback by way of the
defendants account), cert. denied, 531 US 1181 (2001); United States v. Seward, 272 F.3d 831, 836837 (7th Cir.
2001) (18 U.S.C. 1957 charges arising out of scheme to appropriate decedents assets; funds held to be proceeds
once defendant impersonated decedent to obtain transfer of funds to new account); United States v. Massey, 48 F.3d
1560, 15661570 (10th Cir.) (18 U.S.C. 1957 charges involving advance fee scheme; funds by way of wire
transfer to a coconspirator held to be proceeds), cert. denied sub nom. Wilkins v. United States, 515 US 1167 (1995);
United States v. Christo, 129 F.3d 578, 579581 (11th Cir. 1997) (18 U.S.C. 1957 charge involving check-kiting
scheme; funds held to be proceeds, since monetary transaction separate from and in addition to underlying criminal
activity found to be proceeds); United States v. Nolan, 223 F.3d 1311, 13151316 (11th Cir. 2000) (18 U.S.C.
1957 charges arising out of the theft of public funds; funds held to be proceeds once defendant deposited duplicate
government payment).
253 See, e.g., United States v. Richard, 234 F.3d 763, 770 (1st Cir. 2000); United States v. McCarthy, 271 F.3d 387,
395 (2d Cir. 2001); United States v. Szur, 289 F.3d 200, 213214 (2d Cir. 2002).
254 United States v. Kennedy, 64 F.3d 1465, 14771478 (10th Cir. 1995). For other cases employing a similar
analysis, see United States v. Hildebrand, 152 F.3d 756, 761762 (8th Cir.) (checks deposited in advance fee scheme
for purposes of filing class action suit were proceeds of the offense), cert. denied sub nom. Webb v. United States,
525 US 1033 (1998); United States v. Ross, 210 F.3d 916, 919921 (8th Cir.) (citing Hildebrand and Kennedy in
holding that checks deposited into business account in advance fee loan scheme were proceeds of the offense), cert.
denied, 531 US 969 (2000); United States v. McCarthy, 271 F.3d 387, 394395 (2d Cir. 2001) (funds from
retirement plan transferred into accounts controlled by the defendant were proceeds of the offense).
255 United States v. Massey, 48 F.3d 1560 (10th Cir.), cert. denied sub nom. Wilkins v. United States, 515 US 1167
(1995).
256 United States v. Kennedy, 64 F.3d 1465, 14791480 (10th Cir. 1995).

- 191 - 191 - 191 -

purchase of a home from the state official, and by way of a loan to the official and
her spouse to purchase a second home, established the elements of the offense.
The court further stated that the follow in time language in Johnson was not an
absolute rule, because any transaction concealing the nature or source of the
income was sufficient to establish an offense. The court noted that while payment
of a kickback is not money laundering, filtering the kickback through real estate
transactions created a separate money-laundering offense.257
In United States v. Prince, the Sixth Circuit followed this line of authority in a
case involving a scheme to buy properties at favorable prices out of bankruptcy,
which was charged as money laundering. Funds were transferred in three different
ways: (1) investors wire-transferred money into bank accounts of third parties and
the third parties wrote checks to one defendant who transferred funds to the
second; (2) investors wire-transferred money by Western Union to third parties
and the money was then transferred to the first defendant who transferred it to the
second; and (3) investors wire-transferred money directly to one defendant who
then transferred it to the second, the principal of the scheme. One defendant
claimed that proceeds were not created until he had physical possession of the
funds and, once he did, he did not thereafter conduct a financial transaction. The
court rejected that contention, holding that once the funds were transferred by the
victims, even though the funds were not yet in the defendants possession, the
defendants had sufficient control of the funds such that proceeds were created.258
Similarly, the concept of proceeds has been broadly interpreted where the
specified unlawful activity is bank fraud. For example, in United States v. Allen,
involving a complex interlocking loan scheme, kickbacks were paid to a banker
from consulting fees and loan proceeds were diverted. The Fifth Circuit held that
in the context of the misapplication of bank funds, the bank fraud offense was
complete and proceeds were created when the funds were no longer under the
banks control.259
In a less expansive decision, the Ninth Circuit, in United States v. Estacio, found
proceeds sufficient to sustain money-laundering convictions based on a checkkiting scheme. The court held that the scheme had been ongoing for months and
that the transactions charged as money laundering were proceeds of earlier checkkiting transactions.260
257 United States v. Pretty, 98 F.3d 1213, 12191221 (10th Cir. 1996), cert. denied, 520 US 1266 (1997).
258 United States v. Prince, 214 F.3d 740, 747750 (6th Cir.), cert. denied sub nom. White v. United States, 531 US
974 (2000).
259 United States v. Allen, 76 F.3d 1348, 13601362 (5th Cir.), cert. denied, 519 US 841 (1996).
260 United States v. Estacio, 64 F.3d 477, 480481 (9th Cir. 1995), cert. denied, 517 US 1121 (1996). See also
United States v. Savage, 67 F.3d 1435, 14411442 (9th Cir. 1995) (adopting similar analysis for 18 U.S.C. 1956(a)
(2)), cert. denied, 516 US 1136 (1996); United States v. Marbella, 73 F.3d 1508, 15131514 (9th Cir.) (referral fees
from illegally obtained insurance settlements held to be proceeds for 18 U.S.C. 1956(a)(2)), cert. denied sub nom.

- 192 - 192 - 192 -

Not all circuit courts are in agreement on this issue. In United States v. Christo, an
18 USC 1957 case involving a check-kiting scheme, the Eleventh Circuit held
that the evidence was insufficient to establish a money laundering offense. The
court stated that the mere writing of a check with insufficient funds did not create
proceeds where the funds paid by the bank were not used again by the defendant.
While the court failed to mention Allen and distinguished Estacio, these decisions
are inconsistent.261 In a later decision, the Eleventh Circuit held that checks used
to withdraw funds received in an insurance claim settlement were proceeds of a
bank fraud offense where the bank had a mortgage on the subject property. The
court distinguished Christo as a case where the bank fraud and money laundering
were predicated on the same, as opposed to separate, transactions.262
The Seventh Circuit in the late 1990s attempted to harmonize a number of the
earlier cases. In United States v. Mankarious, the defendants were convicted of
money laundering based on a complex mail and wire fraud scheme. Citing
Kennedy, Christo, and other cases, the court outlined the following principles for
money-laundering cases involving mail fraud, bank fraud, and wire fraud
predicate offenses: (1) in a mail fraud case, proceeds may be created long before a
mailing that furthers the fraudulent scheme; (2) in contrast, bank fraud creates
proceeds only after execution of the scheme; and (3) wire fraud creates proceeds
only after a predicate wire transfer involving funds employed in the scheme.263
Thereafter, in United States v. Bolden, the Fourth Circuit cited Mankarious in a
Medicare fraud scheme. The court held that prospective payments made in
advance by Medicare constituted proceeds even though the payments occurred
prior to the financial transaction that constituted the money-laundering offense.264
Even further complicating this area, the Third Circuit, in United States v. Morelli,
refused to follow Mankarious in a daisy-chain excise tax case. The court stated
that proceeds may not be created before mailings occur when the predicate
money-laundering offense consists of a mail fraud violation, and that the mail and
wire fraud statutes should be interpreted in an identical fashion. In this case, oil
was sold to a series of companies, including a burn company that collected the
excise taxes, and then to a street company that eventually sold the fuel. The
government only proved wire transfers of funds from the street company to the
burn company, and the defendant claimed that no proceeds existed until the funds
passed through the burn company. The court rejected the contention, holding that
Amigable v. United States, 518 US 1020 (1996).
261 United States v. Christo, 129 F.3d 578, 579581 (11th Cir. 1997).
262 United States v. Gregg, 179 F.3d 1312, 13151316 (11th Cir. 1999), cert. denied, 528 US 1176 (2000).
263 United States v. Mankarious, 151 F.3d 694, 703706 (7th Cir.), cert. denied, 525 US 1056 (1998).
264 United States v. Bolden, 325 F.3d 471, 477478 (4th Cir. 2003).

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the funds were the proceeds of the fraud and were proceeds of the wire fraud.
While noting that there would be no proceeds from the first series of transactions
upstream, the court held that since multiple series of transactions were proven,
transfers after the initial series furthered the wire fraud scheme using proceeds of
the offense.265
The USAM notes the difficulty in determining when proceeds occur. It provides,
as an example, that if a victim in a fraud scheme sends her husband to deliver
funds to the defendant, the funds do not become proceeds until the defendant
receives them. If the defendant sends his assistant to retrieve the funds, then they
become proceeds upon receipt by the assistant. If a middleman collects payments
on behalf of the defendant but had no knowledge of their criminally driven nature
and no interest in the funds, then the funds will probably be proceeds to the
defendant when collected. The USAM recommends that neither 18 USC 1956
nor 18 USC 1957 be charged where the same financial transaction represents
both the money-laundering offense and part of the specified unlawful activity
generating the proceeds being laundered.266 While the case law suggests that the
prudent prosecutor will bring a charge as to the second transaction, cases
permitting the first to be charged expand the concept of proceeds in connection
with these types of specified unlawful activities by merging the underlying
predicate offense with the money-laundering charge.267
H. Definition of TermsSection 1957.
1. Monetary Transaction. The term monetary transaction means the deposit, withdrawal,
transfer, or exchange in or affecting interstate or foreign commerce, of funds or a monetary
instrument, by, through, or to a financial institution.268 The definition of a monetary transaction
is less expansive than the definition of financial transaction.
2. Criminally Derived Property. The term criminally derived property includes any property
constituting, or derived from, proceeds obtained from a criminal offense.269

265 United States v. Morelli, 169 F.3d 798, 803809 (3d Cir.), cert. denied, 528 US 820 (1999). See also United
States v. Omoruyi, 260 F.3d 291, 295296 (3d Cir. 2001) (mail fraud scheme where stolen checks were deposited
into accounts in fictitious names; holding that proceeds were created once deposited checks were honored), cert.
denied, 534 US 1100 (2002).
266 MLPM 9-4108.98-99. See also United States v. Piervinanzi, 23 F.3d 670, 679683 (2d Cir.) (holding that the
USAM provision is not binding in sustaining a conviction under 18 U.S.C. 1956(a)(2) and proceeds are not
required to sustain an 18 U.S.C. 1956(a)(2) charge), cert. denied, 513 US 904 (1994).
267 Comisky, Feld & Harris, Laundering of Monetary Instruments, MONEY LAUNDERING, ASSET FORFEITURE AND
RELATED TOPICS (TAX FRAUD & EVASION VOL. 2), 11.02 (Warren, Gorham & Lamont).
268 18 U.S.C. 1957(f)(1).
269 18 U.S.C. 1957(f)(2).

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3. Proceeds Obtained From a Criminal Offense.270 The authors271 discussions of proceeds

obtained from a criminal offense are as follows:
The scope of what is a proceed has emerged as a crucial issue in 18 USC 1957
cases. In United States v. Johnson, for example, a defendant convinced investors
to fund a peso scheme in which he bought discounted pesos and sold them at
market price. The 18 USC 1957 violations were based on the wire transfer of
customers funds to his account. The Tenth Circuit found that the transfers to the
defendants account did not involve proceeds of an unlawful activity, since the
monetary transactions occurred prior to the completion of the underlying criminal
event. The funds could not be considered proceeds until credited to the
defendants account, and the convictions were reversed on the 18 USC 1957
counts. The court, however, sustained convictions on the 18 USC 1957 counts
that charged the transfer of funds from the credited account to certain investors,
since, at this point in time, the funds were proceeds of the unlawful activity (i.e.,
the wire fraud scheme).272
A number of circuit courts have discussed the concept of proceeds post-Johnson.
First Circuit. In United States v. Richard, one defendant was convicted of
soliciting funds to invest in an ongoing lawsuit involving a bankrupt party. The
defendant argued that the bankruptcy fraud was not complete until the funds were
deposited into a separately created bank account. The court rejected this
contention, stating that proceeds were created even prior to the deposit into a
nominee bank account, since acceptance of the checks constituted a completed
phase of an ongoing bankruptcy fraud.273
Second Circuit. In United States v. Piervinanzi, a conviction was reversed of one
defendant under 18 USC 1957 based on the fraudulent transfer of $24 million
from a domestic bank to a foreign bank. Although the transfer was completed, the
parties discovered that the transfer was not authorized and the transaction was
reversed. The court held that the transfer of funds from the domestic bank to the
foreign bank did not involve proceeds, since the funds never came into the
possession or control of the participants to the scheme.274
270 Comisky, Feld & Harris, Monetary Transactions Involving Property Derived From Specified Unlawful Activity,
TAX FRAUD & EVASION VOL. 2: MONEY LAUNDERING, ASSET FORFEITURE, SENTENCING, 11.03 (Warren, Gorham
& Lamont).
271 Id.
272 United States v. Johnson, 971 F.2d 562, 570 (10th Cir. 1992) (court further held that there was no requirement
for the government to show there were no untainted funds in the account and even though funds were commingled,
18 USC 1957 convictions were upheld; stating that any other holding would vitiate 18 USC 1957).
273 United States v. Richard, 234 F.3d 763, 768770 (1st Cir. 2000).
274 United States v. Piervinanzi, 23 F.3d 670, 676677 (2d Cir.), cert. denied, 513 US 904 (1994). See also United
States v. Christo, 129 F.3d 578, 579581 (11th Cir. 1997); United States v. McIntosh, 124 F.3d 1330, 13351336

- 195 - 195 - 195 -

Third Circuit. In United States v. Cefaratti, the defendant, on behalf of a

vocational school that was near termination from a loan program, manipulated
repayment student rates by falsely showing that the loans had been deferred and
made payments on behalf of students who were in arrears. The court held that
fraudulently obtained proceeds may emanate either from an already completed
offense or a completed phase of an ongoing offense. Finding that the checks had
to be endorsed by the borrower and the representative of the company before they
could be deposited, the court held that they became proceeds when the student
borrowers endorsed them.275
Fifth Circuit. In United States v. Leahy, the defendant participated in a scheme
whereby his company provided false invoices to the Veterans Administration to
obtain progress payments. The payments were then diverted. The 18 USC 1957
count related to a transfer from a bank-created escrow account to the companys
primary business account. Holding that the company had sufficient control over
the escrow accounts such that the wire fraud was complete when the money was
deposited, the court affirmed the conviction.276
In United States v. Dupre, defendants were engaged in bank fraud, and the 18
USC 1957 counts related to the transfer of portions of loan proceeds and a loan
discount from a title company account to the Cayman Islands and then to
domestic accounts. Holding that proceeds were created once the funds were under
the defendants control, and that once in the hands of the title company they were
under the defendants control, the court affirmed the convictions.277
Sixth Circuit. In United States v. Griffith, the defendant purchased merchandise
for credit, sold the merchandise without paying for it, and deposited the proceeds
of the sales in secret bank accounts. The 18 USC 1957 counts related to the sale
of the merchandise. The court held that the merchandise, which was criminally
derived property, was within the defendants control prior to his engaging in the
financial transactions that resulted in the sales. Finding that proceeds were
created, the court affirmed the conviction.278
Seventh Circuit. In United States v. Seward, the defendant engaged in a scheme to
misappropriate his deceased friends assets, and the 18 USC 1957 counts
involved the transfer of funds out of an account opened by the defendant after his
friends death. The particular transactions involved a transfer from a CD into a
(10th Cir. 1997).
275 United States v. Cefaratti, 221 F.3d 502, 502511 (3d Cir. 2000).
276 United States v. Leahy, 82 F.3d 624, 634636 (5th Cir. 1996).
277 United States v. Dupre, 117 F.3d 810, 821822 (5th Cir. 1997), cert. denied, 522 US 1078 (1998).
278 United States v. Griffith, 17 F.3d 865, 878879 (6th Cir.), cert. denied, 513 US 850 (1994).

- 196 - 196 - 196 -

joint account opened shortly after the friends death and two checks written on the
account. Holding that the act of fraud was complete once the defendant had
control of the proceeds and the funds were placed into the joint account, the court
affirmed the conviction.279
Ninth Circuit. In United States v. Savage, the defendant solicited $5,000 amounts
from investors by informing them that the funds would be used to obtain foreign
loans with a promised $10 million return. The defendant used others to gather the
funds, deposit them, wire transfer the money to other accounts, and pay his
personal expenses. The court held that the term criminally derived property for
purposes of 18 USC 1957 was the same as the term proceeds in 18 USC
1956. Holding that the funds were in the defendants possession, even though
transferred by third parties, the court affirmed the convictions.280
Tenth Circuit. In United States v. Lovett, the defendant, who defrauded his almostblind grandmother of her life savings, was charged with the interstate
transportation of fraudulently obtained funds and 18 USC 1956 and 1957
violations. The 18 USC 1957 counts related to the deposit of a loan obtained
through a CD, which had been purchased using the fraudulently obtained funds as
collateral. Holding that the deposits of the loan proceeds, and not the directly
deposited tainted funds, were proceeds, the court affirmed the conviction.281
In United States v. Massey, the defendant was involved in an advance fee loan
scheme. The 18 USC 1957 count was based on the wire transfer to a
coconspirator of funds obtained from the victims of the scheme. The defendants
claimed that the funds did not derive from the offense, since none of the victimclients were sent any correspondence through the mails prior to the wire transfer.
After a lengthy analysis of the mail fraud statute, the court concluded that lulling
letters sent to victims, other than those whose money was used in the transfer, to
explain why funding of the loans had not occurred, furthered the overall scheme
by avoiding detection. Holding that these letters were sufficient to establish the
mail fraud predicate for the money-laundering offense, the court held that the
transfer of funds out of the account involved proceeds of mail fraud.282
Eleventh Circuit. In United States v. Nolan, the defendants converted government
contract proceeds. The 18 USC 1957 count related to a duplicate payment of
279 United States v. Seward, 272 F.3d 831, 836837 (7th Cir. 2001).
280 United States v. Savage, 67 F.3d 1435, 14421443 (9th Cir. 1995), cert. denied, 516 US 1136 (1996).
281 United States v. Lovett, 964 F.2d 1029, 10371038 (10th Cir.), cert. denied, 506 US 857 (1992).
282 United States v. Massey, 48 F.3d 1560, 15651567 (10th Cir.), cert. denied sub
nom. Wilkins v. United States, 515 US 1167 (1995). See also United States v.
Kennedy, 64 F.3d 1465, 14791480 (10th Cir. 1995) (following Massey in mail fraud
charged as 18 USC 1956(a)(1)(A)(i)).

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funds, which were transferred from a corporate account to a shell corporation

account owned and controlled by the defendant. Holding that the evidence was
sufficient to show that once the money went into the corporate account, the
defendant had control over it and proceeds were created, the court affirmed the
conviction.283
District of Columbia Circuit. In United States v. Wynn, the defendant sold clothing
to narcotics traffickers. The 18 USC 1957 count related to a payment for
clothing. Holding that the defendant knew the funds were criminally derived
based on years of dealing with the traffickers, including cash purchases of over
$500,000 in merchandise, the court affirmed the conviction.284
There is an unresolved issue as to whether the tracing of funds is required,
especially for commingled funds, under 18 USC 1957.285 In United States v.
Johnson, for example, the Tenth Circuit sustained a conviction in a peso fraud
scheme as to transfers out of the defendants account where over 98 percent of the
funds in the account were tied to the fraud. 286 In United States v. Moore, the
Fourth Circuit went further in a case involving the sale of condominium units the
defendant had purchased in part with the proceeds of loans that were obtained
based on false tax return information. When the condominiums were sold, a
settlement check of approximately $37,000 was received, and the deposit of the
check was the transaction charged as the money-laundering offense. The Fourth
Circuit upheld the conviction, even though the government did not trace the loan
proceeds to the settlement check, stating that the statute permits a presumption
that the funds acquired, up to the originally derived and illegal loan amounts,
were proceeds.287 The Eighth Circuit has also held that tracing is not required in
an 18 USC 1957 case.288

283 United States v. Nolan, 223 F.3d 1311, 13151316 (11th Cir. 2000).
284 United States v. Wynn, 61 F.3d 921, 921927 (DC Cir.), cert. denied, 516 US 1015 (1995). For other decisions
of interest, see, e.g., United States v. Smith, 44 F3d 1259, 12641266, 1270 (4th Cir.) (defendants involved in a wire
fraud scheme to defraud distributors for luxury bus company and lenders who financed purchases, where 18 USC
1957 counts related to transfer of funds from corporation to Florida trust; court sustains sufficiency of indictment
as to one defendant and evidence as to a second, holding that proceeds were created once defendants deposited funds
from the lender in the corporate account), cert. denied, 514 US 1113 (1995) ; United States v. Butler, 211 F.3d 826,
828830 (4th Cir. 2000) (bankruptcy fraud where 18 USC 1957 counts related to transactions concealing
settlement proceeds from bankruptcy trustee; proceeds were created once settlement funds were received), cert.
denied, 531 US 1149 (2001) ; United States v. LaBrunerie, 914 F. Supp. 340, 344347 (WD Mo. 1995) (defendant
was involved in conspiracy to bribe city councilman; court dismissed money-laundering counts, holding that no
proceeds were created until payment was received by councilman). For additional discussion of the use of mail fraud
predicates in money-laundering cases.
285 Tracing has not been required in 18 USC 1956 offenses.
286 United States v. Johnson, 971 F.2d 562, 570 (10th Cir. 1992).
287 United States v. Moore, 27 F.3d 969, 976977 (4th Cir.), cert. denied, 513 US 979 (1994).
288 United States v. Pennington, 168 F.3d 1060, 10651066 (8th Cir. 1999) (citing Moore).

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The Ninth Circuit took a contrary position in United States v. Rutgard, where the
defendant, an ophthalmologic surgeon, was charged with Medicare and related
insurance fraud and with violating 18 USC 1957 in connection with wire
transfers of $5.629 million and $1.935 million from a family trust account to a
bank offshore. The government claimed that the entire surgical practice was
fraudulent, but the court reversed, finding that the fraudulent proceeds were a
little over $46,000. The court stated that the elements of an 18 USC 1957
offense were different from those under 18 USC 1956, and held that
commingling will prevent a conviction under 18 USC 1957 if deposits are kept
under the $10,000 threshold. The court refused to sustain a presumption that the
transfers to the offshore bank included the $46,000 of fraudulently obtained
proceeds and reversed the conviction on this count.289
The Ninth Circuit reviewed an 18 USC 1957 conviction arising out of a
telemarketing scheme in United States v. Hanley, where tracing did not occur. The
court reaffirmed its earlier decision in Rutguard, but noted that if the government
could show that the defendants entire business was fraudulent, then the financial
transactions would necessarily involve tainted funds. Holding that the only
purpose of the telemarketing scheme was to sell exorbitantly overpriced products
to unwitting customers and that the only funds involved in the accounts came
from such sales, the court sustained an 18 USC 1957 conviction.290
In United States v. Loe,291 the Fifth Circuit created its own tracing rule. The
defendants were involved in a scheme to defraud the Army Corps of Engineers of
leasehold payments and insurance carriers of insurance proceeds. The moneylaundering counts were based on transfers from an insurance carrier to an account
controlled by the defendants. Relying on its earlier decision in United States v.
Davis,292 the Fifth Circuit reaffirmed that if the aggregate amount withdrawn from
an account containing commingled funds exceeds the clean funds, individual
withdrawals would be deemed to be tainted funds. The court, however, also held
that Davis implied the converse, that where the account contained clean funds
sufficient to cover the withdrawal (which they did in this case), the government
could not prove beyond a reasonable doubt that the withdrawal contained dirty
funds. The money-laundering convictions were reversed.
I. Financial Transaction Representing Proceeds of Unlawful Activity. It is a crime for a person to
know that property involved in a financial transaction represents proceeds of some unlawful
activity and to conduct or to attempt to conduct that financial transaction, or an international
289 United States v. Rutgard, 116 F.3d 1270, 12901293 (9th Cir. 1997).
290 United States v. Hanley, 190 F.3d 1017, 10241027 (9th Cir. 1999).
291 United States v. Loe, 248 F.3d 449, 466467 (5th Cir.) (suggesting that presumptions of Moore and United
States v. Sokolow, 91 F.3d 396 (3d Cir. 1996), cert. denied, 519 US 1116 (1997), may be unconstitutional, citing
Sandstrom v. Montana, 442 US 510 (1979), cert. denied, 534 US 974 (2001)).
292 United States v. Davis, 226 F.3d 346, 357 (5th Cir. 2000), cert. denied, 531 US 1181 (2001).

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transportation or transmission of funds, that involves the proceeds of specified unlawful activity
either with (i) the intent to promote specified unlawful activity;293 (ii) the knowledge that a
transaction is designed in whole or in part to conceal or disguise the source of ownership of the
proceeds;294 or (iii) the knowledge that the transmission is designed in whole or in part to avoid a
state or federal transaction reporting requirement.295
A person who knows that property involved in a financial transaction represents proceeds of
some unlawful activity and who conducts or attempts to conduct a financial transaction that
involves the proceeds of specified unlawful activity with the intent to commit tax evasion under
I.R.C. 7206 or tax fraud under I.R.C. 7201 violates Section 1956.296 However, few cases
under Section 1956 involve the allegation of tax fraud or evasion. Most cases under Section
1956 involve attempts to conceal or transfer assets derived from specified unlawful activities.
J. Financial Transactions Constituting Domestic Money Laundering. A domestic money
laundering offense297 involves the concealment of assets derived from an unlawful activity if a
person conducts or attempts to conceal a financial transaction and: (i) he knows that the
property represents the proceeds of some form of illegal activity;298 (ii) the proceeds are in fact
derived from specified unlawful activity;299 (iii) he knows that the transaction is designed, in
whole or in part, to conceal or disguise the nature, the location, the source, the ownership or
control of the funds or to avoid a transaction reporting requirement under state or federal law.300
K. Financial Transactions Constituting Interstate or Foreign Money Laundering. A financial
transaction is a transaction that in any way or degree affects interstate commerce or foreign
commerce: (i) involving the movement of funds by wire or other means (such as by mail); (ii)
involving one or more monetary instruments; (iii) involving the transfer of title to any real estate,
vehicle, vessel or aircraft; or (iv) involving the use of a financial institution that is engaged in, or
the activities of which affect, interstate or foreign commerce in any way.301 Financial
transactions thus include, among many other transactions, loans, pledges, gifts, transfers of
funds, deposits in a bank account, placement of funds in a safe deposit box, purchases of
securities and the transfer of title to real estate.
L. Specified Unlawful Activities. Specified unlawful activities (predicate offenses) include
numerous offenses such as various types of concealment of assets from courts, smuggling of
goods into the U.S., narcotics trafficking, bank fraud, fraud upon a foreign bank, trafficking in
counterfeit goods and services,302 and racketeering activities under the Racketeer Influenced and
293 18 U.S.C. 1956(a)(1)(A)(i).
294 18 U.S.C. 1956(a)(1)(B)(i).
295 18 U.S.C. 1956(a)(1)(B)(ii).
296 18 U.S.C. 1956(a)(1)(A)(ii).
297 18 U.S.C. 1956(a)(1).
298 Id.
299 Id.
300 18 U.S.C. 1956(a)(1)(B)(i) and (ii).
301 18 U.S.C. 1956(c)(4).
302 18 U.S.C. 1956(c)(7) contains a long list of offenses that constitute a specified unlawful activity. 18 U.S.C.
1957(f)(3) provides that specified unlawful activity has the same meaning given under 18 U.S.C. 1956(c)(7).

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Corrupt Organizations (R.I.C.O.) Act.303 The transportation of monetary instruments or transfer

of funds between the U.S. and a foreign jurisdiction are included under Section 1956 under the
same circumstances described in the preceding paragraph.304 Activities under R.I.C.O. that are
included as specified unlawful activities under Sections 1956 and 1957 include, among other
activities, the following: fraud and related activity in connection with identification documents,
mail fraud, wire fraud, financial institution fraud, procurement of citizenship or nationalization
unlawfully, obstruction of justice, obstruction of criminal investigations, obstruction of state or
local law enforcement, forgery, false use or misuse of passports, visas, permits and other
documents, fraudulent sale of securities, and specific reference is made to Section 1956 (relating
to the laundering of monetary instruments) and Section 1957 (relating to engaging in monetary
transactions in property derived from specified unlawful activities).305 As a result of the specific
reference under R.I.C.O., the unlawful specified activities (predicate offenses) are broad.
Presently, the money laundering laws do not include tax fraud as a specified unlawful activity
(predicate offense) for international money laundering purposes. One noted practitioner and
author writes:
However, the concept of fraud, or any scheme or attempt to defraud, by or
against a foreign bank is included in 18 U.S.C. 1956[(c)](7)(B)(iii) and it
would clearly seem to include tax evasion, and would make banks agents for the
U.S. Government in identifying and reporting money laundering from such
crimes. Indeed the U.S. has prosecuted persons for money laundering whose
predicate offenses have been evading Canadian excise taxes on cigarettes and
liquor, prosecutable for use of the wires in violation of 18 U.S.C. 1956(a)(2)(A).
The British have been somewhat more specific in criminalizing foreign fiscal
offenses although the effect is the same as the U.S.: until now no reported
criminal prosecutions for money laundering relating to foreign fiscal offenses. In
fact, the U.S. prosecution on the Bank of New York included money laundering
relating to Russian tax crimes. In particular, the indictment charges the defendants
with wire fraud, namely, a scheme to defraud the Russian Government of
customs duties and tax revenues and the use of the wires in furtherance thereof, in
violation of Title 18, United States Code, Section 1956(a)(2)(A).306
303 18 U.S.C. 1961(1).
304 18 U.S.C. 1956(a)(2).
305 18 U.S.C. 1961(1)(B). 18 U.S.C. 1956(a)(1) involves financial transactions of some form of unlawful
activity, 18 U.S.C. 1956(a)(2) involves the transporting or transferring of monetary instruments or funds and 18
U.S.C. 1957 relates to engaging in a monetary transaction in criminally derived property. Each of the three
foregoing statutes, however, requires that transactions in fact involve the proceeds of specified unlawful activity.
Sections 1956 and 1957 then refer to racketeering activities under R.I.C.O. as a specified unlawful activity. R.I.C.O.
provides a laundry list of racketeering activities including referring back to section 1956 (relating to the laundering
of monetary instruments), section 1957 (relating to engaging in monetary transactions and property derived from
specified unlawful activity) without describing any additional activities. This circular reference from the money
laundering statutes to R.I.C.O., and then from R.I.C.O., without describing specific unlawful activities, back to the
money laundering statutes is an overreaching attempt to expand the definition of specified unlawful activity (and
hopefully a mistake in drafting).
306 See Bruce A. Zagaris and Ben Hinceman, Uncle Sam Reaches Out: Current United States Money Laundering
Law, in WORKING PAPERS, INTERNATIONAL TAX PLANNING ASSOCIATION CONFERENCE PROCEEDINGS, Windsor
Court Hotel, Nov. 19-21, 2000 (citing U.S. v. Peter Berlin et al, U.S. Dist. Ct. S.D.N.Y., 99 Cr. 914 (SWK) (Feb. 16,

- 201 - 201 - 201 -

M. Offenses that are Prosecutable; Burden of Proof. Sections 1956 and 1957 make it an offense
that is prosecutable to knowingly take the proceeds from specified unlawful activities and engage
in any financial or monetary transaction, or international transportation or transmission of
funds.307 U.S. government must prove beyond a reasonable doubt that: (i) an underlying
specified unlawful activity occurred; and (ii) the illicit proceeds derived from the specified
unlawful activity were laundered.308 However, in a Section 1957 prosecution, proof is not
required that the defendant knew that the offense from which the criminally derived property
came from was derived from specified unlawful activity.309
1. Elements of Proof for Section 1956 Crimes. Under Section 1956, the U.S. government must
prove that the person had knowledge310 and that the property involved was the product of
unlawful activity. Section 1956 requires actual knowledge that concealed proceeds were derived
from illegal activity. However, in a concealment case, there is a split of authority as to whether
the U.S. government must prove that the U.S. person knew whether a specific criminal offense
was the source of the funds. The Second, Third and Fourth Circuits follow the standard that the
U.S. person must only know that some form of unlawful activity was involved in generating
the funds.311 Under these circuits, the U.S. government is required only to show that the
defendant knew that the property was derived from a federal or state felony.
2. Elements of Proof for Section 1957 Crimes. Similarly, Section 1957 requires the U.S.
government to prove that the property involved was derived from criminally derived property.
Section 1957 states it is a crime to knowingly engage in or attempt to engage in a monetary
transaction in criminally derived property (criminally derived funds), valued over $10,000, that
is derived from specified unlawful activity.312 Under Section 1957, the U.S. government is
required to show that a defendant knew that the property was derived from a criminal offense
that includes a foreign, state or a federal felony or misdemeanor.313 The Seventh Circuit
determined that the U.S. person must know the specific unlawful activity that was the source of

2000), 58).
307 See Bruce A. Zagaris and Ben Hinceman, Uncle Sam Reaches Out: Current United States Money Laundering
Law, in WORKING PAPERS, INTERNATIONAL TAX PLANNING ASSOCIATION CONFERENCE PROCEEDINGS, Windsor
Court Hotel, Nov. 19-21, 2000.
308 Id.
309 18 U.S.C. 1957(c).
310 18 U.S.C. 1956(c)(1).
311 See United States v. Maher, 108 F.3d 1513 (2d Cir. 1997); Cardona Usaquiano v. United States, 513 U.S. 939
(1994); and United States v. Campbell, 977 F.2d 854 (4th Cir. 1992), cert. denied, 507 U.S. 938 (1993).
312 18 U.S.C. 1957(a).
313 The U.S. Department of Justice does not authorize the prosecution of criminal defense attorneys handling
criminal matters under 18 U.S.C. 1957 when the only evidence of the attorneys knowledge of the illicit source of
the finds is based upon a willful blindness standard. U.S. Attorneys Manual 9-105.600. However, attorneys who
receive criminally derived property in exchange for carrying out or engaging in other commercial transactions
unrelated to the representation of a client in a criminal matter or for representing a client in a civil matter should be
treated the same as any other person. See also United States v. Bencs, 28 F.3d 555 (6th Cir. 1998); United States v.
McDougold, 990 F.2d 259 (6th Cir. 1993); and United States v. Antzoulatos, 962 F.2d 720 (7th Cir.), cert. denied,
506 U.S. 919 (1992).

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the funds.314 Circumstantial evidence is permitted to prove that a U.S. person had actual
knowledge that some form of illegal activity was the source of the concealed funds.315
N. Similarities and Differences in Section 1956 and Section 1957. Under Section 1957, specified
unlawful activity has the same meaning as defined under Section 1956.316 Under Section 1956,
in order to engage in the act of promoting specified unlawful activities317 a financial
transaction318 is required. In order to be engaged in cross border transports or transfers, monetary
instruments or funds319 are required. Section 1957 refers to a monetary transaction320 instead of a
financial transaction or monetary instruments or funds. A monetary transaction means the
deposit, withdrawal, transfer, or exchange, in or affecting interstate or foreign commerce, of
funds or a monetary instrument by, through, or to a financial institution 321 Contrary to
Section 1956, Section 1957 requires that the conduct of money laundering by a foreign person
involve a financial institution located in the U.S.322 Also, contrary to Section 1956, in a Section
1957 prosecution the U.S. government is not required to prove that the defendant knew that the
offense from which the criminally derived property came from specified unlawful activity.323
O. Sting Provision. Section 1956 includes a sting provision. A law enforcement officer, or
someone at the direction of a law enforcement officer, is permitted to represent to a person that a
transaction involving property consists of proceeds that are derived from an unlawful activity or
property used to conduct or facilitate illegal activity. If this person acts on this knowledge and
conducts or attempts to conduct a financial transaction believing the represented property to be
the proceeds of specified unlawful activity, a crime may occur. A crime occurs if this person
intends to promote the specified unlawful activity to conceal or disguise its source of ownership
or to avoid a state or federal transaction-reporting requirement.324
P. Federal Sentencing Guidelines. Under the Federal Sentencing Guidelines,325 fixed sentencing
ranges are stated for each federal offense. Little discretion is granted to federal judges with
respect to amount of incarceration time to be imposed unless there is a basis for departure from

314 See United States v. Antzoulatos, 962 F.2d 720 (7th Cir.), cert. denied, 506 U.S. 919 (1992).
315 See United States v. Heaps, 39 F.3d 479 (11th Cir. 1994); United States v. Anderskow, 88 F.3d 245 (3d Cir.
1996); See also S. Rep. No. 433, 99th Cong., 2d Sess. 9-10 (1986).
316 18 U.S.C. 1957(f)(1)(3).
317 18 U.S.C. 1956(a).
318 18 U.S.C. 1956(a)(1).
319 18 U.S.C. 1956(a)(2).
320 18 U.S.C. 1957(a).
321 18 U.S.C. 1957(f).
322 A monetary transaction is defined by U.S.C. 1957(f)(1) as any transaction that passes through a financial
institution. And, 1957 refers to The Bank Secrecy Act, 31 U.S.C. 5312, for the definition of financial
institution. Further, under the Bank Secrecy Act, financial institutions include those located in the U.S. and the
term does not include offices of U.S. banks located outside the U.S.
323 18 U.S.C. 1957(c).
324 18 U.S.C. 1956(a)(3).
325 Statutory Index, Appendix A to the Guidelines Manual. See U.S.S.G. 2S1.1.

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the guidelines. One basis for departure is providing substantial assistance in the investigation or
prosecution of another person.326
1. Sentencing Guidelines for Money Laundering Crimes. Section 1956 and Section 1957 have
high guideline ranges. The guideline for laundering of monetary instruments in a Section 1956
violation specifies a base level of 23, if the offense of plea or conviction is under Section 1956(a)
(1)(A), Section 1956(a)(2)(A), or Section 1956(a)(3)(A).327 For all other convictions, a level 20
is applicable.328 For example, if a defendant is convicted under Section 1956(a)(1)(A)(ii), for
laundering money with the intent to engage in a million dollar tax evasion, a level 23 is
applicable. If the defendant pleads guilty and accepts responsibility for his actions, then the
sentencing range for such an offense is 51-63 months.329 Periods of incarceration can be
increased according to the amount of money involved and the specific characteristics of the
offense, such as knowing that the proceeds were derived from drug trafficking.
2. Focus by U.S. Government on Money Laundering. In recent years, the U.S. Government has
focused on including money laundering charges and indictments involving tax and other fraud
violations.330
[P]rosecutors have sought to include money laundering charges in indictments
charging tax and other fraud violations. The reason is simple: under the
Sentencing Guidelines the guideline ranges for money laundering charges are
exponentially greater than for the underlying fraudulent conduct. At the same
time, the evidence needed to prove money laundering violations is often just
marginally greater than that needed to establish the fraudulent conduct itself.
The Money Laundering Control Act of 1986331 defined and criminalized for the
first time a category of activity known as money laundering.332 Unlike earlier
efforts, like the Bank Secrecy Act and the Currency and Foreign Transactions
Reporting Act, that unsuccessfully attempted to control the movement of illegal
income through financial institution reporting requirements,333 the Money
326 See U.S.S.G. 5k1.1.
327 U.S.S.G. 2S1.1(a)(1).
328 U.S.S.G. 2S1.1(a)(2).
329 If the value of the funds laundered is $1 million, a 4-level enhancement is applied under U.S.S.G. 2S1.1(b) on
top of the level 23.
330 Bruce I. Hochman, Michael Popoff, Dennis L. Perez, Charles P. Rettig, Steven R. Toscher, T.M. 636-2d, Tax
Crimes (Income Series).
331 18 U.S.C. 1956 and 1957, [amended by] Antiterrorism and Effective Death Penalty Act of 1996, [Pub.] L.
104-132, 726, (1996) 2, and [(USA PATRIOT)] Act, [Pub.] L. 107-56 (Title III, Subtitle A) (2001). See also 1986
U.S.C.C.A.N. 5393 (legislative history of Money Laundering Control Act of 1986); and 1996 U.S.C.C.A.N. 944
(legislative history of Antiterrorism and Effective Death Penalty Act of 1996).
332 See G. Richard Strafer, Money Laundering: The Crime of the 90s, 27 AM. CRIM. L. REV. 149 (1989); Mark R.
Irvine & Daniel R. King, Comment, The Money Laundering Control Act of 1986: Tainted Money and the Criminal
Defense Lawyer, 19 PAC. L. J. 171, 176-77 (1987); Project, Twelfth Survey of White Collar Crime, 34 AM. CRIM. L.
REV. 793-814 (1997).
333 See 31 U.S.C. 321, 5311-5324 (Bank Secrecy Act); 12 U.S.C. 1730(d), 1829(b), 1951-1959 (Currency
and Foreign Transactions Reporting Act).

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Laundering Control Act was aimed at the lifeblood of organized crime: the act
of converting funds derived from illegal activities into spendable forms.334
3. Improper Application of Money Laundering Guidelines. However, in a case favorable to the
criminal defense bar, the Seventh Circuit Court of Appeals affirmed convictions, but remanded
for sentencing based on the pronouncement of the U.S. Sentencing Commission that the money
laundering guideline was drafted to cover conduct more egregious than in the facts presented to
this court.335 This court stated: Ultimately, we conclude that the Sentencing Commission itself
has indicated that the heartland of U.S.S.G. 2S1.1 the money laundering activity, when
evaluated against the entire course of conduct, was an incidental by-product of the kickback
scheme . To use the money laundering guideline in this routine fraud case would let the tail
wag the dog. As the Court said in United States v. Kuku, 129 F.3d 1435, 1440 (11th Cir. 1997),
strict focus on the technicalities of the sentencing process obscures the overarching directive to
match the guideline to the offense conduct which formed the basis of the underlying conviction.
We are convinced that this case presents one of those anomalies that Congress intended the
courts to deal with fairly. To fulfill that obligation, we direct the use of the fraud guidelines
rather than that for money laundering.336
Q. Extraterritorial JurisdictionU.S. Government. A careful reading of Section 1956(f) and
Section 1957(d)(2) is required to understand that extraterritorial jurisdiction is not granted to the
U.S. government for acts or omissions constituting tax fraud or tax evasion, or even absolute
fraud. Section 1956(f) requires conduct involving a transaction or series of related transactions
involving funds or monetary instruments of a value exceeding $10,000. Section 1956(a)(2)
deals with funds or monetary instruments and does not include tax fraud or tax evasion.337
Section 1957 makes no reference to tax fraud or tax evasion and, therefore, extraterritorial
jurisdiction to the U.S. government is not granted for such reasons.
1. Wire and Mail Fraud. The U.S. government obtains extraterritorial jurisdiction from wire and
mail fraud.338 A transaction or a series of related transactions must involve funds or monetary
instruments of a value exceeding $10,000.339 Transfer by wire or mail is a transaction involving
funds or monetary instruments.340 Thus, the mailing or wiring of funds to a foreign jurisdiction
provides extraterritorial jurisdiction to the U.S. government. Again, the involvement of tax fraud
or tax evasion does not grant extraterritorial jurisdiction; it is mail and wire fraud as predicate
offenses that provide the extraterritorial jurisdiction.
334 Letter from Irving R. Kaufman, Chairman, Presidents Commission on Organized Crime, to President Ronald
Reagan (Oct. 1984), reprinted in Presidents Commission on Organized Crime, Interim Report to the President and
the Attorney General, The Cash Connection: Organized Crime, Financial Institutions and Money Laundering (1984).
335 See U.S. v. Smith, 186 F.3d 290 (3rd Cir. 1999).
336 Id.
337 18 U.S.C. 1956(a)(1)(A)(ii) includes tax fraud or tax evasion as a specified unlawful activity relating to a
financial transaction.
338 18 U.S.C. 1956(c)(4)(A) and (5); 18 U.S.C. 1957(f)(1) includes the transfer or exchange, in or
affecting interstate or foreign commerce, of funds or a monetary instrument (as defined in 1956(c)(5) of this title)
by, through, or to a financial institution (as defined in 1956 of this title)
339 18 U.S.C. 1956(f)(2).
340 18 U.S.C. 1956(f) and 1957(f)(1).

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2. Transactions Involving Funds or Monetary Instruments. Section 1956 and Section 1957
provide extraterritorial jurisdiction to the U.S. government. There is extraterritorial jurisdiction
over the conduct prohibited by this Section if--(1) the conduct is by a United States citizen or, in
the case of a non-United States citizen, the conduct occurs in part in the United States; and (2)
the transaction or series of related transactions involves funds or monetary instruments of a value
exceeding $10,000.341 Extraterritorial jurisdiction is also granted to the U.S. government under
Section 1957.342 In contrast to Section 1956, Section 1957 requires that the money laundering
conduct involve a financial institution located in the U.S. On the other hand, if the money
laundering transaction occurred in the U.S., involving property valued more than $10,000,343 the
U.S. government is not required to prove the U.S. person knew that the offense from which the
criminally derived property was derived was specified unlawful property.344 Under Section
1957, the U.S. government must prove that the U.S. person knew that the property involved was
derived from a criminal offense.345 Generally, it is easier for the government to rely upon
extraterritorial jurisdiction granted under Section 1956, notwithstanding that it must be proved
that the person knew that the property involved was the product of specified unlawful activity.
3. Fraud or Scheme by or Against a Foreign Bank. In addition, the concept of fraud or any
scheme or attempt to defraud by or against a foreign bank, is included in 18 U.S.C. 1956(c)(7)
(B)(iii) and appears to include tax evasion and thereby cause banks to be treated as agents for the
U.S. government in identifying and reporting money laundering from such crimes.346
4. Department of Justice Position on Offenses Under Extraterritorial Provisions. The USAM347
states that [d]ue to the potential international sensitivities, as well as proof problems no
grand jury investigation may be commenced, indictment returned, or complaint filed without the
written approval of [Asset Forfeiture and Money Laundering Section], Criminal Division when
jurisdiction to prosecute these offenses exists only because of these extraterritorial provisions.348
R. Extraterritorial JurisdictionU.S. District Courts. Section 1956(b)349 is amended by the USA
Patriot Act350 to provide U.S. District Courts with jurisdiction over foreign persons in accordance
with the provisions thereof.
341 18 U.S.C. 1956(f).
342 18 U.S.C. 1957(d)(2).
343 18 U.S.C. 1957(a).
344 18 U.S.C. 1957(c).
345 18 U.S.C. 1957(f)(3).
346See Bruce A. Zagaris and Ben Hinceman, Uncle Sam Reaches Out: Current United States Money Laundering
Law, in WORKING PAPERS, INTERNATIONAL TAX PLANNING ASSOCIATION CONFERENCE PROCEEDINGS, Windsor
Court Hotel, Nov. 19-21, 2000 (citing John A. Kelley et al, International Banking and Finance, 34 INTL LAWYER
429, at 432 (Summer 2000)).
347 The United States Attorneys Manual (USAM).
348 USAM 9-105.300.
349 18 U.S.C. 1956(b), amended by, H.R. 3162, Uniting and Strengthening America by Providing Appropriate
Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT) Act of 2001, Pub. L. No. 107-56, 317
(2001).
350 USA Patriot Act, 317.

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1. Long-arm Jurisdiction to a U.S. District Court. Section 1956(b)(2)351 grants long-arm

jurisdiction to U.S. District Courts with respect to adjudicating an action filed or enforcing a
penalty ordered under Section 1956, over any foreign person, including any financial institution
authorized under the laws of a foreign country, so long as service of process is made under the
Federal Rules of Civil Procedure or the laws of the country where the person is found, and the
offender commits a crime involving a financial transaction under Section 1956(a).352 The
financial transaction must occur in whole or in part in the U.S. and the foreign person must
convert, to his own use, property in which the U.S. has an ownership interest due to an order of
forfeiture entered by a court of the U.S.,353 or the foreign person is a financial institution that
maintains a bank account at a financial institution in the U.S.354
2. Power to Issue Pretrial Restraining Order and Appoint a Federal Receiver to Oversee Seized
Assets. A U.S. District Court may issue a pretrial restraining order or take other action necessary
to ensure that any bank account or other property held by the foreign person in the U.S. is
available to satisfy a judgment under 1956(a).355 The court may appoint a Federal Receiver,
upon application of a Federal prosecutor or a Federal or State regulator,356 to oversee the seized
assets.357 Upon appointment, the Receiver is an officer of the court358 with all the powers and
standing equal to that of a Federal prosecutor or a Federal or State Regulator for the purpose of
obtaining information by written request359 from the Financial Crimes Enforcement Network
(FinCEN) of the Department of the Treasury or from a foreign country pursuant to a mutual
legal assistance treaty, multilateral agreement, or other arrangement for international law
enforcement assistance, provided that such requests comply with the policies and procedures of
the U.S. Attorney General.360
III. Criminal Fines and Imprisonment for Money Laundering Transactions. The criminal fines
and imprisonment for intentionally engaging in money laundering transactions are severe and
substantial.361
A. Section 1956(a)(1) Intentional Violations. Section 1956(a)(1) provides for criminal fines and
imprisonment for anyone who knows that the property involved in a financial transaction
represents the proceeds of some form of unlawful activity, conducts or attempts to conduct such
a financial transaction which in fact involves the proceeds of specified unlawful activity with
the intent to promote the carrying on of specified unlawful activity; 362 or with intent to engage
351 Id.
352 18 U.S.C. 1956(b)(2)(A).
353 18 U.S.C. 1956(b)(2)(B).
354 18 U.S.C. 1956(b)(2)(C).
355 18 U.S.C. 1956(b)(3).
356 18 U.S.C. 1956(b)(4)(B)(i).
357 18 U.S.C. 1956(b)(4)(A).
358 18 U.S.C. 1956(b)(4)(B)(ii).
359 18 U.S.C. 1956(b)(4)(B)(iii).
360 18 U.S.C. 1956(b)(4)(B).
361 18 U.S.C. 1956(a)(1) and (2); 18 U.S.C. 1957(a) and (b).
362 18 U.S.C. 1956(a)(1)(A)(i).
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in conduct constituting a violation of section 7201 or 7206 [tax evasion or tax fraud] of the
Internal Revenue Code;363 or knowing that the transaction is designed to conceal or
disguise the nature, the location, the source, the ownership, or the control of the proceeds of
specified unlawful activity;364 or to avoid a transaction reporting requirement under State or
Federal law .365
B. Section 1956(a)(2) Intentional Violations. Section 1956(a)(2) mirrors Section 1956(a)(1) and
provides for criminal fines and imprisonment for anyone who transports, transmits, or transfers,
or attempts to transport, transmit, or transfer a money instrument or funds in a cross-border
transaction with the intent to promote the carrying on of specified unlawful activity; 366 or
knowing that the monetary instrument or funds involved in the transportation, transmission or
transfer represent the proceeds of some form of unlawful activity and knowing that such
transportation, transmission, or transfer is designed to conceal or disguise the nature, the
location, the source, the ownership, or the control of the proceeds of specified unlawful
activity;367 or to avoid a transaction reporting requirement under State or Federal law .368
The defendants knowledge may be established by proof that a law enforcement officer
represented the matter specified in 18 U.S.C. 1956(a)(2)(B) as true and the defendants
subsequent statements or actions indicate the defendant believed such representation to be true.
C. Section 1956(a)(3) Sting Operations. Section 1956(a)(3) provides for criminal fines and
imprisonment for anyone who with the intent to promote the carrying on a specified
unlawful activity; to conceal or disguise the nature, location, source, ownership or control of
property believed to be the proceeds of specified unlawful activity; or to avoid a transaction
reporting requirement under State or Federal law, conducts or attempts to conduct a financial
transaction involving property who represented to be the proceeds of specified unlawful activity,
or property used to conduct or facilitate specified unlawful activity . The foregoing
represented is any representation made by a law enforcement officer or by another person at
the direction of, or with the approval of, a Federal official authorized to investigate or prosecute
violations of this section [Section 1956].369
D. Specific Criminal Fines and Imprisonment for Section 1956 Violations. Each violation of one
or both of Sections 1956(a)(1) or (2) is subject to a 20-year prison term and a fine of $500,000,
or twice the value of the property involved in the financial transaction or twice the value of the
money instrument or funds involving the transportation, transmission or transfer, whichever is
greater, or both.370
E. Specific Criminal Fines and Imprisonment for Section 1957 Violations. Section 1957 provides
a fine under Title 18 of the United States Code, or imprisonment for not more than 10-years or
363 18 U.S.C. 1956(a)(1)(A)(ii).
364 18 U.S.C. 1956(a)(1)(B)(i).
365 18 U.S.C. 1956(a)(1)(B)(ii).
366 18 U.S.C. 1956(a)(2)(A).
367 18 U.S.C. 1956(a)(2)(B)(i).
368 18 U.S.C. 1956(a)(2)(B)(ii).
369 18 U.S.C. 1956(a)(3).
370 18 U.S.C. 1956(a)(1)(A) and (B); 18 U.S.C. 1956(a)(2)(A) and (B).
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both;371 or an alternate fine of not more than twice the value of the criminally derived property in
the transaction.372
IV. Civil Penalties for Money Laundering Transactions. The foregoing criminal fines and
imprisonment involve intentionally engaging in transactions involving specified money
laundering transactions. In addition, anyone who conducts or attempts to conduct a transaction
covered by Section 1956 or Section 1957 is subject to a civil penalty equal to the value of the
property, funds, or monetary instruments involved in the transaction or $10,000, whichever is
greater.373 Also, Section 1957(b)(2) provides an alternate fine of not more than twice the amount
of the criminally derived property involved in a money laundering transaction.
V. Forfeiture of Assets. Not only may the net proceeds from money laundering transactions be
forfeited but also the proceeds of crime may be confiscated. This is commonly referred to as the
facilitation theory.374
A. Facilitation Theory. In accordance with the facilitation theory, property that facilitates the
laundering of proceeds from crime may also be confiscated in addition to the actual proceeds.375
The civil forfeiture statute376 states that all property involved in a transaction or attempted
transaction under Section 1956 or Section 1957 may be forfeited.377
1. Reference to Facilitate in the U.S. Code. Real or personal property, within the jurisdiction of
the U.S., that constitutes or is derived from or traceable to proceeds that are obtained directly or
indirectly from an offense against a foreign nation or property used to facilitate such events may
be forfeited.378
2. Burden of Proof. If the U.S. governments theory of forfeiture is that the property was used to
commit or facilitate the commission of a criminal offense or was involved in the commission of a
criminal offense, the U.S. government must establish a substantial connection between the
property and the offense.379 The legislative history indicates that this provision applies in any
action to forfeit bank accounts containing both tainted and untainted funds and where the
government seeks to forfeit a business because the funds were laundered in a firm bank account.
The legislative history further states that for a business to be forfeitable, a primary purpose for
the establishment or maintenance of the entire business must be to disguise a money laundering
scheme.380
371 18 U.S.C. 1957(b)(1).
372 18 U.S.C. 1957(b)(2).
373 18 U.S.C. 1956(b)(1).
374 See Guy Stessens, Money LaunderingA New International Law Enforcement Model, CAMBRIDGE STUDIES IN
INTERNATIONAL AND COMPARATIVE LAW, Cambridge University Press (2000).
375 Id.
376 18 U.S.C. 981.
377 18 U.S.C. 981(a)(1)(A).
378 18 U.S.C. 981(a)(1)(B).
379 18 U.S.C. 983(c); Pub. L. No. 106-185, 2(a), 114 Stat. 202, as amended by Pub. L. No. 106-185, 9, 114
Stat. 216 (Apr. 25, 2000).
380 146-2 Cong. Rec. H2051 (Apr. 11, 2000).

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3. Excessive Fines. The decision by the Supreme Court involving a currency and monetary
instrument report forfeiture under the Eighth Amendment, Excessive Fines clause, indicates that
a forfeiture based on a facilitation theory is subject to an Eighth Amendment challenge.381
B. Criminal Forfeiture. Criminal forfeiture is also available to the U.S. Government. The court,
in imposing a sentence on a person convicted of an offense in violation of Section 1956 or 1957,
among other violations, shall order that person to forfeit to the U.S. any property involved in the
offense or any property traceable to such property.382
C. Civil Asset Forfeiture Reform Act of 2000.383 The Civil Asset Forfeiture Reform Act of 2000
(CAFRA), effective August 23, 2000, caused major changes with respect to forfeitures.
1. Civil Forfeiture of Proceeds of Specified Unlawful Activity. CAFRA amends 18 U.S.C.
981(a)(1)(C) and authorizes the civil forfeiture of the proceeds of any offense defined as
specified unlawful activity in Section 1956(c)(7). Proceeds is defined as gross proceeds
where the offense involves unlawful activity, health care fraud or telemarketing fraud.
Proceeds is further defined as gross proceeds minus direct costs, if the offense involves lawful
goods or lawful services that are sold or provided in an illegal manner.
2. Forfeiture of U.S. Property for a Person Arrested in a Foreign Country. In international cases
where any person is arrested or charged in a foreign country in connection with an offense that
gives rise to the forfeiture of property in the U.S. under 18 U.S.C. 981, or under the Controlled
Substances Act, the assets of the person arrested may be frozen.384
3. Court May Issue a Subpoena Duces Tecum Case Involving Forfeiture In Rem. In cases where
an action for forfeiture in rem is brought by the U.S. Government under various provisions,
including Section 1956, Section 1957 and the Controlled Substances Act, any party may request
the court to issue a subpoena duces tecum to a financial institution385 to produce books, records
and other documents at any place designated by the requesting party.386
4. Sanctions in an In Rem Case. In addition, in a forfeiture in rem case, the court may enter
sanctions up to and including dismissal of a civil forfeiture case, or an ancillary proceeding in a
criminal case, if the records are in a bank secrecy jurisdiction and the claimant refuses to produce
the records, if the claimant has the capacity to waive the claimants rights under applicable
financial secrecy laws or has the capacity to obtain the records, notwithstanding the secrecy
laws.387
381 United States v. Bajakajian, 524 US 321 (1998) (holding there was no instrumentality in a currency and
monetary instrument report offense).
382 18 U.S.C. 982(a).
383 Civil Asset Forfeiture Reform Act of 2000, Pub. L. No. 106-185 (Apr. 25, 2000).
384 18 U.S.C. 981(b)(4).
385 Financial institution is defined by 31 U.S.C. 5312(a).
386 18 U.S.C. 986(a).
387 18 U.S.C. 986(d)(1). The right of a claimant to refuse production based on an assertion of privilege,
however, is not affected. 18 U.S.C. 986(d)(2).

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D. Forfeiture of Funds in U.S. Interbank Accounts. The U.S. government is now provided with
additional civil forfeiture rights under 18 U.S.C. 981(k)388 with respect to funds deposited into
an account at a foreign bank if that bank has an interbank account in the U.S. with a covered
financial institution. The funds in the foreign bank account shall be deemed to have been
deposited into the interbank account in the U.S. and any restraining order, seizure warrant or
arrest warrant in rem regarding such funds may be served on the covered financial institution,
and funds in the interbank account, for an amount equal to the value of the funds deposited in the
account at the foreign bank. Such funds may be restrained, seized or arrested.
1. Interbank Account in a Covered Financial Institution. Funds that are deposited into an account
at a foreign bank that has an interbank account in a U.S. covered financial institution,389 such
funds are deemed to have deposited into the interbank account in the U.S. Such funds are
subject to any restraining order, seizure warrant, or arrest warrant in rem regarding the funds
may be served on the covered financial institution, and funds in the interbank account, or up to
the value of the funds deposited into the account at the foreign bank, may be restrained, seized or
arrested.
2. No Requirement for U.S. Government to Trace Funds. In an Action Under 18 U.S.C. 981(k),
the U.S. Government is not required to establish that the funds are directly traceable to funds that
were deposited into a foreign bank nor is the U.S. Government required to rely on the application
of 18 U.S.C. 984.390
3. Authority to Suspend; Defense Against Forfeiture. The Attorney General, in consultation with
the Secretary of the Treasury, may suspend or terminate such a forfeiture if the Attorney General
determines that a conflict of law with respect to liabilities arising from the restraint, seizure or
arrest of such funds and that such action could be in the interest of justice and harm national
interests of the U.S. The owner of the funds deposited into a foreign account may contest the
forfeiture by providing a claim under 18 U.S.C. 983.
4. Example of Seizing Correspondent Account of Foreign Bank. The U.S. government is
provided with new forfeiture and seizure rights with respect to a covered financial institution,
and funds in an interbank account, equal to the value of funds deposited in a foreign bank that
has an interbank account391 in the U.S. with a covered financial institution.392 The U.S.
government may now seize the funds in the interbank account of the covered financial institution
without having to trace the funds deposited in the covered financial institution to the account in
the foreign bank because the funds are deemed to have been deposited into the U.S. interbank
account. 319(b) of the USA Patriot Act provides summons or subpoena of records authority to
388 USA Patriot Act, 319(a).
389 As defined in 31 U.S.C. 5318(j)(1).
390 18 U.S.C. 981(k)(2).
391 The term interbank account is defined as [a]n account held by one financial institution at another financial
institution primarily for the purpose of facilitating customer transactions. The term interbank account has the
same meaning as it has in 18 U.S.C. 984(c)(2)(B). USA Patriot Act, 319(a)(4)(A).
392 USA Patriot Act, 319(a), adding 18 U.S.C. 981(k).

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the Secretary of the Treasury or the Attorney General.393 The Secretary of the Treasury or the
Attorney General is provided with new summons or subpoena of records authority.394
a. Testimony at U.S. Senate Banking Committee. Tax Analysts, in its Worldwide Tax Daily
(January 31, 2002), reported the U.S. Department of Justice testimony at the U.S. Senate
Banking Committee hearing on money laundering. WTD 2127. Michael Chertoff of the U.S.
Department of Justice testified to the following:
[27]Some of the new provisions in the Act have already been deployed with
successful results. For example, the Department of Justice relied on the new civil
forfeiture authority provided in the PATRIOT Act to seize six bank accounts in
New Jersey and three in Florida related to the 11 September terrorists. On 8
November, 2001, the United States Attorneys Office for the District of New
Jersey obtained nine seizure warrants for bank accounts used by the terrorists
based on the newly enacted PATRIOT Act authority codified at 18 U.S.C. 981(a)
(1)(G), which provides for the seizure of all assets owned, acquired or used by
any individual or organization engaged in domestic or international terrorism.
Notice of the proposed forfeiture of these accounts has been made and, not
surprisingly, no one has claimed an interest in the accounts.
[28] In addition, we recently used Section 319 of the PATRIOT Act to good
effect. Section 319(a) provided us with a new tool to seize and forfeit criminal
assets deposited into a foreign bank account through the foreign banks
correspondent bank account in the United States. This section provides that assets
which are subject to forfeiture in the United States, but which are deposited
abroad in a foreign bank may be deemed to be held in the foreign banks
correspondent account in the United States. Thus, where a criminal deposits funds
in a bank account in a foreign country and that bank maintains a correspondent
account in the United States, the government may seize and forfeit an equivalent
sum of money in the correspondent account, irrespective of whether the money in
the correspondent account is traceable to the proceeds deposited in an account
held by the foreign bank.
[29] Although I was recused from the case because of a past representation, I
can report that last month we recovered almost US $ 1.7 million in funds using
Section 319, which will be used to compensate the victims of a fraud scheme. On
18 January 2001, a grand jury in the Southern District of Illinois indicted James
R. Gibson for various offenses, including conspiracy to commit money
laundering, mail and wire fraud. Gibson defrauded clients of millions of dollars
by fraudulently structuring settlement agreements for numerous tort victims.
Gibson and his wife, who was indicted later, fled to Belize, depositing some of the
proceeds of their fraud scheme in two Belizean banks.

393 18 U.S.C. 981(k)(2).

394 USA Patriot Act, 319(b), adding 31 U.S.C. 5318(k).
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[30] Our efforts to recover the proceeds at first were unsuccessful. Although
the government of Belize initially agreed to restrain the assets, a Belizean court
ordered the freeze lifted, because local law prohibited legal assistance to the
United States: the treaty providing for legal assistance between the two countries
has not entered into force. The court also prohibited the government from
assisting the United States law enforcement agencies further, including providing
information regarding Gibsons money laundering activities. Efforts to break the
impasse failed, and all the while the Gibsons systematically looted their accounts
in Belize.
[31] Following the passage of the PATRIOT Act, and interagency consultation,
the Criminal Division authorized the use of the Section 319(a) authority. A seizure
warrant was served on the correspondent bank, and the remaining funds were
recovered. In our judgment, this case presents a compelling example of the need
for, and appropriate use of, the new authority under Section 319(a).
[32] While this instance involved fraud, the facts of this case demonstrate the
utility of this particular tool, particularly in the area of terrorist financing. Section
319(a) is, of course, an important enhancement to the law enforcements ability to
pursue assets overseas. It is also a very powerful tool and one that can affect our
international relationships. Accordingly, the Criminal Division is developing a
policy to provide prosecutorial oversight regarding the use of this new provision.
[33] Similarly, Section 319(b) of the Act provides new summons and subpoena
authority with respect to foreign banks that have correspondent accounts in the
United States. This section authorizes the Attorney General and the Secretary of
the Treasury to issue subpoenas and summonses to foreign banks that maintain
correspondent accounts with banks in the United States in order to obtain records
related to the U.S. correspondent accounts. We also anticipate delegating authority
to use Section 319(b) to a level below the Attorney General, but because of the
international sensitivities involved, we anticipate that the use of such authority
will remain subject to departmental review and approval and interagency
consultation. I am currently reviewing a proposal regarding the best way to
implement this important new authority.
b. The Gibson Case.395 The court refused to order the Belize bank to return these assets to the
U.S. because local law prohibited legal assistance to the U.S.: the Mutual Legal Assistance
Treaty (MLAT) between the two countries was not in force. The court also prohibited the Belize
government from assisting U.S. law enforcement agencies, including providing information
regarding Gibsons money laundering activities.
[i] Facts of the Gibson Case. Mr. and Mrs. Gibson, who fled the U.S. and moved to Belize,
opened an account at Provident Bank & Trust of Belize Limited. Provident Bank & Trust of
395 The Queen v. James R. Gibson, Action No. 306 of 2001, June 25, 2001 (the cite
for the consolidated cases is: Provident Bank & Trust of Belize Ltd. v. Emerald
Inc., Action No. 306 of 2001, June 25, 2003).

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Belize Limited filed an action, as a bank or financial institution, due to Governor of the Central
Bank of Belize issuing an Affidavit instructing Provident Bank & Trust of Belize Limited to
freeze the deposits of Mr. and Mrs. Gibson. This action by the Governor of the Central Bank of
Belize was based on the Belize police advising him that these deposits may involve money
laundering proceeds, as determined pursuant to statements made by the F.B.I. in the U.S.
Provident Bank & Trust of Belize Limited asked the court what action it should take as a bank.
[ii] Reasoning of the Gibson Case. The court held that the Governor of the Central Bank of
Belize was not given the power to effect a freeze on bank accounts of customers. The court
further stated that if the Governor received information that money laundering had occurred, he
must send that information to the law enforcement authorities. The court further stated: To
freeze a customers account with his bank is a grave and serious action which can only be
allowed by express words of a statute I cannot overemphasize the need for coordination,
speed and secrecy and timely action for the provisions of the Act [Belize Money Laundering
(Prevention) Act] to be deployed in the fight against the pernicious practice of money laundering
but all this must be done in consonance with the law. The court further noted that there was no
action contemplated or pending against Mr. Gibson in any Court in Belize; and all evidence had
been proceeded in the U.S. due to the approach by authorities in the U.S. with the Belize police
regarding Mr. Gibson. The court further stated: In my view, in the circumstances of this
application, the requirements of subsection (6) of section 23 of the Money Laundering
(Prevention) Act, are mandatory assistance by this court for the purposes of money laundering
offenses shall be provided only to those countries with whom Belize has entered into mutual
assistance treaties either on a bilateral or a multilateral basis. The court concluded that there
was not yet an operative mutual assistance treaty in force between Belize and the U.S.,
notwithstanding the evident unilateral ratification by Belize of the Mutual Legal Assistance in
Criminal Matters Treaty between the two countries signed on, 19th September 2000 in Belize
and ratified Belize on 8th January 2001. To bring this treaty into force, there has to be its
ratification by the United States and the exchange of its instrument of ratification with Belize.396
[iii] Current Status of MLAT with Belize. The MLAT with Belize, signed on September 18-19,
2000, was ratified on July 15, 2002.397
c. Criminal Information Charge Against BDO Seidman, LLP. The U.S. Attorney for the
Southern District of Illinois, as a part of a pretrial diversion agreement, filed a criminal
information charging BDO Seidman, LLP, on April 12, 2002, with misprision of a felony, in
violation of 18 U.S.C. 4.398
[i] Facts Leading to Criminal Information Charge. BDO Seidman, LLP, represented SBU, Inc.,
Flag Finance Corporation, and Family Company of America and knew that SBU, Inc., was a
third-party settlement company owned and operated by James R. Gibson engaged in the business
of structuring personal injury plaintiffs settlements and judgments through the establishment of
a revocable trust funded with U.S. Treasury obligations intended to qualify as tax-exempt
396 See http://belizelaw.org/judgements/no_306_of_2001.html.
397 See http://www.whitehouse.gov/news/releases/2002/07/20020715-6.html.
398 News Release, Miriam F. Miquelon, United States Attorney, on BDO Seidman, LLP (April 12, 2002) (on file
with U.S. Attorneys Office, Southern District of Illinois) available at http://www.usdoj.gov/usao/ils/newsreleases.

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transactions. The criminal information showed the BDO Seidman, LLP, through its former St.
Louis office, knew in October 1995 that SBU, Inc., and James R. Gibson failed to purchase
promised U.S. Treasury obligations to fund approximately 22 of SBU, Inc.s clients trusts.
Instead, the money was diverted to finance the purchase and operations of a chain of 23 grocery
stores, purchased in March 1996. In addition, the Internal Revenue Service (IRS), on July 7,
1997, sent a Notice of Tax Examination to SBU, Inc., for the tax year ending October 31, 1993.
During the tax examination, the IRS requested information relating to tax years 1994 and 1995.
BDO Seidman, LLP, submitted documents on behalf of SBU, Inc., pursuant to this request, on
January 8, 1998. The U.S. Attorneys office states: At that time, BDO knew that James R.
Gibson had committed a felonyattempted tax evasionin connection with the tax year 1995
return. In the January 8, 1998 submission, BDO failed to inform the IRS of information that
was material to the determination of income for year 1995, i.e., that James R. Gibson had not
purchased U.S. Treasury obligations with settlement funds received and that James R. Gibson
had, instead, used those funds to purchase and operate the grocery stores which were not
qualified assets under the Internal Revenue Code, and BDO failed to inform the IRS that
James R. Gibson had committed attempted tax evasion.399
[ii] Agreement with BDO Seidman, LLP. BDO Seidman, LLP, must cooperate with the
agreement and pay a total of $16 million into fund established as victim restitution for former
clients of SBU, Inc.
[iii] Prosecution. The office of the U.S. Attorney states that prosecution will be deferred with a
view toward dismissal of information after eighteen months.
E. Banks Concern About Privacy Versus Concerns About Money Laundering. A case in London
shows the problems that a bank faces with respect to concerns about the privacy of its bank
depositors and the concerns about financial crimes related to those deposits, even with the help
of a court.400
VI. Weapons Against Promoters Who Recommend Transactions Constituting Tax Fraud or Tax
Evasion. Promoters who recommended to and established on behalf of U.S. persons simple or
elaborate schemes and structures that include so-called secret accounts are subjecting
themselves, as well as their clients, to numerous crimes. The IRS has numerous weapons against
advisors giving fraudulent and improper tax advice. The four most powerful weapons are:

A. Conspiracyprovides that If two or more persons conspire either to commit any offense
against the U.S., or to defraud the U.S., or any agency thereof in any manner or for any purpose,
and one or more of such persons do any act to effect the object of the conspiracy, each shall be
fined or imprisoned not more than five years, or both. If, however, the offense, the

399 Id.
400 Bank of Scotland v. A. Ltd., [2001] 1 W.L.R. 751, [2001] 3 All E.R. 58, [2001] 1 All E.R. (Comm) 1023. See
also The Queen v. James R. Gibson, Action No. 306 of 2001, June 25, 2001 (the cite for the consolidated cases is:
Provident Bank & Trust of Belize Ltd. v. Emerald Inc., Action No. 306 of 2001, June 25, 2003).

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commission of which is the object of the conspiracy, is a misdemeanor only, the punishment for
such conspiracy shall not exceed the maximum punishment provided for such misdemeanor.401

B. Corrupt Interferenceprovides that anyone who obstructs or impedes, or who endeavors to

obstruct or impede, the due administration of the tax laws shall upon conviction, be fined not
more than $5,000, or imprisoned not more than three years, or both, except that if the offense is
committed only by threats of force (instead of actual force), the person convicted thereof shall be
fined not more than $3,000, or imprisoned not more than one year, or both.402

C. Aiding and Abettingprovides for a penalty of $1,000 per return or document, except in the
case of the tax liability of a corporation where the penalty is increased to $10,000, is imposed
upon anyone (i) who aids or assists in, procures, or advises with respect to, the preparation or
presentation of any portion of a return, affidavit, claim or other document; (ii) who knows (or has
reason to believe) that such portion will be used in connection with any material matter arising
under the tax laws; and (iii) who knows that such portion (if so used) will result in an
understatement of the liability for tax of another person.403

D. Swapping or Transferring Information to IRS by Other Governmental AgenciesOther

governmental agencies are permitted to swap or transfer information to the IRS.404 Specifically,
the following may be disclosed: returns and return information for use in criminal investigations;
return information other than taxpayer return information for use in criminal investigations;
return information to apprise appropriate government officials of criminal activities or
emergency circumstances; returns and return information for use in judicial or administrative
proceedings; information to locate fugitives from justice; and returns may be available in certain
circumstances for inspection by the officers and employees of the General Accounting Office.
This swapping and transferring of information is available not only against promoters, but
taxpayers, in criminal investigations, audits, and court proceedings.
VII. Weapons Against Promoters Who Participate in or Facilitate Money Laundering
Transactions for Clients. Civil and criminal penalties are provided against anyone who promotes
a transaction that constitutes the commission of the crime of money laundering under Section
1956 or 1957.405 And, practitioners must be concerned with the general conspiracy statute that
may apply with respect to representing a particular client who is engaged in the activity of
money laundering.406

401 18 U.S.C. 371.

402 I.R.C. 7212(a).
403 I.R.C. 6701.
404 I.R.C. 6103(i).
405 18 U.S.C. 1956(a)(3); 18 U.S.C. 1957(a) and (b).
406 18 U.S.C. 371.
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A. Cooperation Against Professional to Reduce Period of Incarceration. Because periods of

incarceration may be increased according to the amount of money involved and the specific
characteristics of the offense, it follows that a U.S. person facing incarceration has substantial
incentives to cooperate against his or her professional advisor. A professional runs a high risk of
becoming involved in a Federal investigation if his or her client is protecting assets that are
derived from illegal activities. The fact that the professional is unaware that proceeds are being
concealed may not avoid the horrors of a federal investigation. Thus, it is important for
professionals representing persons going offshore to determine the source of funds, the
background and character of the client and obtain bank references and other professional
references of the client, etc. It is also recommended that the client sign an Affidavit of Solvency
that includes an attached description of the money laundering statutes, with an affirmation by the
client that none of the funds being transferred offshore are illicit proceeds.407
B. Increasing Number of Statutes Providing for Forfeiture of Illegally Derived Assets in Money
Laundering Matters. Professionals, especially attorneys, must be aware of the increasing number
of statutes providing for forfeiture of illegally derived assets in transactions of money laundering.
And, transactions that may result in forfeiture are not limited to drug cases. The forfeiture laws
impacting professionals include forfeitures in money laundering, corruption, program fraud and
bank fraud cases,408 forfeiture in R.I.C.O. cases409 and forfeitures in narcotics cases.410
C. Forfeiture of Attorneys Fees. The forfeiture of funds used to pay for attorneys fees that were
derived from a narcotics enterprise were upheld by the U.S. Supreme Court, pursuant to the
provisions of 21 U.S.C. 883.411 Furthermore, the U.S. Supreme Court upheld a restraining
order on potentially forfeitable assets, where legal counsel requested such assets for payment of
legal fees.412
D. Strong Burden of Proof. Attorneys who are seeking relief from forfeiture of fees may find a
strong burden in court. A law firm cannot inform clients that it refuses to accept improper funds
without performing due diligence on the source of the funds.413 In order for an attorney to raise
the innocent owner defense in a forfeiture case, the attorney must show that he was not acting
with willful blindness that the property was either used to facilitate an unlawful transaction or
that the proceeds were derived from an unlawful transaction.414
VIII. The John Doe Summonses Cases.
407 See United States v. Miller, 134 F.3d 385 (11th Cir. 1997); United States v. Knowles, 66 F.3d 1146 (11th Cir.
1996); United States v. Tokars, 95 F.2d 520 (11th Cir. 1996); and United States v. Herrero, 893 F.2d 1512 (7th Cir.
1990).
408 18 U.S.C. 982.
409 18 U.S.C. 1963.
410 21 U.S.C. 853.
411 Caplin & Drysdale, Chartered v. United States, 491 U.S. 617 (1989).
412 United States v. Monsanto, 491 U.S. 600 (1989). Placing attorneys liens, mortgages, and etc. on forfeitable
property to secure legal fees may become a detriment to the professional.
413 United States v. Moffitt, Zwerling & Kemler, P.C., 83 F.3d 660 (4th Cir. 1996).
414 See United States v. One 1973 Rolls Royce, 43 F.3d 794 (1993).

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A. The John Doe Summonses Case in Miami.

1. The Petition and the Supporting Brief. The U.S. Department of Justice filed a petition in the
U.S. District Court, Southern District of Florida (Miami), requesting authorization to serve John
Doe summonses, pursuant to I.R.C. 7609(f) and (h), on MasterCard International and
American Express Travel Related Services Co. to obtain information relating to all U.S.
taxpayers holding credit and debit cards issued by banks in The Bahamas, Cayman Islands,
Antigua and Barbuda during the years 1998 and 1999.415 This request calls for information on the
banks that issued the cards, credit card applications, account correspondence, security and credit
checks on the cardholders, and transactions regarding the purchase of airline tickets, cars and
other high-ticket items.416
The U.S. Department of Justice filed a brief in support of its request for credit card information
and records of American Express Travel Related Services Co. and MasterCard International for
the years in question from the three specific jurisdictions. The following is paragraph 12 of the
Department of Justice brief:
[12] Moreover, the Declaration of Revenue Agent West sets forth specific
examples of court cases and pending investigations reflecting that other known
taxpayers have used or promoted the use of cards to access funds held in offshore
banks as part of schemes to evade the payment of taxes or otherwise fail to
comply with the internal revenue laws. The schemes involve the transfers of
funds, not reported as taxable income in federal tax returns, to offshore banks, and
their eventual repatriation for tax-free use in the United States through the use of
cards for purchases or direct access to cash withdrawals. See United States v.
Brigham Young University, 679 F.2d 1345, 1349-50 (10th Cir. 1982), vacated for
consideration of mootness, 459 U.S. 1095 (1983) (prior audit experience with
other contributors that had overvalued in kind contributions was a reasonable
basis for issuing a John Doe summons for the identity of all in kind
contributors to Brigham Young University).
The court, in Case No. 00-3919-CIV-JORDAN (S.D. Fla. 2000), issued an order granting ex
parte petition for leave to file John Doe summonses. An ex parte order is one that is granted
after considering the request of one party. The following is the order:
The United States of America has filed a petition for leave to file John Doe
summonses pursuant to 26 U.S.C. 7609(f). I have considered the petition, the
memorandum of law, and the supporting affidavits and exhibits ex parte, as
required by 26 U.S.C. 7609(h)(2). I find that the United States has established
the following.
First, the summonses relate to the investigation of an ascertainable group or class
of persons, i.e., American Express and MasterCard signatories whose charge,
415 U.S. Department of Justice Brief Supports Ex Parte Petition for Offshore Credit Card Reports, 2000 WTD 21127 (October 25, 2000).
416 As cited in http://www.usdoj.gov/tax/02_tax_485.htm.

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debit, or credit cards were issued by or through, or paid for from funds drawn on,
banks in Antigua and Barbuda, the Bahamas, or the Cayman Islands during 1998
and 1999. See 26 U.S.C. 7609(f)(1).
Second, a reasonable basis exists for believing that such individuals may fail or
may have failed to comply with provisions of the internal revenue laws. See 26
U.S.C. 7609(f)(2).
Third, the information to be obtained from the testimony and examination of the
records (and the identities of the persons with respect to whose liability the
summonses are issued) is not readily available from other sources. See 26 U.S.C.
7609(f)(3).
Accordingly, the Internal Revenue Service, through an authorized officer or agent,
may serve John Doe summonses, in the forms attached to the petition as Exhibits
1 & 2, on American Express Travel Related Services Co. and MasterCard
International.
DONE and ORDERED in chambers in Miami, Florida, this 30th day of October,
2000.
The U.S. Department of Justice states that MasterCard has produced over 1.7 million records that
involve 230,000 accounts in three tax haven jurisdictions in response to the John Doe
summonses case filed in Miami.417 The IRS states that by using the MasterCard account total, it
is estimated that 1-2 million such unreported accounts exist.418
2. The Impetus for the Government to File the Summonses. It is important to understand the
reason that the U.S. government filed the petition requesting authorization to serve John Doe
summonses on MasterCard International and American Express Travel Related Services. This
case was filed because of the information provided by Mr. Mathewson, regarding his Cayman
Islands bank to the Federal Bureau of Investigation (F.B.I.).419 Mr. Mathewson formed
Guardian Bank & Trust (Cayman) Ltd., a bank in the Cayman Islands, and established so-called
secret accounts for U.S. persons. Mr. Mathewson divulged extremely helpful information to
the F.B.I. in order to avoid incarceration. Please note particularly the reports of the Mathewson
case by THE WALL STREET JOURNAL and the ASSOCIATED PRESS in the following paragraphs.
On August 3, 1999, THE WALL STREET JOURNAL reported: U.S. District Judge Alfred Lechner
called Mr. Mathewsons cooperation unparalleled, before waiving federal-sentencing
guidelines Monday and ordering him to service five years probation and to pay a $30,000 fine.

417 Lavonne Kuykendall, Cards: Whats Behind Offshore Data Tug-of-War, AMERICAN BANKER (April 1, 2002).
418 Id; Title for article, (March 28, 2002); Curt Anderson, Judge Approves IRS Summons for Visa Card Records
From Banks in 30 Tax-Haven Countries, THE ASSOCIATED PRESS (March 28, 2002).
419 See United States v. Mathewson, 1993 U.S. Dist. LEXIS 3931 (S.D. Fla. 1993),
motion granted, 839 F. Supp. 858 (S.D. Fla. 1993).

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Mr. Mathewsons guilty pleas in separate indictments in federal courts in Newark, Brooklyn and
Miami could have netted him up to 57 months in prison, under sentencing guidelines.420
On August 7, 1999, the ASSOCIATED PRESS reported: Mathewson could have received a fiveyear prison term, but he got probation by providing what U.S. District Judge Alfred J. Lechner
called unparalleled cooperation: computerized records that could produce tax evasion charges
against 1,500 U.S. citizens. In hushed tones, bankers and officials here disputed Mathewsons
claims that his actions were commonplace -- and suggestions by U.S. officials that by obtaining
the secret codes to Guardians files, they might have pierced other banks secrecy.421
The extremely helpful information provided by Mr. Mathewson, including the secret codes to
Guardians files that may have pierced the secrecy of other banks, spawned the filing of the
John Doe summonses in Miami.
3. Apparent Purpose for Requesting the Information. The U.S. Department of Justice on behalf
of the IRS wants this information in order to match the data obtained with the returns filed by
each individual to determine if they reported interests in foreign accounts on Form TD F 90-22.1
and on Schedule B, Part III, of Form 1040. Alternatively, or in addition to, the IRS may want
this information to determine if tax fraud and/or tax evasion is involved. Failure to report these
transactions potentially constitutes the crimes of tax fraud or tax evasion and civil tax fraud, as
well as the crime of money laundering.
4. Typical Facts Regarding Unreported Accounts with Credit and Debit Cards. The IRS and
other federal governmental agencies are aware of specific facts regarding the use of unreported
accounts by U.S. persons. The U.S. government is also aware of the use of unreported accounts
in discharging the liabilities of credit and debit cards issued by foreign banks.
One of the more typical structures is the formation of an international business company (IBC)
by a foreign person on behalf of a U.S. person. Upon formation of the IBC, bearer shares are
issued to a foreign person as the nominee owner. Bearer shares are certificates of stock with no
name and are deemed, for legal purposes, to be owned by the person in possession of those
shares of stock.422 However, for tax purposes, the U.S. person is deemed to be the owner of the
shares of stock. A foreign person places those bearer shares in his internal files or in his desk.
The foreign person who formed the IBC, or someone on his behalf, establishes a bank account or
investment account in the name of the IBC. The foreign person opening the bank account in the
name of the IBC informs the bank of the U.S. person who is the beneficial owner or has a
beneficial interest in the account. A U.S. person typically transfers money to this bank or
investment account by wiring or mailing funds. A credit or debit card is issued by this bank or
another bank either in the name of the U.S. person or the IBC. The bank issuing the credit or
debit card generally obtains financial information from the U.S. person with the beneficial
interest prior to issuing the credit or debit card. Irrespective of whether the credit or debit card is
420 See Michael Allen, Murky World of Offshore Banking Emerges in U.S. Tax-Fraud Probe, WALL ST. J., August
3, 1999.
421 See Dan Perry, Secretive Caymans rally behind beleaguered bankers, ASSOCIATED PRESS NEWSWIRES, August
7, 1999.
422 See Tax Compliance and Reporting Requirements, supra.

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issued in the name of the U.S. person or the IBC, the credit or debit card is used for the benefit of
a U.S. person. Failure to report these transactions constitutes the crime of money laundering, tax
fraud and tax evasion, as well as civil tax fraud.
Another typical fact situation is included at paragraph eleven of the Department of Justice brief
that quotes from a professional journal423 as follows:
[11] In this regard, a recent law review article published in the Journal of Taxation
is instructive. In Advising a Client with Secret Offshore AccountsCurrent Filing
and Reporting Problems, 91 J. TAXN 158 (1999) Scott D. Michel, a past chair
of the Committee on Civil and Criminal Tax Penalties of the ABA Tax Section,
describes the following not atypical [common] hypothetical:
In the spring of 1996, Richard Smith had a marvelous vacation on the tropical
island of Azure. While he was there, he attended a free seminar on offshore
banking and investing, where he heard about the many benefits of having an
Azure bank account, including the islands strict bank secrecy laws. Smith
opened an account at an Azure bank and deposited funds over the next three
years. The bank invested his money and provided him with a debit card to use
for untraceable cash advances and purchases. While Smith was careful to
report all of his domestic income on his tax returns for 1996 and 1997, he did not
disclose the existence of the Azure account or report the income earned in the
account.
The article then analyzes how the taxpayer in this hypothetical violated provisions
of the Internal Revenue Code, such as failing to comply with the disclosure
requirements for foreign financial accounts and willfully failing to report earnings
on such accounts. Of course, implicit in the hypothetical set forth by the writer of
the article, is the use of the debit card as an integral component of the tax evasion
scheme.424
B. John Doe Summonses case in San Francisco. Due to the favorable order granted in the John
Doe Summonses case in Miami and the fact that MasterCard International and American Express
Travel Related Services Co. are turning over requested records to the IRS,425 the U.S.
government filed another case in San Francisco.426

423 See Scott D. Michel, Advising a Client with Secret Offshore AccountsCurrent Filing and Reporting Problems,
91 J. OF TAXATION 158, Warren, Gorham and Lamont (Sept. 1999).
424 Case No. 00-3919-CIV-JORDAN at 11, (S.D. Fla. 2000).
425 Curt Anderson, Judge Approves IRS Summons for Visa Card Records From Banks in 30 Tax-Haven Countries,
THE ASSOCIATED PRESS (March 28, 2002); John D. McKinnon, IRS Seeks to Get Credit-Card Records to Thwart
$70 Billion-A-Year Scam, THE WALL STREET JOURNAL (March 8, 2002); Lavonne Kuykendall, Cards: Whats
Behind Offshore Data Tug-of-War, AMERICAN BANKER (April 1, 2002).
426 In the Matter of the tax liabilities of John Does, et al., No: CV-02-0049-MISCPHJ (USDC Calif., filed March 27, 2002).

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1. Order of the Judge. U.S. District Judge Phyllis Hamilton of San Francisco, in a ruling late
Wednesday, March 27, 2002, agreed that the IRS had demonstrated there is a reasonable basis
for believing many of these cardholders were not complying with U.S. tax laws. She granted the
IRS request for a summons to obtain the Visa records. The summons seeks information
including the names, addresses, social security numbers, and telephone numbers of U.S.
taxpayers who, during the years ended 31 December 1999 through 31 December 2001, had
signature authority over Visa cards issued by, through, or on behalf of banks or other financial
institutions in: Anguilla; Antigua and Barbuda; Aruba; the Bahamas; Belize; Bermuda; the
British Virgin Islands; the Cayman Islands; the Cook Islands; Cyprus; Dominica; Gibraltar;
Guernsey/Sark/Alderney; Hong Kong; the Isle of Man; Jersey; Latvia; Liechtenstein;
Luxembourg; Malta; Nauru; Netherlands Antilles; Panama; Samoa; St. Kitts and Nevis; St.
Lucia; St. Vincent and the Grenadines; Switzerland; the Turks and Caicos; and Vanuatu.427
2. The Impetus for the Government to File the Case. The affidavit filed in support of the petition
for a summons to be issued against Visa states that MasterCard International complied with the
John Doe summonses case filed in Miami by producing electronic database records and the
records contained files of over 1.7 million transactional records involving more than 230,000
different accounts. The affidavit further states that many of the cards appear to be issued to U.S.
customers and, based on these records, the IRS has developed hundreds of cases for civil audits
or potential criminal investigation.
In addition, on March 25, 2002, a stipulation, involving a stipulated agreement with American
Express Travel Related Services Co., requesting a court order was filed in the U.S. District Court
for the Southern District of Florida. After entry of the order, American Express Travel Related
Services Co. will provide certain records for 1998 and 1999 on cards for U.S. persons with
transactions in the U.S. and with mailing addresses in the islands subject to the John Doe
summonses case filed in Miami.428
C. Tax Compliance and Reporting Requirements. Specific tax compliance and tax reporting
requirements for the above transactions include the following:
1. Form 1040, Schedule B, Part III.429 Form 1040, Schedule B, Part III, Line 11a asks did you
have an interest in or signature or other authority over a financial account in a foreign country,
such as a bank account, securities account, or other financial account? Line 11a of this
Schedule must be answered in the affirmative for a foreign grantor trust. Line 11b of this
Schedule then requires entering the name of the foreign country for where the foreign account,
established by the trust, is located. Line 12 of this Schedule asks Were you the grantor of, or
transferor to, a foreign trust whether or not you have any beneficial interest in it? This also
must be answered in the affirmative since the U.S. person who establishes the trust is both a
grantor and a transferor to the trust. Line 12 then states, with respect to an affirmative answer
427 IRS Chronology on Credit Cards and John Doe Summonses, 2002 TNT 169-10 (August 29, 2002).
428 Lavonne Kuykendall, Cards: Whats Behind Offshore Data Tug-of-War, AMERICAN BANKER (April 1, 2002).
429 The IRS states that 117,000 individuals checked this schedule indicating interest in or signature or other
authority over foreign financial accounts in the year 1999. See Lavonne Kuykendall, Cards: Whats Behind
Offshore Data Tug-of-War, AMERICAN BANKER (April 1, 2002).

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that you may have to file Form 3520, 3520-A, or 926. Answering Lines 11 (foreign account)
and 12 (foreign grantor trust) of this Schedule in the affirmative clearly shows that the taxpayer
is required to file TD F 90-22.1 and Form 3520.
2. TD F 90-22.1Report of Foreign Bank and Financial Accounts.430 This report is filed by each
U.S. citizen who has a financial interest in, or signature authority or other authority over, any
financial accounts, including bank, securities or other financial accounts, in a foreign country
exceeding $10,000 in the aggregate at any time during a calendar year. A U.S. citizen means a
citizen or resident of the U.S., a domestic partnership, a domestic corporation, or a domestic
estate or trust.431 A financial interest includes interest in foreign accounts titled in the names of
nominees, agents and trusts if the present beneficial interest of the U.S. citizen in the trust
exceeds 50% of the assets or more than 50% of the current income is distributed to a U.S.
citizen. Signature authority includes the ability to control the disposition of money or property in
the foreign account by oral or written instructions to the signatory or titleholder on the account.
The TD F 90-22.1 Form states Civil and criminal penalties, including certain circumstances a
fine of not more than $500,000 and imprisonment of not more than five years, are provided for
failure to file a report, supply information, and for filing a false or fraudulent report. The U.S.
Code provides that the person who willfully fails to file this return shall be fined not more than
$250,000, or imprisoned for not more than five years, or both.432 The U.S. Code further
provides that the person who willfully fails to file this return while violating another law of the
United States or as part of a pattern of any illegal activity involving more than $100,000 in a 12month period shall be fined not more than $500,000, imprisoned for not more than ten years,
or both.433 These penalties for failure to file are further provided by the Code of Federal
Regulations.434
3. Form 4789Currency Transaction Report. This currency transaction report is filed for
deposits, withdrawals, exchange of currencies or other payment or transfer of more than $10,000
per year.
4. Form 4790Report of International Transportation of Currency or Monetary Instruments. This
report is filed for international transportation of currency or monetary instruments.
5. Form 926Return by a U.S. Transferor of Property to a Foreign Corporation. This form is due
with respect to the transfer, directly or indirectly, of assets to a foreign corporation. The penalty
is 10% of the fair market value of the property at the time of the transfer for failure to file the

430 The IRS states that 170,000 of these reports were filed for the year 2000. See Lavonne Kuykendall, Cards:
Whats Behind Offshore Data Tug-of-War, AMERICAN BANKER (April 1, 2002).
431 Instructions for TD F 90-22.1, General Definitions, 1 (2000).
432 31 U.S.C. 5322(a).
433 31 U.S.C. 5322(b).
434 31 C.F.R. 103.49.

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Form 926.435 For U.S. tax purposes, the U.S. person is the real owner of the shares of stock, not
the nominee owner.
6. Form 5471Information Return of U.S. Persons with Respect to Certain Foreign Corporations.
This form is required for a U.S. person who has direct or indirect (real) control over a foreign
corporation. The foreign corporation is generally classified as a controlled foreign corporation
for income tax purposes. A foreign corporation is a controlled foreign corporation for a taxable
year if more than 50% of the voting power or value of its stock is owned, directly, indirectly or
constructively, on any day of the taxable year by a U.S. shareholder or shareholders.436 Each
shareholder must report Subpart F income437 of a controlled foreign corporation yearly, whether
or not distributions are made.438 Attempts to avoid the thrust of the rules for determining
controlled foreign corporation status by appearing to formally transfer voting control to non-U.S.
shareholders is not effective if the formality is not a reflection of the facts.439 Thus, if the
unofficial but real or indirect power to control the corporation remains with a U.S. person, that
person is considered the holder of the foreign corporations voting control. For U.S. tax
purposes, the U.S. person who controls the foreign corporation is deemed to be the shareholder,
not the nominee owner. A U.S. person in control of a foreign business entity (a foreign
corporation or foreign partnership), must provide such information as the Secretary of the
Treasury may prescribe440 (on Form 5471 with respect to a foreign corporation) relating to (i)
identifying information, such as the name, place of organization or incorporation, principal place
of business and nature of business, (ii) in the case of a corporation, its post-1986 undistributed
earnings, (iii) a balance sheet, (iv) related party transactions, i.e., transactions between the entity
and the U.S. person, another entity that the U.S. person controls, or any U.S. person owning 10%
or more of the entity, and (v) a description of the capitalization of the entity, along with names,
addresses and interests owned by any person holding 5% or more of any class of outstanding
stock.441
D. Government Jurisdiction Over the Credit and Debit Card Records. The U.S. government has
jurisdiction over American Express Travel Related Services Co. and MasterCard International for
several reasons. The payment, in U.S. dollars, of credit or debit card bills issued by foreign
435 I.R.C. 6038B(c)(1).
436 I.R.C. 957(b). A. U.S. shareholder is any U.S. person holding, directly, indirectly or constructively, 10% or
more of the foreign corporations voting power. I.R.C. 951(b).
437 Subpart F income is the primary type of income that passes through from a controlled foreign corporation to its
U.S. shareholders. I.R.C. 952(a) provides the basic definition of Subpart F income. Subpart F income generally
consists of the sum of five types of income and payments under I.R.C. 952(a) and includes foreign personal
holding company income under I.R.C. 954(a)(1). Foreign personal holding company income generally includes:
dividends, interest, royalties, rents, annuities, net gains and gains from certain property transactions, net gains from
certain commodities transactions and certain foreign currency gains. I.R.C. 954(c).
438 I.R.C. 951(a). In effect, this provision contains a pass-through system for taxing certain U.S. shareholders of
a controlled foreign corporation. See generally Treas. Reg. 1.951-1(a). I.R.C. 951(b) defines U.S. shareholder
with respect to a foreign corporation as a U.S. person who owns, directly or indirectly, by applying the entity
attribution rules under I.R.C. 958(a), or by applying the constructive ownership attribution rules under I.R.C.
958(b), 10% or more of the voting stock of the foreign corporation.
439 Treas. Reg. 1.957-1(b)(2).
440 I.R.C. 6038.
441 I.R.C. 6038(a)(1).

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banks results in the settling of those dollar payments in the Federal Reserve Bank of New York.
The necessary liquidity to discharge those liabilities resides at the Federal Reserve Bank of New
York. However, if the position is taken that credit and debit card records are outside the U.S. and
reside with banks in the three jurisdictions, the question is whether the U.S. government has
extraterritorial jurisdiction, if necessary, available under this John Doe summonses over these
credit and debit card receipts, records and other information. The answer is in the affirmative.
1. Extraterritorial Jurisdiction Granted to the U.S. Government Under Section 1956 and 1957. A
careful reading of Section 1956(f) and Section 1957(d)(2) is required to understand that
extraterritorial jurisdiction is not granted to the U.S. government for acts or omissions
constituting tax fraud or tax evasion, or even absolute fraud. Section 1956(f) requires conduct by
a U.S. citizen, or in the case of a non-U.S. citizen the conduct occurs in part in the U.S.,
involving a transaction or series of related transactions involving funds or monetary
instruments of a value exceeding $10,000. Section 1956(a)(2) deals with funds or monetary
instruments and does not include tax fraud or tax evasion.442 Section 1957 makes no reference to
tax fraud or tax evasion and, therefore, extraterritorial jurisdiction is not granted to the U.S.
government for such reasons.
a. Wire and Mail Fraud. The U.S. government obtains extraterritorial jurisdiction from wire and
mail fraud.443 Thus, the mailing or wiring of funds to a foreign jurisdiction provides
extraterritorial jurisdiction to the U.S. government. The failure to report the so-called secret
account constitutes concealment or tax fraud or tax evasion and causes the account to be
classified as a specified unlawful activity.444 However, as stated, the fact that tax fraud or tax
evasion is involved does not grant extraterritorial jurisdiction; it is mail and wire fraud as
predicate offenses that provide the extraterritorial jurisdiction.
b. Specific Provisions Granting Exterritorial Jurisdiction.445 The U.S. government has specific
extraterritorial jurisdiction over the records requested in the John Doe summonses case in
Miami under Section 1956446 and Section 1957.447
2. Extraterritorial Jurisdiction Under the USA Patriot Act.448
a. Jurisdiction of U.S. District Courts. Jurisdiction is granted to U.S. District Courts with respect
to an action filed or enforcing a penalty ordered under Section 1956, over any foreign person,
including any financial institution, so long as the service of process is made under the federal

442 18 U.S.C. 1956(a)(1)(A)(ii) includes tax fraud or tax evasion.

443 18 U.S.C. 1956(c)(4)(A) and (5); 18 U.S.C. 1957(f)(1) includes the transfer or exchange, in or affecting
interstate or foreign commerce, of funds or a monetary instrument (as defined in 1956(c)(5) of this title) by,
through, or to a financial institution (as defined in 1956 of this title)
444 18 U.S.C. 1956(a)(1)(A)(ii).
445 See Transactions Involving Funds or Monetary Instruments, supra.
446 18 U.S.C. 1956(f).
447 18 U.S.C. 1957(d)(2).
448 See Extraterritorial JurisdictionU.S. District Courts, supra.

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rules of civil procedures or the laws of the country where the person is found and the offender
commits a crime a financial transaction under Section 1956(a).449
b. Jurisdiction of U.S. Government. The USA Patriot Act provides jurisdiction over foreign
banks that have U.S. correspondent, interbank or payable-through accounts.450
3. Jurisdiction under CAFRA. CAFRA grants jurisdiction involving Section 1956 and Section
1957 cases and a court may issue a subpoena duces tecum to a financial institution to produce
books, records and other documents.451
4. Resident Jurisdiction Over Credit Card Companies. The U.S. government has jurisdiction
over American Express Travel Related Services Co. and MasterCard International because both
companies are located in the U.S. Also, the settlement of credit and debit card bills in dollars
occurs in the U.S. at the Federal Reserve Bank of New York. Furthermore, as previously stated,
the concept of fraud or any scheme or attempt to defraud by or against a foreign bank, is
included in 18 U.S.C. 1956(c)(7)(B)(iii) and appears to include tax evasion and thereby causes
banks to be treated as agents of the U.S. government in identifying and reporting money
laundering from such crimes.452 This is especially true due to the jurisdiction given to the U.S.
government and the U.S. District Courts over foreign banks and their customers, as well as the
due diligence or enhanced due diligence as required at the U.S. financial institutions having a
correspondent banking account for foreign banks.
5. Mutual Legal Assistance Treaties. The U.S. government has and continues to enter into an
MLAT with jurisdictions around the world. An MLAT provides assistance in criminal matters
and seeks to improve the effectiveness of judicial assistance and to regularize and facilitate its
procedures. Each country to the MLAT designates a central authority, generally the Justice
Departments for direct communication. An MLAT includes the power to summon witnesses,
compel the production of documents and other real evidence, to issue search warrants, and to
serve legal process. Remedies offered by an MLAT are only available to prosecutors. An MLAT
with a jurisdiction may be used by the U.S. government against a U.S. person who has a debit or
credit card issued by a bank in that jurisdiction where unreported accounts are used to discharge
the liabilities under the debit or credit card. The defense generally must proceed with the
available methods of obtaining evidence in criminal matters under the laws of the host country
that usually involve letters rogatory.
a. MLATs in Force.453 MLATs currently in force include: Anguilla, Antigua/Barbuda, Argentina,
Australia, Austria, Bahamas, Barbados, Belgium, Brazil, British Virgin Islands, Canada, Cayman
Islands, Cyprus, Czech Republic, Dominica, Egypt, Estonia, Greece, Grenada, Hong Kong,
449 18 U.S.C. 1956(b)(2)(A).
450 See USA Patriot Act, supra.
451 18 U.S.C. 986(a).
452 See Bruce A. Zagaris and Ben Hinceman, Uncle Sam Reaches Out: Current United States Money Laundering
Law, in WORKING PAPERS, INTERNATIONAL TAX PLANNING ASSOCIATION CONFERENCE PROCEEDINGS, Windsor
Court Hotel, Nov. 19-21, 2000 (citing John A. Kelley et al, International Banking and Finance, 34 INTL LAWYER
429, at 432 (2000)).
453 See http://travel.state.gov/mlat.html.

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Hungary, Israel, Italy, Jamaica, Korea (South), Latvia, Lithuania, Luxembourg, Mexico,
Montserrat, Morocco, Netherlands, Panama, Philippines, Poland, Romania, St. Kitts-Nevis, St.
Lucia, St. Vincent, Spain, Switzerland, Thailand, Trinidad, Turkey, Turks and Caicos Islands,
Ukraine, United Kingdom, Uruguay.454
b. Purposes of MLATs. MLATs are specifically designed to override local laws pertaining to
bank secrecy and to ensure the admissibility of the evidence obtained. MLATs generally contain
provisions that, in conjunction with certain statutes, are directed as securing the admissibility of
business records, or establishing chain of custody over an evidentiary item, without having to
adduce the in-court testimony of a foreign witness.
6. Tax Information Exchange Agreements. The U.S. has entered into, and continues to enter into,
tax information exchange agreements (TIEA) with numerous jurisdictions that allow for the
exchange of information with respect to tax matters.
a. Some TIEAs in Force. On November 27, 2001, the U.S. and the U.K. signed a TIEA with
respect to the Cayman Islands. The Cayman Islands agreement comes into force January 1,
2004, for criminal tax evasion and on January 1, 2006, for all other tax matters. On January 24,
2002, the U.S. signed a TIEA with The Bahamas. The Bahamas agreement comes into force
January 1, 2004, with respect to matters in connection with criminal tax matters and on January
1, 2006, for information in connection with civil tax matters. The U.S. also signed TIEAs with
the following, among others: Antigua and Barbuda (December 6, 2001), the British Virgin
Islands (April 3, 2002), the Netherlands Antilles (April 17, 2002), Guernsey (September 19,
2002), the Isle of Man (October 3, 2002), and Jersey (November 4, 2002). The U.S. has signed
TIEAs with other jurisdictions and continues to sign TIEAs with additional jurisdictions around
the world.
b. Scope of TIEAs. Under most of the TIEAs, as well as tax treaties, to which the U.S. is a party,
requests for assistance may be made for any civil or criminal tax investigation or proceeding
regarding any tax year not barred by the statute of limitations of the state seeking the
information.
c. Designation of a Competent Authority to Administer TIEAs. TIEAs, as well as tax treaties,
specify competent authorities to act on behalf of each treaty partner to make requests, to receive
and execute requests, and to administer generally the treaty relationship. The Assistant
Commissioner-International, IRS, is designated to act as the Competent Authority for exchanging
information under TIEAs, as well as tax treaties, under the authority of the Secretary of Treasury.
d. Example of a TIEA. The Cayman Islands tax cooperation agreement with the U.S. and the
U.K. is an example of a TIEA. This TIEA, under Article 1 provides the Scope of the Agreement.
Article 1 states: The competent authorities of the contracting party shall provide assistance
through exchange of information relating to the administration and enforcement of the domestic
454 Treaty with the United Kingdom concerning the Cayman Islands relating to Mutual Legal Assistance in
Criminal Matters. This MLAT was extended to Anguilla, the British Virgin Islands, and the Turks and Caicos Islands
on Nov. 9, 1990, and to Montserrat on April 26, 1991.

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laws of the contracting parties concerning the taxes and the tax matters covered by this
Agreement, including information that may be relevant to the determination, assessment,
verification, enforcement or collection of tax claims with respect to persons subject to such taxes,
or to the investigation or prosecution of criminal tax evasion in relation to such persons. The
territorial scope of this Agreement, in respect of the United Kingdom, is the territory of the
Cayman Islands. Under Article 3, the taxes covered are federal income taxes. However, the
types of tax covered may be extended by agreement between the parties in the form of an
exchange of letters. Article 5 provides for exchange of information upon a request; Article 6
provides for tax examination (or investigations) abroad; and Article 11 provides for mutual
agreement procedure between the parties. Article 12 provides for entry into force of the
agreement and states that it takes effect for criminal tax evasion on January 1, 2004, and for other
matters covered by Article 1, it takes effect on January 1, 2006.
7. Letters Rogatory. The traditional method used by U.S. litigants to enlist the assistance of
foreign authorities to obtain evidence abroad, in both civil and criminal cases, is a letter rogatory,
also known as a letter of request. In general, a letter rogatory is a formal request from a court, in
which an action is pending, to a foreign court to perform some judicial act. If the foreign court
honors the request, it does so based on comity rather than any sort of strict obligation. As this
definition suggests, a letter rogatory can usually only be used in a proceeding that has
commenced, such as in the post-indictment stages of a criminal case or the post-complaint stages
of a civil case; however, this is not an iron-clad rule.
E. Issuance of John Doe Summons to Merchants. The IRS is not only obtaining information from
American Express Travel Related Services Co. and MasterCard International, but also of
merchants in the U.S. in which the debit and credit cards have been used to purchase products.
Also, the IRS is issuing summonses to the credit card companies with respect to specific
individuals, specific debit or credit card numbers, with appearance required by credit card
companies at a specific address, at a specific time, with specific information requested.
F. Chronology on Credit Cards and John Doe Summonses.455 In an August 29, 2002, release, the
IRS describes the major steps it is taking to combat tax-avoidance456 schemes involving credit
cards issued by offshore banks. The following are excerpts from this release:
1. Identifying Promoters and Participants.
Lead Development Center
[84] Key to the fight against abusive scams and schemes is better identifying their
promoters. To succeed, we must go the source and cut off the supply. To this end,
SB/SE established a Lead Development Center (LDC) in April 2002. Its purpose
is threefold:

455 2003 TNT 63-24.

456 Here, the IRS shows that tax avoidance involves the use of legal devices to defer or avoid taxes; whereas, tax
fraud or tax evasion involves the use of illegal schemes or devices to evade income taxes.

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-Centralize the receipt and development of leads on promoters of abusive tax

schemes;
-Authorize and monitor on a national level abusive tax promoter investigations
(also called 6700 investigations) assigned to the field; and
-Promote and effect the coordination of parallel investigation with IRS Criminal
Investigation.
[85] Let me explain how the LDC works. The Center receives leads from both
internal and external sources, such as practitioners and taxpayers. For example, as
I will discuss later in my testimony, the OVCI [Offshore Voluntary Compliance
Initiative] is producing leads from taxpayers coming clean. We will make
excellent use of them at the LDC. LDC personnel also conduct Internet and other
public database searches to develop facts about promoters or the promotion of
schemes.
[86] The lead is then classified, prioritized and eventually assigned to LDC agents
for development and potential referral to the field. We also coordinate with the
IRS Office of Chief Counsel, Criminal Investigation, and other departments and
functions for input on approval of the lead. If approved, the promoter is then
referred to the field for case development.
[87] Because of the LDC, we now also have a much better handle on the universe
of the problem. Since its formation in April 2002, approximately 1,100 leads have
been received by the LDC. The current receipt of new leads is averaging
approximately 70-80 per month. As of March 1, 2003, we have 267 investigation
referrals being worked in the field, with the remaining being evaluated in the LDC
for further action. The leads can also be broken down into promoter brackets or
buckets, with domestic trusts, offshore transactions and frivolous constitutional
arguments being the largest.
[88] I also want to point out an interesting pattern that is starting to emerge from
our investigations. We are not seeing many new promoters. Rather, it is the same
promoters selling a number of new schemes. If one scheme gets too hot, they drop
it and move on to sell a different one, and so on and so forth. This is a hallmark of
the huckster and confidence man.
[89] Mr. Chairman, critical to our efforts are new expedited procedures developed
with the Justice Department to obtain timely injunctions. In the past, many of the
scams and schemes continued to operate even when we had identified them as
being abusive. In a very real sense, we were fighting with one hand tied behind
our back. However, with these new procedures in place, we and our partners at the
Justice Department are in a much better position to shut these scams down before
they can do any more harm.
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[90] As a result of referrals made to the Department of Justice, 22 injunctions

were granted. The streamlined procedure for obtaining civil injunctions is
markedly faster. Indeed, in the case of Section 861 scams, we have gone from
months to weeks after identifying the scheme.
[91] Let me also note that for this fiscal year, we have scheduled three classes to
train approximately 100 additional personnel nationwide in promoter
investigations. Our regular classroom training program related to scams and
schemes for FY 2003 includes: abusive tax promotions (95 revenue agents),
abusive schemes/passthroughs (125 managers), John Doe/Offshore cases (1,400
revenue agents), anti-money laundering (240 revenue agents), advanced collection
techniques for schemes (120 revenue officers); foreign trust and other offshore
(240 revenue agents), Casino Bank Secrecy Act (96 revenue agents), special
enforcement training (75 revenue agents), OVCI training (700 revenue agents),
and advanced fraud referral specialist (80 agents) and abusive tax scheme
coordinators (50 special agents).
2. Credit Card Summonses.
[92] Since October 2000, the IRS has issued a series of summonses to a variety of
financial and commercial businesses to obtain information on U.S. residents who
held credit, debit, or other payment cards issued by offshore banks. We are
identifying promoters and participants. The following is a chronology of our
actions, according to public records:
-On October 30, 2000, a federal judge in Miami issued an order authorizing the
IRS to serve John Doe summonses on American Express and MasterCard. These
summonses were designed to obtain limited information for 1998 and 1999,
revealing U.S. participants in offshore arrangements who hold credit cards issued
by banks from Antigua and Barbuda, the Bahamas, and the Cayman Islands.
-On March 27, 2002, a federal judge in San Francisco issued an order authorizing
the IRS to serve a John Doe summons on VISA International seeking records on
transactions for 1999-2001 using cards issued by banks in over 30 tax haven
countries.
-On August 21, 2002, a federal judge in Miami issued an order authorizing the
IRS to serve a John Doe summons on MasterCard for records on transactions for
1999-2001 using credit cards issued by banks in over 30 tax haven countries.
-In August and October 2002, federal judges in 18 district courts across the nation
gave permission to the IRS to serve John Doe summonses on over 120 businesses
to assist in the identification of credit card owners.

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[93] The results of the investigations have been promising. The first summons
alone yielded data from MasterCard on 237,000 cards issued through 28 banks in
three countries.
[94] Investigators have been using records from these summonses to trace the
identities of those whose use of these payment cards may be related to hiding
taxable income. We identified thousands of offshore payment cardholders for
potential examination and dozens of cases have already been referred to Criminal
Investigation for possible action. The investigation itself has entailed combing
through data on millions of transactions.
[95] An early estimate suggested that 1-2 million cardholders could be involved.
However, after reviewing records in recent months obtained from the John Doe
effort, we reduced our estimate of the number of abusive cardholders. This reestimate is based on information we culled on duplicate cards issued to the same
individual, inactive or small-dollar accounts, people using the cards because of
bad credit, persons traveling abroad, and a wide range of other non-tax reasons for
holding the cards. While an exact figure of taxpayers involved remains uncertain,
we now believe the use of offshore credit, debit, and charge cards to evade
payment of U.S. taxes involves hundreds of thousands of taxpayers.
[96] Once taxpayers are identified from cards, case building begins. The IRS
already has developed over a thousand cases for civil audits or potential criminal
investigations. The IRS is increasing resources in Fiscal Years 2003-2004 devoted
to working these cases.
[97] Access to information is also critical to ensuring the full and fair enforcement
of the tax laws. In addition to techniques, such as the use of these John Doe
summonses, the United States has a broad network of bilateral treaties and
agreements with countries throughout the world that allow the IRS to obtain
information relevant to the tax liabilities of U.S. taxpayers. Information requested
from other countries under these treaties and agreements is an important means by
which the IRS identifies taxpayers who attempt to hide income offshore to avoid
their tax obligations.
3. The Offshore Voluntary Compliance Initiative.
[98] In January 2003, we launched an initiative aimed at bringing taxpayers who
used offshore payment cards or other offshore financial arrangements to hide
their income back into compliance with tax law. The Offshore Voluntary
Compliance Initiative (OVCI) grows out of the two-year-old John Doe
summons investigation described above in my testimony.
[99] Under the OVCI, eligible taxpayers who step forward will not face civil
fraud and information return penalties. However, taxpayers will still have to pay
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back taxes, interest, and certain accuracy or delinquency penalties. The last day a
taxpayer can apply is two weeks away -- April 15, 2003.
[100] Eligible taxpayers who come forward will also avoid criminal prosecution
based upon application of the revised voluntary disclosure practice. A taxpayer
who does not come forward now, however, will be subject to payment of taxes,
interest, penalties, and potential criminal prosecution.
[101] The Voluntary Compliance Initiative reflects an attempt to bring taxpayers
back into compliance quickly while simultaneously gathering more information
about the promoters of these offshore schemes. Mr. Chairman, I fully concur with
your statement that while taxpayers will be getting a fresh start, IRS plans on
making it the end of the line for crooked perpetrators.
[102] As part of the request to participate, the taxpayer must provide full details
on those who promoted or solicited the offshore financial arrangement.
[103] The IRS will use this information to pursue promoters and to obtain
information about taxpayers who have avoided tax through the use of offshore
payment cards or other offshore financial arrangements and who do not come
forward under the OVCI.
[104] We are striking the proper balance with this initiative. It is sound tax
administration, and it will help root out tax evasion. Those who misused offshore
credit and other payment cards will be able to pay their fair share. Just as
importantly, it will help the IRS get the people promoting these deals.
[105] In addition to the names of those who promoted these offshore financial
arrangements, taxpayers deemed eligible to participate in the Voluntary
Compliance Initiative must provide the details on all aspects of the scheme used
to avoid paying the proper tax liability.
[106] Those who promoted or solicited others to avoid tax by using offshore
payment cards and other domestic and offshore abusive schemes are not eligible
to participate in the OVCI. Also prohibited is anyone who has illegal source
income, such as a drug dealer. Complete details on this initiative and eligibility
can be found in Revenue Procedure 2003-11.
[107] Under the OVCI, eligible taxpayers will have to file or amend their returns
and pay interest and certain civil penalties, as well as the tax. The interest and
penalties depend on the amount of the unpaid tax liability, the years involved,
whether a return was inaccurate or if a return should have been filed and was not.
[108] For example, a taxpayer who understated his income to avoid $ 100,000 in
taxes in 1999 would wind up paying $ 149,319 to the government. This includes
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the tax liability plus $ 29,319 in interest and an additional accuracy-related

penalty of $ 20,000.
[109] If a taxpayer did not step forward, his or her tax liability generally would
include the civil fraud penalty of $ 75,000, and therefore higher interest of $
42,758. The total amount due would be $ 217,758, without considering probable
additional civil penalties for failure to file certain information returns.
[110] The accuracy-related penalty, cited in the above examples, is equal to 20
percent of the tax underpayment. The civil fraud penalty is up to 75 percent of the
unpaid tax liability attributable to fraud.
[111] To apply for the OVCI, taxpayers must notify the IRS in writing and
provide their name taxpayer identification number, current address, daytime
phone number, and certain promoter information as specified in the Revenue
Procedure.
[112] As part of the OVCI, the IRS will also be closely monitoring the filing of
amended returns. If, in order to circumvent this initiative, taxpayers simply file an
amended return without complying with the other required provisions, they run
the risk of having the civil fraud penalty and other information return penalties
applied. As Senator Baucus rightly observed, The IRS message to tax evaders is
clear -- either come forward and pay what is owed to the country today, or find
the IRS knocking on your door with jail time and high financial penalties
tomorrow.
[113] People interested in participating in the Offshore Voluntary Compliance
Initiative can contact the IRS by calling 215- 516-3537 (not toll-free), or visit our
web site.
[114] OVCI results to date are promising and we expect more taxpayers to take
advantage of the initiative in its final two weeks. We will provide the Committee
with an update after the close of the program.
[115] Anecdotally, there are excellent examples of the results we are receiving.
The OVCI unit is also receiving promoter and other fraud related information
from taxpayers who have seen the OVCI media coverage, but who are not
involved in offshore activities. These promotional materials and leads are being
referred to the SB/SE and CI Lead Development Centers.
4. Civil ActionsOffshore Credit Cards.
[124] On March 13, the IRS announced that summons enforcement petitions have
been filed by the Justice Department in seven U.S. District Courts against
individual taxpayers related to the Offshore Credit Card Project. This marks the
first time in the Offshore Project that the IRS has taken this step; previous court
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efforts centered on credit card companies and businesses. These actions are
against individual participants.
[125] According to publicly-filed court documents:
-The IRS took these steps based on information gathered in the Offshore Project
-- an on-going effort to identify persons who hide taxable income by transferring
funds to offshore jurisdictions and then use payment cards to access these funds in
the United States.
-The summons enforcement petitions were filed against individuals who used a
MasterCard payment card issued by the Leadenhall Bank & Trust Company in
Nassau, Bahamas. The enforcement petitions were filed after the individuals did
not produce for examination the books or records requested in earlier IRS
summonses.
-The IRS and Justice Department filed the petitions in U.S. District Courts in the
Eastern District of California, the Middle District of Florida, the Southern District
of Florida, the District of Maryland, the District of Nevada, the District of North
Dakota, and the Western District of Tennessee.
[126] Treasury Assistant Secretary for Tax Policy Pam Olson stated that the IRS
has focused resources on identifying and weeding out the threats to our tax system
posed by tax avoidance activities, such as hiding income offshore. The Treasury
Department is supporting the IRS initiatives by putting sunlight on the offshore
sector. The Treasury and the IRS will continue to use all of the tools available to
ensure that every taxpayer pays what it owes to support this great country.
5. Tax Avoidance Schemes.
[128] According to a March 20, 2003 DOJ press release, a federal court in Las
Vegas issued a temporary restraining order barring Irwin Schiff and two
associates, Cynthia Neun and Lawrence N. Cohen, from promoting their tax
scams. The order prohibits the trio from holding any seminars to promote or sell
Schiffs fraudulent zero tax plan or any other false, fraudulent, or frivolous tax
schemes or arguments.
[129] The order also prohibits Schiff and his associates from selling or advertising
tax-scam books, audiotapes and other tax- related products and services, and from
preparing any federal income tax returns for others. Within 10 days, Schiff, Neun,
and Cohen must provide a copy of the order to their current customers and former
customers with whom they have done business since January 1, 1999.
[130] According to court papers filed by the Justice Department, Schiff, Neun,
and Cohen conduct seminars and sell audiotapes and other products designed to
help customers evade federal taxes, primarily by filing income-tax returns falsely
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listing no income and no tax due. The Justice Department has alleged that
customers of Schiff and his associates attempted to evade an estimated $ 56
million in income taxes from 1999 through 2001.
[131] This is the latest in a series of actions brought by the Justice Department in
recent years against alleged tax scam promoters across the country. In the past two
years, the Department has filed suits asking for injunction orders against 35
promoters and has prevailed in every case decided so far.
[132] Also, according to a February 28, 2003 DOJ press release, a federal court in
Tampa ordered David Bosset of Spring Hill, Fla., to stop promoting a fraudulent
tax scheme. The permanent injunction bars Bosset from promoting the frivolous
Section 861 argument. Bosset had falsely claimed that Section 861 of the
Internal Revenue Code exempted from federal income taxes persons with U.S.source income. Bosset also must contact clients and inform them of the
injunction.
[133] In the permanent injunction order, the court stated that in promoting the
scheme Bosset made false or fraudulent statements. The court last March had
entered a preliminary injunction against Bosset. Federal courts have enjoined five
other Section 86 1 tax scam promoters in other cases.
6. Web Site Actions.
[134] As of March 16, 2003, the following web sites were shut down or had
injunctions posted on them:
-Al Abdo, www.amtaxplan.com, preliminary injunction entered and website shut
down 5/25/01. (This was the first site shut down by means of an IRS/DOJ
injunction suit.)
-Joy Foundation & Jack Malone, www.Joyfoundation.com, permanent injunction
on 10/21/02 and injunction posted on website within a week thereafter.
Government moved for contempt because posting was not sufficiently prominent;
thereafter the posting was made more prominent.
-Michael Richmond & Rex Black, www.mcep.com; www.libertyinstitute.com &
www.nationaCEP.com, permanent injunction against Rex Black on 6/14/02. Black
served 3 months in prison and incurred substantial fines for civil contempt for
failing to post the injunction on the sites. Injunction was finally posted in
February.
-Thurston Bell, www.nite.org, Preliminary injunction entered 1/10/03; injunction
posted on website a few days later.
Suit has been filed and is pending against:
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-Chad Prater, www.taxinformer.com, preliminary injunction entered December

19, 2002. Court declined to order posting of injunction order on website, but did
order Prater to remove false statements from the site. Prater has not complied with
the injunction. DOJ moved for contempt on 3/10/03, and again asked the court to
order Prater to post the injunction. A hearing on the contempt motion is scheduled
for April 2, 2003.
-Irwin Schiff, www.paynoincometax.com, www.ischiff.com, suit filed 3/12/03
seeking temporary restraining order (TRO) to remove false statements from
websites. TRO granted on March 20, 2003.
[135] Three additional suits have been referred to DOJ in which we requested
DOJ to enjoin false statements on websites.
7. Criminal ActionsShift to Tax Administration.
[136] With the IRS major compliance initiatives now revolving around
promoters and abusive scams and schemes, CI developed a comprehensive
compliance strategy that incorporates all IRS operating divisions and their
taxpayer bases. To begin the process, CI worked particularly closely with the
other divisions to develop a strong fraud referral program.
8. Fraud Referrals from other IRS Operating Divisions.
[137] CI works closely with SB/SE, LMSB and W&I operating divisions to
improve the fraud referral process. SB/SE established the position of fraud
referral specialists to aid employees in identifying matters suitable for referral
for criminal investigation. CIs lead development managers also work closely
with SB/SEs fraud specialists to monitor the process. This has complemented
CIs efforts to re-focus its investigative resources on legal source income cases.
The acceptance rate for fraud referrals from other IRS operating divisions was
63% for FY2002 -- a 10% jump from the previous fiscal year.
9. Abusive Trusts.
[143] In FY 2002, CI initiated 108 investigations compared to 79 in FY 2001,
recommended 55 prosecutions as compared to 30 in FY 2001, received 44
indictments as compared to 32 the previous year and won 26 convictions
compared to 45 in FY 2001. The incarceration rate was 88.2 percent and average
months served in prison was 32 months
[144] For the Anderson Ark & Associates abusive scheme, 79 investigations were
initiated and 23 prosecutions were recommended. There were also 20 indictments
and 10 convictions. Two individuals were sentenced and incarcerated with an
average of 18 month to serve in prison.
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10. Voluntary Disclosure.

[151] Outside of the on-going Offshore Voluntary Compliance Initiative, as of
February 28, 2003, Criminal Investigation has received a total of 30 voluntary
disclosure requests, 16 have been approved, five declined and nine are still
pending.
11. OffshoreAbusive Trust Guilty Plea Victory.
[152] In a March 5, 2003 press release, the Department of Justice announced that
two former administrators of the Institute of Global Prosperity (IGP) admitted in
federal court in Charleston, S.C., that they used a foreign bank account to commit
tax evasion. Shoshana B. Szuch, former Director of Operations of IGP, and her
husband, Jeffrey S. Szuch, a former IGP conference planner, each entered a guilty
plea before U.S. District Judge David C. Horton.
[153] According to the charging document filed in court, the Szuchs were
administrators of the Institute of Global Prosperity (IGP), an organization that
hosted offshore seminars for promoters of abusive trusts and anti-tax schemes.
IGP was also known by other names, including Global Prosperity Marketing
Group (GPMG) and Global Prosperity Group (GPG). Members of IGP marketed
and sold various IGP products, including an education course named Global 1
priced at $ 1,250; a ticket to a three-day offshore seminar named Global 2
priced at $ 6,250; and a ticket to a five-day offshore seminar named Global 3
priced at $ 18,750. The Global 2 and Global 3 seminars brought together portions
of the IGP membership to hear, among other things, presentations by individuals
and organizations involved in the sale and operation of foreign trusts designed in
part to conceal income from the IRS.
[154] Shoshana Szuch marketed and sold IGP products from the fall of 1996 until
the fall of 1997 and was the Director of Operations of IGP from the fall of 1997
through February 2001, according to documents filed in court. Her husband,
Jeffrey Szuch, assisted her in selling IGP products and planning offshore
conferences hosted by IGP.
[155] On or about Sept. 4, 1997, Shoshana Szuch and Jeffrey Szuch purchased an
International Business Corporation (IBC) and related offshore bank account in the
name of Oro Blanco, Ltd. This bank account, located in Antigua, was used by the
Szuchs to conceal the income paid to Shoshana Szuch by IGP and the income
earned from the sale of IGP products. Shoshana and Jeffrey Szuch failed to file a
1997 tax return despite having approximately $ 62,540 in taxable income from
IGP-related activities, upon which they owed approximately $ 21,051 in income
tax.

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[156] The plea agreement requires the Szuchs to cooperate fully with the
government regarding their involvement and the involvement of others with IGP
and to cooperate with the IRS in the ascertainment, computation, and payment of
their correct federal income tax liability for 1997 through 1999. The maximum
statutory penalties for tax evasion are imprisonment for five years, release under
court supervision for three years and a fine of $ 250,000. No sentencing date has
been set for the Szuchs.
[157] A member of IGP, Margo E. Jordan, pled guilty to tax evasion regarding her
1997 income taxes in the District of Maine on Feb. 28, 2003.
12. Conclusion.
[158] Mr. Chairman, combating these abusive scams and schemes is our number
one compliance priority. More than sapping the government of badly needed
revenues, they undermine the confidence of honest taxpayers in the fairness of our
time-honored system of voluntary compliance. I am pleased to report the progress
we have made over the past year to identify the promoters and participants and to
shut some schemes down. Clearly, we have a much better grip on the situation
than we did a year ago. But clearly too, we still have much work to do. Yet I am
convinced that if we stay the course we are on today, we can succeed.
G. Conflicting Opinions Regarding Success of the Offshore Initiative. Treasury Assistant
Secretary for Tax Policy stated that the Offshore Voluntary Compliance Initiative was a
success.457 The Wall Street Journal reports that the IRS admits the Offshore Voluntary
Compliance Initiative failed.458 The IRS was premature in its negative assessment because
individuals who came forward under the Offshore Voluntary Compliance Initiative divulged the
names of foreign banks, foreign financial institutions, U.S. and foreign service providers, U.S.
and foreign lawyers, and other professionals who helped with the structuring of accounts, trusts,
international business companies, limited liability companies, offshore life insurance, and etc.,
where the failure to file required tax returns (including the TD F 90-22.1) and the failure to
report income were involved.
H. FinCEN Transfers Enforcement Authority To IRS to Crack Down on Offshore Accounts.459
On April 10, 2003, FinCEN announced an agreement that FinCEN delegates its enforcement
authority for foreign bank and financial account reporting to the IRS. The agreement marks
another step by the IRS to find individuals with undisclosed overseas accounts.460 The agreement
provides IRS responsibility to oversee the filing of foreign bank and financial account reports
(FBARs) under the Bank Secrecy Act. The form for these filings is the TD F 90-22.1, the
457 See John D. McKinnon, I.R.S. Admits Offshore Tax Amnesty Failed Washington,
THE WALL STREET JOURNAL, May 2, 2003.
458 Statement by Treasury Assistant Secretary for Tax Policy Pam Olson on the
Results of the Offshore Initiative (May 1, 2003)
http://www.treas.gov/press/releases/js353.htm.
459 IR-2003-46, at http://www.irs.gov/newsroom/article/0,,id=108608,00.html.
460 News Release (IR-2003-48) Internal Revenue Service.

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Foreign Bank and Financial Account Report (previously discussed). IRS agents who are
focusing on the use of offshore bank payment cards to avoid reporting income will also be
recommending assertion of penalties under the statute governing FBARs.
I. Conclusion Regarding John Doe Summonses Cases. Mr. Mathewson of Guardian Bank &
Trust (Cayman) Ltd.461 provided extremely helpful information, as well as the secret code to
Guardians files to the F.B.I. that may have pierced the secrecy of other banks. The F.B.I. turned
this information over to the IRS. The U.S. Department of Justice obtained an ex parte order from
the U.S. District Court, Southern District of Florida, granting the serving of John Doe
summonses on MasterCard International and American Express Travel Related Services Co.
After the IRS began obtaining requested information from MasterCard International and
American Express Travel Related Services Co., the Department of Justice, with the help of the
IRS, filed the John Doe summonses case in San Francisco against the larger credit card company,
Visa International involving 30 jurisdictions. In addition, the IRS has substantial information in
its files due to targeting certain promoters and their promotions and sales of fraudulent schemes
and structures to U.S. persons. The IRS identified these promoters primarily from attending
conferences sponsored by promoters, both inside and outside the U.S., as well as reading books
written by promoters and searching the Internet. Due to this substantial information in the hands
of the IRS, U.S. persons who have used unreported accounts to discharge credit and debit card
liabilities are potentially facing serious criminal charges, including tax fraud, tax evasion, money
laundering, failure to file the TD F 90-22.1 report, and etc. Such U.S. persons must either attempt
to come clean with the IRS or face indictments. Lawyers who represent U.S. persons facing
money laundering charges or criminal tax fraud and/or tax evasion charges must understand that
the issues are complex and serious.462 It is recommended that knowledgeable practicing tax
lawyers experienced in the planning areas of offshore structuring and criminal tax lawyers
represent such U.S. persons.
J. Conclusion Regarding the Offshore Voluntary Compliance Initiative. The primary purpose of
the Offshore Voluntary Compliance Initiative program was to allow individuals to come clean
with lessoned penalties, in some cases, in exchange for their divulging the names of foreign
banks, foreign financial institutions, U.S. and foreign service providers, U.S. and foreign
lawyers, and other professionals who helped with the structuring of accounts, trusts, international
business companies, limited liability companies, offshore life insurance, and etc., where the
failure to file required tax returns (including the TD F 90-22.1) and the failure to report income
were involved. The IRS has compared the names, divulged by these individuals, with the names
resulting from the John Doe Summonses cases, names divulged at audits of tax shelter
promoters clients, checking promoters Web sites, and attending promoters conferences. With
this information, the IRS has determined those parties who have helped U.S. persons enter into
structures or open accounts without complying with the law, as well as foreign banks and foreign
financial institutions that are holding those accounts on behalf of U.S. persons.
IX.Discussion Questions
461 United States v. Mathewson, 1993 U.S. Dist. LEXIS 3931 (S.D. Fla. 1993),
motion granted, 839 F. Supp. 858 (S.D. Fla. 1993).
462 See Scott D. Michel, Advising a Client with Secret Offshore AccountsCurrent Filing and Reporting Problems,
91 J. OF TAXATION 158, Warren, Gorham and Lamont (1999).

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1. What are the three primary cycles to the money laundering process?
2. What are the elements of the money laundering crime under both Section 1956 and Section
1957?
3. What are the differences between a financial transaction under Section 1956 and a monetary
transaction under Section 1957? Explain how the U.S. government and the U.S. district courts
can obtain extraterritorial jurisdiction with respect to commission of money laundering crimes.
4. What are the criminal fines and civil penalties for money laundering transactions?
5. What are the varying views of the U.S. judicial circuit courts and views of the requirements
for finding proceeds of crime?
6. What are the key elements of the Civil Asset Forfeiture Reform Act of 2000?
7. What assets are subject to criminal or civil forfeiture?
8. Must assets be traced back to some wrongdoing with respect to criminal civil forfeiture and
how does the "facilitation" theory apply?
9. Explain the purpose of the U.S. Department of Justice filing a John Doe Summonses case and
how can this lead to money laundering, as well as tax fraud or tax evasion.

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APPENDIX A
MONEY LAUNDERING CONTROL ACT OF 1986
18 USC Sec. 1956

TITLE 18 - CRIMES AND CRIMINAL PROCEDURE

PART I - CRIMES
CHAPTER 95 - RACKETEERING
Sec. 1956. Laundering of monetary instruments
(a)(1) Whoever, knowing that the property involved in a financial transaction represents the
proceeds of some form of unlawful activity, conducts or attempts to conduct such a financial
transaction which in fact involves the proceeds of specified unlawful activity (A)(i) with the intent to promote the carrying on of specified unlawful activity; or
(ii) with intent to engage in conduct constituting a violation of section 7201 or 7206 of the
Internal Revenue Code of 1986; or
(B) knowing that the transaction is designed in whole or in part
(i) to conceal or disguise the nature, the location, the source, the ownership, or the control of the
proceeds of specified unlawful activity; or
(ii) to avoid a transaction reporting requirement under State or Federal law, shall be sentenced to
a fine of not more than $500,000 or twice the value of the property involved in the transaction,
whichever is greater, or imprisonment for not more than twenty years, or both.
(2) Whoever transports, transmits, or transfers, or attempts to transport, transmit, or transfer a
monetary instrument or funds from a place in the United States to or through a place outside the
United States or to a place in the United States from or through a place outside the United States

(A) with the intent to promote the carrying on of specified unlawful activity; or
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(B) knowing that the monetary instrument or funds involved in the transportation, transmission,
or transfer represent the proceeds of some form of unlawful activity and knowing that such
transportation, transmission, or transfer is designed in whole or in part
(i) to conceal or disguise the nature, the location, the source, the ownership, or the control of the
proceeds of specified unlawful activity; or
(ii) to avoid a transaction reporting requirement under State or Federal law, shall be sentenced to
a fine of not more than $500,000 or twice the value of the monetary instrument or funds involved
in the transportation, transmission, or transfer, whichever is greater, or imprisonment for not
more than twenty years, or both. For the purpose of the offense described in subparagraph (B),
the defendant's knowledge may be established by proof that a law enforcement officer
represented the matter specified in subparagraph (B) as true, and the defendant's subsequent
statements or actions indicate that the defendant believed such representations to be true.
(3) Whoever, with the intent
(A) to promote the carrying on of specified unlawful activity;
(B) to conceal or disguise the nature, location, source, ownership, or control of property believed
to be the proceeds of specified unlawful activity; or
(C) to avoid a transaction reporting requirement under State or Federal law, conducts or attempts
to conduct a financial transaction involving property represented to be the proceeds of specified
unlawful activity, or property used to conduct or facilitate specified unlawful activity, shall be
fined under this title or imprisoned for not more than 20 years, or both. For purposes of this
paragraph and paragraph (2), the term ''represented'' means any representation made by a law
enforcement officer or by another person at the direction of, or with the approval of, a Federal
official authorized to investigate or prosecute violations of this section.
(b) PENALTIES.
(1) IN GENERAL.--; Whoever conducts or attempts to conduct a transaction described in
subsection (a)(1) or (a)(3), or section 1957, or a transportation, transmission, or transfer
described in subsection (a)(2), is liable to the United States for a civil penalty of not more than
the greater of
(A) the value of the property, funds, or monetary instruments involved in the transaction; or
(B) $10,000.
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(2) JURISDICTION OVER FOREIGN PERSONS.

For purposes of adjudicating an action filed or enforcing a penalty ordered under this section, the
district courts shall have jurisdiction over any foreign person, including any financial institution
authorized under the laws of a foreign country, against whom the action is brought, if service of
process upon the foreign person is made under the Federal Rules of Civil Procedure or the laws
of the country in which the foreign person is found, and
(A) the foreign person commits an offense under subsection (a) involving a financial transaction
that occurs in whole or in part in the United States; (B) the foreign person converts, to his or her
own use, property in which the United States has an ownership interest by virtue of the entry of
an order of forfeiture by a court of the United States; or
(C) the foreign person is a financial institution that maintains a bank account at a financial
institution in the United States.
(3) COURT AUTHORITY OVER ASSETS.A court described in paragraph (2) may issue a
pretrial restraining order or take any other action necessary to ensure that any bank account or
other property held by the defendant in the United States is available to satisfy a judgment under
this section.
(4) FEDERAL RECEIVER.
(A) IN GENERAL.A court described in paragraph (2) may appoint a Federal Receiver, in
accordance with subparagraph (B) of this paragraph, to collect, marshal, and take custody,
control, and possession of all assets of the defendant, wherever located, to satisfy a civil
judgment under this subsection, a forfeiture judgment under section 981 or 982, or a criminal
sentence under section 1957 or subsection (a) of this section, including an order of restitution to
any victim of a specified unlawful activity.
(B) APPOINTMENT AND AUTHORITY.A Federal Receiver described in subparagraph
(A)
(i) may be appointed upon application of a Federal prosecutor or a Federal or State regulator, by
the court having jurisdiction over the defendant in the case;
(ii) shall be an officer of the court, and the powers of the Federal Receiver shall include the
powers set out in section 754 of title 28, United States Code; and
(iii) shall have standing equivalent to that of a Federal prosecutor for the purpose of submitting
requests to obtain information regarding the assets of the defendant
(I) from the Financial Crimes Enforcement Network of the Department of the Treasury; or
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(II) from a foreign country pursuant to a mutual legal assistance treaty, multilateral agreement, or
other arrangement for international law enforcement assistance, provided that such requests are
in accordance with the policies and procedures of the Attorney General.
(c) As used in this section
(1) the term ''knowing that the property involved in a financial transaction represents the
proceeds of some form of unlawful activity'' means that the person knew the property involved in
the transaction represented proceeds from some form, though not necessarily which form, of
activity that constitutes a felony under State, Federal, or foreign law, regardless of whether or not
such activity is specified in paragraph (7);
(2) the term ''conducts'' includes initiating, concluding, or participating in initiating, or
concluding a transaction;
(3) the term ''transaction'' includes a purchase, sale, loan, pledge, gift, transfer, delivery, or other
disposition, and with respect to a financial institution includes a deposit, withdrawal, transfer
between accounts, exchange of currency, loan, extension of credit, purchase or sale of any stock,
bond, certificate of deposit, or other monetary instrument, use of a safe deposit box, or any other
payment, transfer, or delivery by, through, or to a financial institution, by whatever means
effected;
(4) the term ''financial transaction'' means (A) a transaction which in any way or degree affects
interstate or foreign commerce (i) involving the movement of funds by wire or other means or
(ii) involving one or more monetary instruments, or (iii) involving the transfer of title to any real
property, vehicle, vessel, or aircraft, or (B) a transaction involving the use of a financial
institution which is engaged in, or the activities of which affect, interstate or foreign commerce
in any way ordegree;
(5) the term ''monetary instruments'' means (i) coin or currency of the United States or of any
other country, travelers' checks, personal checks, bank checks, and money orders, or (ii)
investment securities or negotiable instruments, in bearer form or otherwise in such form that
title thereto passes upon delivery;
(6) the term financial institution includes
(A) any financial institution, as defined in section 5312(a)(2) of title 31, United States Code, or
the regulations promulgated thereunder; and
(B) any foreign bank, as defined in section 1 of the International Banking Act of 1978 (12 U.S.C.
3101).
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(7) the term ''specified unlawful activity'' means

(A) any act or activity constituting an offense listed in section 1961(1) of this title except an act
which is indictable under subchapter II of chapter 53 of title 31;
(B) with respect to a financial transaction occurring in whole or in part in the United States, an
offense against a foreign nation involving
(i) the manufacture, importation, sale, or distribution of a controlled substance (as such term is
defined for the purposes of the Controlled Substances Act);
(ii) murder, kidnapping, robbery, extortion, or destruction of property by means of explosive or
fire, or a crime of violence (as defined in section 16); (FOOTNOTE 1)
(FOOTNOTE 1) So in original. Probably should be followed by ''or''.
(iii) fraud, or any scheme or attempt to defraud, by or against a foreign bank (as defined in
paragraph 7 of section 1(b) of the International Banking Act of 1978);
(iv) bribery of a public official, or the misappropriation, theft, or embezzlement of public funds
by or for the benefit of a public official;
(v) smuggling or export control violations involving
(I) an item controlled on the United States Munitions List established under section 38 of the
Arms Export Control Act (22 U.S.C. 2778); or
(II) an item controlled under regulations under the Export Administration Regulations (15 C.F.R.
Parts 730774); or
(vi) an offense with respect to which the United States would be obligated by a multilateral
treaty, either to extradite the alleged offender or to submit the case for prosecution, if the
offender were found within the territory of the United States;
(C) any act or acts constituting a continuing criminal enterprise, as that term is defined in section
408 of the Controlled Substances Act (21 U.S.C. 848);
(D) an offense under section 32 (relating to the destruction of aircraft), section 37 (relating to
violence at international airports), section 115 (relating to influencing, impeding, or retaliating
against a Federal official by threatening or injuring a family member), section 152 (relating to
concealment of assets; false oaths and claims; bribery), section 215 (relating to commissions or
gifts for procuring loans), section 351 (relating to congressional or Cabinet officer assassination),
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any of sections 500 through 503 (relating to certain counterfeiting offenses), section 513 (relating
to securities of States and private entities), section 541 (relating to goods falsely classified),
section 542 (relating to entry of goods by means of false statements), section 545 (relating to
smuggling goods into the United States), section 549 (relating to removing goods from Customs
custody), section 641 (relating to public money, property, or records), section 656 (relating to
theft, embezzlement, or misapplication by bank officer or employee), section 657 (relating to
lending, credit, and insurance institutions), section 658 (relating to property mortgaged or
pledged to farm credit agencies), section 666 (relating to theft or bribery concerning programs
receiving Federal funds), section 793, 794, or 798 (relating to espionage), section 831 (relating to
prohibited transactions involving nuclear materials), section 844(f) or (i) (relating to destruction
by explosives or fire of Government property or property affecting interstate or foreign
commerce), section 875 (relating to interstate communications), section 922(1) (relating to the
unlawful importation of firearms), section 924(n) (relating to firearms trafficking), section 956
(relating to conspiracy to kill, kidnap, maim, or injure certain property in a foreign country),
section 1005 (relating to fraudulent bank entries), 1006 (FOOTNOTE 2) (relating to fraudulent
Federal credit institution entries), 1007 (FOOTNOTE 2) (relating to Federal Deposit Insurance
transactions), 1014 (FOOTNOTE 2) (relating to fraudulent loan or credit applications), section
1030 (relating to computer fraud and abuse), 1032 (FOOTNOTE 2) (relating to concealment of
assets from conservator, receiver, or liquidating agent of financial institution), section 1111
(relating to murder), section 1114 (relating to murder of United States law enforcement officials),
section 1116 (relating to murder of foreign officials, official guests, or internationally protected
persons), section 1201 (relating to kidnaping), section 1203 (relating to hostage taking), section
1361 (relating to willful injury of Government property), section 1363 (relating to destruction of
property within the special maritime and territorial jurisdiction), section 1708 (theft from the
mail), section 1751 (relating to Presidential assassination), section 2113 or 2114 (relating to bank
and postal robbery and theft), section 2280 (relating to violence against maritime navigation),
section 2281 (relating to violence against maritime fixed platforms), section 2319 (relating to
copyright infringement), section 2320 (relating to trafficking in counterfeit goods and services),
(FOOTNOTE 3) section 2332 (relating to terrorist acts abroad against United States nationals),
section 2332a (relating to use of weapons of mass destruction), section 2332b (relating to
international terrorist acts transcending national boundaries), or section 2339A (relating to
providing material support to terrorists) of this title, section 46502 of title 49, United States
Code, (FOOTNOTE 3) a felony violation of the Chemical Diversion and Trafficking Act of 1988
(relating to precursor and essential chemicals), section 590 of the Tariff Act of 1930 (19 U.S.C.
1590) (relating to aviation smuggling), section 422 of the Controlled Substances Act (relating to
transportation of drug paraphernalia), section 38(c) (relating to criminal violations) of the Arms
Export Control Act, section 11 (relating to violations) of the Export Administration Act of 1979,
section 206 (relating to penalties) of the International Emergency Economic Powers Act, section
16 (relating to offenses and punishment) of the Trading with the Enemy Act, any felony violation
of section 15 of the Food Stamp Act of 1977 (relating to food stamp fraud) involving a quantity
of coupons having a value of not less than $5,000, any violation of section 543(a)(1) of the
Housing Act of 1949 (relating to equity skimming), any felony violation of the Foreign Agents
Registration Act of 1938, or any felony violation of the Foreign Corrupt Practices Act; or
(FOOTNOTE 2) So in original. Probably should be preceded by ''section''. (FOOTNOTE 3) So
in original.
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ENVIRONMENTAL CRIMES
(E) a felony violation of the Federal Water Pollution Control Act (33 U.S.C. 1251 et seq.), the
Ocean Dumping Act (33 U.S.C. 1401 et seq.), the Act to Prevent Pollution from Ships (33 U.S.C.
1901 et seq.), the Safe Drinking Water Act (42 U.S.C. 300f et seq.), or the Resources
Conservation and Recovery Act (42 U.S.C. 6901 et seq.).
(F) Any (FOOTNOTE 4) act or activity constituting an offense involving a Federal health care
offense. (FOOTNOTE 4) So in original. Probably should not be capitalized.
(8) the term ''State'' includes a State of the United States, the District of Columbia, and any
commonwealth, territory, or possession of the United States.
(d) Nothing in this section shall supersede any provision of Federal, State, or other law imposing
criminal penalties or affording civil remedies in addition to those provided for in this section.
(e) Violations of this section may be investigated by such components of the Department of
Justice as the Attorney General may direct, and by such components of the Department of the
Treasury as the Secretary of the Treasury may direct, as appropriate and, with respect to offenses
over which the United States Postal Service has jurisdiction, by the Postal Service. Such
authority of the Secretary of the Treasury and the Postal Service shall be exercised in accordance
with an agreement which shall be entered into by the Secretary of the Treasury, the Postal
Service, and the Attorney General. Violations of this section involving offenses described in
paragraph (c)(7)(E) may be investigated by such components of the Department of Justice as the
Attorney General may direct, and the National Enforcement Investigations Center of the
Environmental Protection Agency.
(f) There is extraterritorial jurisdiction over the conduct prohibited by this section if
(1) the conduct is by a United States citizen or, in the case of a non-United States citizen, the
conduct occurs in part in the United States; and
(2) the transaction or series of related transactions involves funds or monetary instruments of a
value exceeding $10,000.
(g) Notice of Conviction of Financial Institutions. - If any financial institution or any officer,
director, or employee of any financial institution has been found guilty of an offense under this
section, section 1957 or 1960 of this title, or section 5322 or 5324 of title 31, the Attorney
General shall provide written notice of such fact to the appropriate regulatory agency for the
financial institution.
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(h) Any person who conspires to commit any offense defined in this section or section 1957 shall
be subject to the same penalties as those prescribed for the offense the commission of which was
the object of the conspiracy.
18 USC Sec. 1957
TITLE 18 - CRIMES AND CRIMINAL PROCEDURE
PART I - CRIMES
CHAPTER 95 - RACKETEERING
Sec. 1957Engaging in monetary transactions in property derived from specified unlawful
activity
(a) Whoever, in any of the circumstances set forth in subsection (d), knowingly engages or
attempts to engage in a monetary transaction in criminally derived property of a value greater
than $10,000 and is derived from specified unlawful activity, shall be punished as provided in
subsection (b).
(b)
(1) Except as provided in paragraph (2), the punishment for an offense under this section is a fine
under title 18, United States Code, or imprisonment for not more than ten years or both.
(2) The court may impose an alternate fine to that imposable under paragraph (1) of not more
than twice the amount of the criminally derived property involved in the transaction.
(c) In a prosecution for an offense under this section, the Government is not required to prove the
defendant knew that the offense from which the criminally derived property was derived was
specified unlawful activity.
(d) The circumstances referred to in subsection (a) are
(1) that the offense under this section takes place in the United States or in the special maritime
and territorial jurisdiction of the United States; or
(2) that the offense under this section takes place outside the United States and such special
jurisdiction, but the defendant is a United States person (as defined in section 3077 of this title,
but excluding the class described in paragraph (2)(D) of such section).
(e) Violations of this section may be investigated by such components of the Department of
Justice as the Attorney General may direct, and by such components of the Department of the
Treasury as the Secretary of the Treasury may direct, as appropriate and, with respect to offenses
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over which the United States Postal Service has jurisdiction, by the Postal Service. Such
authority of the Secretary of the Treasury and the Postal Service shall be exercised in accordance
with an agreement which shall be entered into by the Secretary of the Treasury, the Postal
Service, and the Attorney General.
(f) As used in this section
(1) the term monetary transaction means the deposit, withdrawal, transfer, or exchange, in or
affecting interstate or foreign commerce, of funds or a monetary instrument (as defined in section
1956 (c)(5) of this title) by, through, or to a financial institution (as defined in section 1956 of
this title), including any transaction that would be a financial transaction under section 1956 (c)
(4)(B) of this title, but such term does not include any transaction necessary to preserve a
persons right to representation as guaranteed by the sixth amendment to the Constitution;
(2) the term criminally derived property means any property constituting, or derived from,
proceeds obtained from a criminal offense; and
(3) the term specified unlawful activity has the meaning given that term in section 1956 of this
title.

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APPENDIX B
CIVIL ASSET FORFEITURE REFORM ACT OF 2000
18 USC 981 (2004)
981. Civil forfeiture
(a)(1) The following property, real or personal, is subject to forfeiture to the United States:
(A) Any property, real or personal, involved in a transaction or attempted transaction in violation
of section 1956, 1957 or 1960 of this title, or any property traceable to such property.
(B) Any property, real or personal, within the jurisdiction of the United States, constituting,
derived from, or traceable to, any proceeds obtained directly or indirectly from an offense against
a foreign nation, or any property used to facilitate such an offense, if the offense
(i) involves the manufacture, importation, sale, or distribution of a controlled substance (as that
term is defined for purposes of the Controlled Substances Act), or any other conduct described in
section 1956(c)(7)(B);
(ii) would be punishable within the jurisdiction of the foreign nation by death or imprisonment
for a term exceeding 1 year; and
(iii) would be punishable under the laws of the United States by imprisonment for a term
exceeding 1 year, if the act or activity constituting the offense had occurred within the
jurisdiction of the United States.
(C) Any property, real or personal, which constitutes or is derived from proceeds traceable to a
violation of section 215, 471, 472, 473, 474, 476, 477, 478, 479, 480, 481, 485, 486, 487, 488,
501, 502, 510, 542, 545, 656, 657, 842, 844, 1005, 1006, 1007, 1014, 1028, 1029, 1030, 1032, or
1344 of this title or any offense constituting "specified unlawful activity" (as defined in section
1956(c)(7) of this title), or a conspiracy to commit such offense.
(D) Any property, real or personal, which represents or is traceable to the gross receipts obtained,
directly or indirectly, from a violation of
(i) section 666(a)(1) (relating to Federal program fraud);
(ii) section 1001 (relating to fraud and false statements);
(iii) section 1031 (relating to major fraud against the United States);
(iv) section 1032 (relating to concealment of assets from conservator or receiver of insured
financial institution);
(v) section 1341 (relating to mail fraud); or

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(vi) section 1343 (relating to wire fraud), if such violation relates to the sale of assets acquired or
held by the Resolution Trust Corporation, the Federal Deposit Insurance Corporation, as
conservator or receiver for a financial institution, or any other conservator for a financial
institution appointed by the Office of the Comptroller of the Currency or the Office of Thrift
Supervision or the National Credit Union Administration, as conservator or liquidating agent for
a financial institution.
(E) With respect to an offense listed in subsection (a)(1)(D) committed for the purpose of
executing or attempting to execute any scheme or artifice to defraud, or for obtaining money or
property by means of false or fraudulent statements, pretenses, representations or promises, the
gross receipts of such an offense shall include all property, real or personal, tangible or
intangible, which thereby is obtained, directly or indirectly.
(F) Any property, real or personal, which represents or is traceable to the gross proceeds
obtained, directly or indirectly, from a violation of
(i) section 511 (altering or removing motor vehicle identification numbers);
(ii) section 553 (importing or exporting stolen motor vehicles);
(iii) section 2119 (armed robbery of automobiles);
(iv) section 2312 (transporting stolen motor vehicles in interstate commerce); or
(v) section 2313 (possessing or selling a stolen motor vehicle that has moved in interstate
commerce).
(G) All assets, foreign or domestic
(i) of any individual, entity, or organization engaged in planning or perpetrating any act of
domestic or international terrorism (as defined in section 2331) against the United States, citizens
or residents of the United States, or their property, and all assets, foreign or domestic, affording
any person a source of influence over any such entity or organization;
(ii) acquired or maintained by any person with the intent and for the purpose of supporting,
planning, conducting, or concealing an act of domestic or international terrorism (as defined in
section 2331) against the United States, citizens or residents of the United States, or their
property; or
(iii) derived from, involved in, or used or intended to be used to commit any act of domestic or
international terrorism (as defined in section 2331) against the United States, citizens or residents
of the United States, or their property.
(H) Any property, real or personal, involved in a violation or attempted violation, or which
constitutes or is derived from proceeds traceable to a violation, of section 2339C of this title.

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(2) For purposes of paragraph (1), the term "proceeds" is defined as follows:
(A) In cases involving illegal goods, illegal services, unlawful activities, and telemarketing and
health care fraud schemes, the term "proceeds" means property of any kind obtained directly or
indirectly, as the result of the commission of the offense giving rise to forfeiture, and any
property traceable thereto, and is not limited to the net gain or profit realized from the offense.
(B) In cases involving lawful goods or lawful services that are sold or provided in an illegal
manner, the term "proceeds" means the amount of money acquired through the illegal
transactions resulting in the forfeiture, less the direct costs incurred in providing the goods or
services. The claimant shall have the burden of proof with respect to the issue of direct costs. The
direct costs shall not include any part of the overhead expenses of the entity providing the goods
or services, or any part of the income taxes paid by the entity.
(C) In cases involving fraud in the process of obtaining a loan or extension of credit, the court
shall allow the claimant a deduction from the forfeiture to the extent that the loan was repaid, or
the debt was satisfied, without any financial loss to the victim.
(b) (1) Except as provided in section 985, any property subject to forfeiture to the United States
under subsection (a) may be seized by the Attorney General and, in the case of property involved
in a violation investigated by the Secretary of the Treasury or the United States Postal Service,
the property may also be seized by the Secretary of the Treasury or the Postal Service,
respectively.
(2) Seizures pursuant to this section shall be made pursuant to a warrant obtained in the same
manner as provided for a search warrant under the Federal Rules of Criminal Procedure, except
that a seizure may be made without a warrant if
(A) a complaint for forfeiture has been filed in the United States district court and the court
issued an arrest warrant in rem pursuant to the Supplemental Rules for Certain Admiralty and
Maritime Claims;
(B) there is probable cause to believe that the property is subject to forfeiture and
(i) the seizure is made pursuant to a lawful arrest or search; or
(ii) another exception to the Fourth Amendment warrant requirement would apply; or
(C) the property was lawfully seized by a State or local law enforcement agency and transferred
to a Federal agency.
(3) Notwithstanding the provisions of rule 41(a) of the Federal Rules of Criminal Procedure, a
seizure warrant may be issued pursuant to this subsection by a judicial officer in any district in
which a forfeiture action against the property may be filed under section 1355(b) of title 28, and
may be executed in any district in which the property is found, or transmitted to the central

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authority of any foreign state for service in accordance with any treaty or other international
agreement. Any motion for the return of property seized under this section shall be filed in the
district court in which the seizure warrant was issued or in the district court for the district in
which the property was seized.
(4)(A) If any person is arrested or charged in a foreign country in connection with an offense that
would give rise to the forfeiture of property in the United States under this section or under the
Controlled Substances Act, the Attorney General may apply to any Federal judge or magistrate
judge in the district in which the property is located for an ex parte order restraining the property
subject to forfeiture for not more than 30 days, except that the time may be extended for good
cause shown at a hearing conducted in the manner provided in rule 43(e) of the Federal Rules of
Civil Procedure.
(B) The application for the restraining order shall set forth the nature and circumstances of the
foreign charges and the basis for belief that the person arrested or charged has property in the
United States that would be subject to forfeiture, and shall contain a statement that the restraining
order is needed to preserve the availability of property for such time as is necessary to receive
evidence from the foreign country or elsewhere in support of probable cause for the seizure of
the property under this subsection.
(c) Property taken or detained under this section shall not be repleviable, but shall be deemed to
be in the custody of the Attorney General or the Secretary of the Treasury, as the case may be,
subject only to the orders and decrees of the court or the official having jurisdiction thereof.
Whenever property is seized under this subsection, the Attorney General, the Secretary of the
Treasury, or the Postal Service, as the case may be, may
(1) place the property under seal;
(2) remove the property to a place designated by him; or
(3) require that the General Services Administration take custody of the property and remove it,
if practicable, to an appropriate location for disposition in accordance with law.
(d) For purposes of this section, the provisions of the customs laws relating to the seizure,
summary and judicial forfeiture, condemnation of property for violation of the customs laws, the
disposition of such property or the proceeds from the sale of such property under this section, the
remission or mitigation of such forfeitures, and the compromise of claims (19 U.S.C. 1602 et
seq.), insofar as they are applicable and not inconsistent with the provisions of this section, shall
apply to seizures and forfeitures incurred, or alleged to have been incurred, under this section,
except that such duties as are imposed upon the customs officer or any other person with respect
to the seizure and forfeiture of property under the customs laws shall be performed with respect
to seizures and forfeitures of property under this section by such officers, agents, or other persons
as may be authorized or designated for that purpose by the Attorney General, the Secretary of the
Treasury, or the Postal Service, as the case may be. The Attorney General shall have sole
responsibility for disposing of petitions for remission or mitigation with respect to property
involved in a judicial forfeiture proceeding.

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(e) Notwithstanding any other provision of the law, except section 3 of the Anti Drug Abuse Act
of 1986 [21 USCS 801 note], the Attorney General, the Secretary of the Treasury, or the Postal
Service, as the case may be, is authorized to retain property forfeited pursuant to this section, or
to transfer such property on such terms and conditions as he may determine
(1) to any other Federal agency;
(2) to any State or local law enforcement agency which participated directly in any of the acts
which led to the seizure or forfeiture of the property;
(3) in the case of property referred to in subsection (a)(1)(C), to any Federal financial institution
regulatory agency
(A) to reimburse the agency for payments to claimants or creditors of the institution; and
(B) to reimburse the insurance fund of the agency for losses suffered by the fund as a result of
the receivership or liquidation;
(4) in the case of property referred to in subsection (a)(1)(C), upon the order of the appropriate
Federal financial institution regulatory agency, to the financial institution as restitution, with the
value of the property so transferred to be set off against any amount later recovered by the
financial institution as compensatory damages in any State or Federal proceeding;
(5) in the case of property referred to in subsection (a)(1)(C), to any Federal financial institution
regulatory agency, to the extent of the agency's contribution of resources to, or expenses involved
in, the seizure and forfeiture, and the investigation leading directly to the seizure and forfeiture,
of such property;
(6) as restoration to any victim of the offense giving rise to the forfeiture, including, in the case
of a money laundering offense, any offense constituting the underlying specified unlawful
activity; or
(7) In [in] the case of property referred to in subsection (a)(1)(D), to the Resolution Trust
Corporation, the Federal Deposit Insurance Corporation, or any other Federal financial
institution regulatory agency (as defined in section 8(e)(7)(D) of the Federal Deposit Insurance
Act [12 USCS 1818(e)(7)(D)]).
The Attorney General or the Secretary of the Treasury, as the case may be, shall ensure the
equitable transfer pursuant to paragraph (2) of any forfeited property to the appropriate State or
local law enforcement agency so as to reflect generally the contribution of any such agency
participating directly in any of the acts which led to the seizure or forfeiture of such property. A
decision by the Attorney General or the Secretary of the Treasury pursuant to paragraph (2) shall
not be subject to review. The United States shall not be liable in any action arising out of the use
of any property the custody of which was transferred pursuant to this section to any non-Federal
agency. The Attorney General or the Secretary of the Treasury may order the discontinuance of

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any forfeiture proceedings under this section in favor of the institution of forfeiture proceedings
by State or local authorities under an appropriate State or local statute. After the filing of a
complaint for forfeiture under this section, the Attorney General may seek dismissal of the
complaint in favor of forfeiture proceedings under State or local law. Whenever forfeiture
proceedings are discontinued by the United States in favor of State or local proceedings, the
United States may transfer custody and possession of the seized property to the appropriate State
or local official immediately upon the initiation of the proper actions by such officials. Whenever
forfeiture proceedings are discontinued by the United States in favor of State or local
proceedings, notice shall be sent to all known interested parties advising them of the
discontinuance or dismissal. The United States shall not be liable in any action arising out of the
seizure, detention, and transfer of seized property to State or local officials. The United States
shall not be liable in any action arising out of a transfer under paragraph (3), (4), or (5) of this
subsection.
(f) All right, title, and interest in property described in subsection (a) of this section shall vest in
the United States upon commission of the act giving rise to forfeiture under this section.
(g) (1) Upon the motion of the United States, the court shall stay the civil forfeiture proceeding if
the court determines that civil discovery will adversely affect the ability of the Government to
conduct a related criminal investigation or the prosecution of a related criminal case.
(2) Upon the motion of a claimant, the court shall stay the civil forfeiture proceeding with
respect to that claimant if the court determines that
(A) the claimant is the subject of a related criminal investigation or case;
(B) the claimant has standing to assert a claim in the civil forfeiture proceeding; and
(C) continuation of the forfeiture proceeding will burden the right of the claimant against selfincrimination in the related investigation or case.
(3) With respect to the impact of civil discovery described in paragraphs (1) and (2), the court
may determine that a stay is unnecessary if a protective order limiting discovery would protect
the interest of one party without unfairly limiting the ability of the opposing party to pursue the
civil case. In no case, however, shall the court impose a protective order as an alternative to a
stay if the effect of such protective order would be to allow one party to pursue discovery while
the other party is substantially unable to do so.
(4) In this subsection, the terms "related criminal case" and "related criminal investigation" mean
an actual prosecution or investigation in progress at the time at which the request for the stay, or
any subsequent motion to lift the stay is made. In determining whether a criminal case or
investigation is "related" to a civil forfeiture proceeding, the court shall consider the degree of
similarity between the parties, witnesses, facts, and circumstances involved in the two
proceedings, without requiring an identity with respect to any one or more factors.
(5) In requesting a stay under paragraph (1), the Government may, in appropriate cases, submit

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evidence ex parte in order to avoid disclosing any matter that may adversely affect an ongoing
criminal investigation or pending criminal trial.
(6) Whenever a civil forfeiture proceeding is stayed pursuant to this subsection, the court shall
enter any order necessary to preserve the value of the property or to protect the rights of
lienholders or other persons with an interest in the property while the stay is in effect.
(7) A determination by the court that the claimant has standing to request a stay pursuant to
paragraph (2) shall apply only to this subsection and shall not preclude the Government from
objecting to the standing of the claimant by dispositive motion or at the time of trial.
(h) In addition to the venue provided for in section 1395 of title 28 or any other provision of law,
in the case of property of a defendant charged with a violation that is the basis for forfeiture of
the property under this section, a proceeding for forfeiture under this section may be brought in
the judicial district in which the defendant owning such property is found or in the judicial
district in which the criminal prosecution is brought.
(i)(1) Whenever property is civilly or criminally forfeited under this chapter [18 USCS 981 et
seq.], the Attorney General or the Secretary of the Treasury, as the case may be, may transfer the
forfeited personal property or the proceeds of the sale of any forfeited personal or real property
to any foreign country which participated directly or indirectly in the seizure or forfeiture of the
property, if such a transfer
(A) has been agreed to by the Secretary of State;
(B) is authorized in an international agreement between the United States and the foreign
country; and
(C) is made to a country which, if applicable, has been certified under section 490(a)(1) of the
Foreign Assistance Act of 1961 [22 USCS 2291j(a)(1)].
A decision by the Attorney General or the Secretary of the Treasury pursuant to this paragraph
shall not be subject to review. The foreign country shall, in the event of a transfer of property or
proceeds of sale of property under this subsection, bear all expenses incurred by the United
States in the seizure, maintenance, inventory, storage, forfeiture, and disposition of the property,
and all transfer costs. The payment of all such expenses, and the transfer of assets pursuant to
this paragraph, shall be upon such terms and conditions as the Attorney General or the Secretary
of the Treasury may, in his discretion, set.
(2) The provisions of this section shall not be construed as limiting or superseding any other
authority of the United States to provide assistance to a foreign country in obtaining property
related to a crime committed in the foreign country, including property which is sought as
evidence of a crime committed in the foreign country.
(3) A certified order or judgment of forfeiture by a court of competent jurisdiction of a foreign
country concerning property which is the subject of forfeiture under this section and was

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determined by such court to be the type of property described in subsection (a)(1)(B) of this
section, and any certified recordings or transcripts of testimony taken in a foreign judicial
proceeding concerning such order or judgment of forfeiture, shall be admissible in evidence in a
proceeding brought pursuant to this section. Such certified order or judgment of forfeiture, when
admitted into evidence, shall constitute probable cause that the property forfeited by such order
or judgment of forfeiture is subject to forfeiture under this section and creates a rebuttable
presumption of the forfeitability of such property under this section.
(4) A certified order or judgment of conviction by a court of competent jurisdiction of a foreign
country concerning an unlawful drug activity which gives rise to forfeiture under this section and
any certified recordings or transcripts of testimony taken in a foreign judicial proceeding
concerning such order or judgment of conviction shall be admissible in evidence in a proceeding
brought pursuant to this section. Such certified order or judgment of conviction, when admitted
into evidence, creates a rebuttable presumption that the unlawful drug activity giving rise to
forfeiture under this section has occurred.
(5) The provisions of paragraphs (3) and (4) of this subsection shall not be construed as limiting
the admissibility of any evidence otherwise admissible, nor shall they limit the ability of the
United States to establish probable cause that property is subject to forfeiture by any evidence
otherwise admissible.
(j) For purposes of this section
(1) the term "Attorney General" means the Attorney General or his delegate; and
(2) the term "Secretary of the Treasury" means the Secretary of the Treasury or his delegate.
(k) Interbank Accounts.
(1) In general.
(A) In general. For the purpose of a forfeiture under this section or under the Controlled
Substances Act (21 U.S.C. 801 et seq.), if funds are deposited into an account at a foreign bank,
and that foreign bank has an interbank account in the United States with a covered financial
institution (as defined in section 5318(j)(1) of title 31), the funds shall be deemed to have been
deposited into the interbank account in the United States, and any restraining order, seizure
warrant, or arrest warrant in rem regarding the funds may be served on the covered financial
institution, and funds in the interbank account, up to the value of the funds deposited into the
account at the foreign bank, may be restrained, seized, or arrested.
(B) Authority to suspend. The Attorney General, in consultation with the Secretary of the
Treasury, may suspend or terminate a forfeiture under this section if the Attorney General
determines that a conflict of law exists between the laws of the jurisdiction in which the foreign
bank is located and the laws of the United States with respect to liabilities arising from the
restraint, seizure, or arrest of such funds, and that such suspension or termination would be in the
interest of justice and would not harm the national interests of the United States.

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(2) No requirement for Government to trace funds. If a forfeiture action is brought against funds
that are restrained, seized, or arrested under paragraph (1), it shall not be necessary for the
Government to establish that the funds are directly traceable to the funds that were deposited into
the foreign bank, nor shall it be necessary for the Government to rely on the application of
section 984.
(3) Claims brought by owner of the funds. If a forfeiture action is instituted against funds
restrained, seized, or arrested under paragraph (1), the owner of the funds deposited into the
account at the foreign bank may contest the forfeiture by filing a claim under section 983.
(4) Definitions. For purposes of this subsection, the following definitions shall apply:
(A) Interbank account. The term "interbank account" has the same meaning as in section 984(c)
(2)(B).
(B) Owner.
(i) In general. Except as provided in clause (ii), the term "owner"
(I) means the person who was the owner, as that term is defined in section 983(d)(6), of the funds
that were deposited into the foreign bank at the time such funds were deposited; and
(II) does not include either the foreign bank or any financial institution acting as an intermediary
in the transfer of the funds into the interbank account.
(ii) Exception. The foreign bank may be considered the "owner" of the funds (and no other
person shall qualify as the owner of such funds) only if
(I) the basis for the forfeiture action is wrongdoing committed by the foreign bank; or
(II) the foreign bank establishes, by a preponderance of the evidence, that prior to the restraint,
seizure, or arrest of the funds, the foreign bank had discharged all or part of its obligation to the
prior owner of the funds, in which case the foreign bank shall be deemed the owner of the funds
to the extent of such discharged obligation.
18 USCS 982 (2004)
982. Criminal forfeiture
(a)(1) The court, in imposing sentence on a person convicted of an offense in violation of section
1956, 1957, or 1960 of this title, shall order that the person forfeit to the United States any
property, real or personal, involved in such offense, or any property traceable to such property.
(2) The court, in imposing sentence on a person convicted of a violation of, or a conspiracy to
violate

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(A) section 215, 656, 657, 1005, 1006, 1007, 1014, 1341, 1343, or 1344 of this title, affecting a
financial institution, or
(B) section 471, 472, 473, 474, 476, 477, 478, 479, 480, 481, 485, 486, 487, 488, 501, 502, 510,
542, 545, 842, 844, 1028, 1029, or 1030 of this title, shall order that the person forfeit to the
United States any property constituting, or derived from, proceeds the person obtained directly or
indirectly, as the result of such violation.
(3) The court, in imposing a sentence on a person convicted of an offense under
(A) section 666(a)(1) (relating to Federal program fraud);
(B) section 1001 (relating to fraud and false statements);
(C) section 1031 (relating to major fraud against the United States);
(D) section 1032 (relating to concealment of assets from conservator, receiver or liquidating
agent of insured financial institution);
(E) section 1341 (relating to mail fraud); or
(F) section 1343 (relating to wire fraud), involving the sale of assets acquired or held by the
Resolution Trust Corporation, the Federal Deposit Insurance Corporation, as conservator or
receiver for a financial institution or any other conservator for a financial institution appointed by
the Office of the Comptroller of the Currency or the Office of Thrift Supervision, or the National
Credit Union Administration, as conservator or liquidating agent for a financial institution, shall
order that the person forfeit to the United States any property, real or personal, which represents
or is traceable to the gross receipts obtained, directly or indirectly, as a result of such violation.
(4) With respect to an offense listed in subsection (a)(3) committed for the purpose of executing
or attempting to execute any scheme or artifice to defraud, or for obtaining money or property by
means of false or fraudulent statements, pretenses, representations, or promises, the gross
receipts of such an offense shall include any property, real or personal, tangible or intangible,
which is obtained, directly or indirectly, as a result of such offense.
(5) The court, in imposing sentence on a person convicted of a violation or conspiracy to violate

(A) section 511 (altering or removing motor vehicle identification numbers);

(B) section 553 (importing or exporting stolen motor vehicles);
(C) section 2119 (armed robbery of automobiles);
(D) section 2312 (transporting stolen motor vehicles in interstate commerce); or

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(E) section 2313 (possessing or selling a stolen motor vehicle that has moved in interstate
commerce); shall order that the person forfeit to the United States any property, real or personal,
which represents or is traceable to the gross proceeds obtained, directly or indirectly, as a result
of such violation.
(6)(A) The court, in imposing sentence on a person convicted of a violation of, or conspiracy to
violate, section 274(a), 274A(a)(1), or 274A(a)(2) of the Immigration and Nationality Act [8
USCS 1324(a), 1324a(a)(1), or 1324a(a)(2)] or section 1425, 1426, 1427, 1541, 1542, 1543,
1544, or 1546 of this title, or a violation of, or conspiracy to violate, section 1028 of this title if
committed in connection with passport or visa issuance or use, shall order that the person forfeit
to the United States, regardless of any provision of State law
(i) any conveyance, including any vessel, vehicle, or aircraft used in the commission of the
offense of which the person is convicted; and
(ii) any property real or personal
(I) that constitutes, or is derived from or is traceable to the proceeds obtained directly or
indirectly from the commission of the offense of which the person is convicted; or
(II) that is used to facilitate, or is intended to be used to facilitate, the commission of the offense
of which the person is convicted.
(B) The court, in imposing sentence on a person described in subparagraph (A), shall order that
the person forfeit to the United States all property described in that subparagraph.
(7) The court, in imposing sentence on a person convicted of a Federal health care offense, shall
order the person to forfeit property, real or personal, that constitutes or is derived, directly or
indirectly, from gross proceeds traceable to the commission of the offense.
(8) The court, in sentencing a defendant convicted of an offense under section 1028, 1029, 1341,
1342, 1343, or 1344, or of a conspiracy to commit such an offense, if the offense involves
telemarketing (as that term is defined in section 2325), shall order that the defendant forfeit to
the United States any real or personal property
(A) used or intended to be used to commit, to facilitate, or to promote the commission of such
offense; and
(B) constituting, derived from, or traceable to the gross proceeds that the defendant obtained
directly or indirectly as a result of the offense.
(b)(1) The forfeiture of property under this section, including any seizure and disposition of the
property and any related judicial or administrative proceeding, shall be governed by the
provisions of section 413 (other than subsection (d) of that section) of the Comprehensive Drug
Abuse Prevention and Control Act of 1970 (21 U.S.C. 853).

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(2) The substitution of assets provisions of subsection 413(p) [21 USCS 853(p)] shall not be
used to order a defendant to forfeit assets in place of the actual property laundered where such
defendant acted merely as an intermediary who handled but did not retain the property in the
course of the money laundering offense unless the defendant, in committing the offense or
offenses giving rise to the forfeiture, conducted three or more separate transactions involving a
total of $ 100,000 or more in any twelve month period.
18 USC 983 (2004)
983. General rules for civil forfeiture proceedings
(a) Notice; claim; complaint.
(1)(A)(i) Except as provided in clauses (ii) through (v), in any nonjudicial civil forfeiture
proceeding under a civil forfeiture statute, with respect to which the Government is required to
send written notice to interested parties, such notice shall be sent in a manner to achieve proper
notice as soon as practicable, and in no case more than 60 days after the date of the seizure.
(ii) No notice is required if, before the 60-day period expires, the Government files a civil
judicial forfeiture action against the property and provides notice of that action as required by
law.
(iii) If, before the 60-day period expires, the Government does not file a civil judicial forfeiture
action, but does obtain a criminal indictment containing an allegation that the property is subject
to forfeiture, the Government shall either
(I) send notice within the 60 days and continue the nonjudicial civil forfeiture proceeding under
this section; or
(II) terminate the nonjudicial civil forfeiture proceeding, and take the steps necessary to preserve
its right to maintain custody of the property as provided in the applicable criminal forfeiture
statute.
(iv) In a case in which the property is seized by a State or local law enforcement agency and
turned over to a Federal law enforcement agency for the purpose of forfeiture under Federal law,
notice shall be sent not more than 90 days after the date of seizure by the State or local law
enforcement agency.
(v) If the identity or interest of a party is not determined until after the seizure or turnover but is
determined before a declaration of forfeiture is entered, notice shall be sent to such interested
party not later than 60 days after the determination by the Government of the identity of the party
or the party's interest.

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(B) A supervisory official in the headquarters office of the seizing agency may extend the period
for sending notice under subparagraph (A) for a period not to exceed 30 days (which period may
not be further extended except by a court), if the official determines that the conditions in
subparagraph (D) are present.
(C) Upon motion by the Government, a court may extend the period for sending notice under
subparagraph (A) for a period not to exceed 60 days, which period may be further extended by
the court for 60-day periods, as necessary, if the court determines, based on a written certification
of a supervisory official in the headquarters office of the seizing agency, that the conditions in
subparagraph (D) are present.
(D) The period for sending notice under this paragraph may be extended only if there is reason to
believe that notice may have an adverse result, including
(i) endangering the life or physical safety of an individual;
(ii) flight from prosecution;
(iii) destruction of or tampering with evidence;
(iv) intimidation of potential witnesses; or
(v) otherwise seriously jeopardizing an investigation or unduly delaying a trial.
(E) Each of the Federal seizing agencies conducting nonjudicial forfeitures under this section
shall report periodically to the Committees on the Judiciary of the House of Representatives and
the Senate the number of occasions when an extension of time is granted under subparagraph
(B).
(F) If the Government does not send notice of a seizure of property in accordance with
subparagraph (A) to the person from whom the property was seized, and no extension of time is
granted, the Government shall return the property to that person without prejudice to the right of
the Government to commence a forfeiture proceeding at a later time. The Government shall not
be required to return contraband or other property that the person from whom the property was
seized may not legally possess.
(2)(A) Any person claiming property seized in a nonjudicial civil forfeiture proceeding under a
civil forfeiture statute may file a claim with the appropriate official after the seizure.
(B) A claim under subparagraph (A) may be filed not later than the deadline set forth in a
personal notice letter (which deadline may be not earlier than 35 days after the date the letter is
mailed), except that if that letter is not received, then a claim may be filed not later than 30 days
after the date of final publication of notice of seizure.
(C) A claim shall

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(i) identify the specific property being claimed;

(ii) state the claimant's interest in such property; and
(iii) be made under oath, subject to penalty of perjury.
(D) A claim need not be made in any particular form. Each Federal agency conducting
nonjudicial forfeitures under this section shall make claim forms generally available on request,
which forms shall be written in easily understandable language.
(E) Any person may make a claim under subparagraph (A) without posting bond with respect to
the property which is the subject of the claim.
(3)(A) Not later than 90 days after a claim has been filed, the Government shall file a complaint
for forfeiture in the manner set forth in the Supplemental Rules for Certain Admiralty and
Maritime Claims or return the property pending the filing of a complaint, except that a court in
the district in which the complaint will be filed may extend the period for filing a complaint for
good cause shown or upon agreement of the parties.
(B) If the Government does not
(i) file a complaint for forfeiture or return the property, in accordance with subparagraph (A); or
(ii) before the time for filing a complaint has expired
(I) obtain a criminal indictment containing an allegation that the property is subject to forfeiture;
and
(II) take the steps necessary to preserve its right to maintain custody of the property as provided
in the applicable criminal forfeiture statute, the Government shall promptly release the property
pursuant to regulations promulgated by the Attorney General, and may not take any further
action to effect the civil forfeiture of such property in connection with the underlying offense.
(C) In lieu of, or in addition to, filing a civil forfeiture complaint, the Government may include a
forfeiture allegation in a criminal indictment. If criminal forfeiture is the only forfeiture
proceeding commenced by the Government, the Government's right to continued possession of
the property shall be governed by the applicable criminal forfeiture statute.
(D) No complaint may be dismissed on the ground that the Government did not have adequate
evidence at the time the complaint was filed to establish the forfeitability of the property.
(4)(A) In any case in which the Government files in the appropriate United States district court a
complaint for forfeiture of property, any person claiming an interest in the seized property may
file a claim asserting such person's interest in the property in the manner set forth in the
Supplemental Rules for Certain Admiralty and Maritime Claims, except that such claim may be
filed not later than 30 days after the date of service of the Government's complaint or, as

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applicable, not later than 30 days after the date of final publication of notice of the filing of the
complaint.
(B) A person asserting an interest in seized property, in accordance with subparagraph (A), shall
file an answer to the Government's complaint for forfeiture not later than 20 days after the date
of the filing of the claim.
(b) Representation.
(1)(A) If a person with standing to contest the forfeiture of property in a judicial civil forfeiture
proceeding under a civil forfeiture statute is financially unable to obtain representation by
counsel, and the person is represented by counsel appointed under section 3006A of this title in
connection with a related criminal case, the court may authorize counsel to represent that person
with respect to the claim.
(B) In determining whether to authorize counsel to represent a person under subparagraph (A),
the court shall take into account such factors as
(i) the person's standing to contest the forfeiture; and
(ii) whether the claim appears to be made in good faith.
(2)(A) If a person with standing to contest the forfeiture of property in a judicial civil forfeiture
proceeding under a civil forfeiture statute is financially unable to obtain representation by
counsel, and the property subject to forfeiture is real property that is being used by the person as
a primary residence, the court, at the request of the person, shall insure that the person is
represented by an attorney for the Legal Services Corporation with respect to the claim.
(B)(i) At appropriate times during a representation under subparagraph (A), the Legal Services
Corporation shall submit a statement of reasonable attorney fees and costs to the court.
(ii) The court shall enter a judgment in favor of the Legal Services Corporation for reasonable
attorney fees and costs submitted pursuant to clause (i) and treat such judgment as payable under
section 2465 of title 28, United States Code, regardless of the outcome of the case.
(3) The court shall set the compensation for representation under this subsection, which shall be
equivalent to that provided for court-appointed representation under section 3006A of this title.
(c) Burden of proof. In a suit or action brought under any civil forfeiture statute for the civil
forfeiture of any property
(1) the burden of proof is on the Government to establish, by a preponderance of the evidence,
that the property is subject to forfeiture;
(2) the Government may use evidence gathered after the filing of a complaint for forfeiture to
establish, by a preponderance of the evidence, that property is subject to forfeiture; and

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(3) if the Government's theory of forfeiture is that the property was used to commit or facilitate
the commission of a criminal offense, or was involved in the commission of a criminal offense,
the Government shall establish that there was a substantial connection between the property and
the offense.
(d) Innocent owner defense.
(1) An innocent owner's interest in property shall not be forfeited under any civil forfeiture
statute. The claimant shall have the burden of proving that the claimant is an innocent owner by a
preponderance of the evidence.
(2)(A) With respect to a property interest in existence at the time the illegal conduct giving rise
to forfeiture took place, the term "innocent owner" means an owner who
(i) did not know of the conduct giving rise to forfeiture; or
(ii) upon learning of the conduct giving rise to the forfeiture, did all that reasonably could be
expected under the circumstances to terminate such use of the property.
(B)(i) For the purposes of this paragraph, ways in which a person may show that such person did
all that reasonably could be expected may include demonstrating that such person, to the extent
permitted by law
(I) gave timely notice to an appropriate law enforcement agency of information that led the
person to know the conduct giving rise to a forfeiture would occur or has occurred; and
(II) in a timely fashion revoked or made a good faith attempt to revoke permission for those
engaging in such conduct to use the property or took reasonable actions in consultation with a
law enforcement agency to discourage or prevent the illegal use of the property.
(ii) A person is not required by this subparagraph to take steps that the person reasonably
believes would be likely to subject any person (other than the person whose conduct gave rise to
the forfeiture) to physical danger.
(3)(A) With respect to a property interest acquired after the conduct giving rise to the forfeiture
has taken place, the term "innocent owner" means a person who, at the time that person acquired
the interest in the property
(i) was a bona fide purchaser or seller for value (including a purchaser or seller of goods or
services for value); and
(ii) did not know and was reasonably without cause to believe that the property was subject to
forfeiture.

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(B) An otherwise valid claim under subparagraph (A) shall not be denied on the ground that the
claimant gave nothing of value in exchange for the property if
(i) the property is the primary residence of the claimant;
(ii) depriving the claimant of the property would deprive the claimant of the means to maintain
reasonable shelter in the community for the claimant and all dependents residing with the
claimant;
(iii) the property is not, and is not traceable to, the proceeds of any criminal offense; and
(iv) the claimant acquired his or her interest in the property through marriage, divorce, or legal
separation, or the claimant was the spouse or legal dependent of a person whose death resulted in
the transfer of the property to the claimant through inheritance or probate, except that the court
shall limit the value of any real property interest for which innocent ownership is recognized
under this subparagraph to the value necessary to maintain reasonable shelter in the community
for such claimant and all dependents residing with the claimant.
(4) Notwithstanding any provision of this subsection, no person may assert an ownership interest
under this subsection in contraband or other property that it is illegal to possess.
(5) If the court determines, in accordance with this section, that an innocent owner has a partial
interest in property otherwise subject to forfeiture, or a joint tenancy or tenancy by the entirety in
such property, the court may enter an appropriate order
(A) severing the property;
(B) transferring the property to the Government with a provision that the Government
compensate the innocent owner to the extent of his or her ownership interest once a final order of
forfeiture has been entered and the property has been reduced to liquid assets; or
(C) permitting the innocent owner to retain the property subject to a lien in favor of the
Government to the extent of the forfeitable interest in the property.
(6) In this subsection, the term "owner"
(A) means a person with an ownership interest in the specific property sought to be forfeited,
including a leasehold, lien, mortgage, recorded security interest, or valid assignment of an
ownership interest; and
(B) does not include
(i) a person with only a general unsecured interest in, or claim against, the property or estate of
another;

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(ii) a bailee unless the bailor is identified and the bailee shows a colorable legitimate interest in
the property seized; or
(iii) a nominee who exercises no dominion or control over the property.
(e) Motion to set aside forfeiture.
(1) Any person entitled to written notice in any nonjudicial civil forfeiture proceeding under a
civil forfeiture statute who does not receive such notice may file a motion to set aside a
declaration of forfeiture with respect to that person's interest in the property, which motion shall
be granted if
(A) the Government knew, or reasonably should have known, of the moving party's interest and
failed to take reasonable steps to provide such party with notice; and
(B) the moving party did not know or have reason to know of the seizure within sufficient time
to file a timely claim.
(2)(A) Notwithstanding the expiration of any applicable statute of limitations, if the court grants
a motion under paragraph (1), the court shall set aside the declaration of forfeiture as to the
interest of the moving party without prejudice to the right of the Government to commence a
subsequent forfeiture proceeding as to the interest of the moving party.
(B) Any proceeding described in subparagraph (A) shall be commenced
(i) if nonjudicial, within 60 days of the entry of the order granting the motion; or
(ii) if judicial, within 6 months of the entry of the order granting the motion.
(3) A motion under paragraph (1) may be filed not later than 5 years after the date of final
publication of notice of seizure of the property.
(4) If, at the time a motion made under paragraph (1) is granted, the forfeited property has been
disposed of by the Government in accordance with law, the Government may institute
proceedings against a substitute sum of money equal to the value of the moving party's interest in
the property at the time the property was disposed of.
(5) A motion filed under this subsection shall be the exclusive remedy for seeking to set aside a
declaration of forfeiture under a civil forfeiture statute.
(f) Release of seized property.
(1) A claimant under subsection (a) is entitled to immediate release of seized property if
(A) the claimant has a possessory interest in the property;

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(B) the claimant has sufficient ties to the community to provide assurance that the property will
be available at the time of the trial;
(C) the continued possession by the Government pending the final disposition of forfeiture
proceedings will cause substantial hardship to the claimant, such as preventing the functioning of
a business, preventing an individual from working, or leaving an individual homeless;
(D) the claimant's likely hardship from the continued possession by the Government of the
seized property outweighs the risk that the property will be destroyed, damaged, lost, concealed,
or transferred if it is returned to the claimant during the pendency of the proceeding; and
(E) none of the conditions set forth in paragraph (8) applies.
(2) A claimant seeking release of property under this subsection must request possession of the
property from the appropriate official, and the request must set forth the basis on which the
requirements of paragraph (1) are met.
(3)(A) If not later than 15 days after the date of a request under paragraph (2) the property has
not been released, the claimant may file a petition in the district court in which the complaint has
been filed or, if no complaint has been filed, in the district court in which the seizure warrant was
issued or in the district court for the district in which the property was seized.
(B) The petition described in subparagraph (A) shall set forth
(i) the basis on which the requirements of paragraph (1) are met; and
(ii) the steps the claimant has taken to secure release of the property from the appropriate official.
(4) If the Government establishes that the claimant's claim is frivolous, the court shall deny the
petition. In responding to a petition under this subsection on other grounds, the Government may
in appropriate cases submit evidence ex parte in order to avoid disclosing any matter that may
adversely affect an ongoing criminal investigation or pending criminal trial.
(5) The court shall render a decision on a petition filed under paragraph (3) not later than 30 days
after the date of the filing, unless such 30-day limitation is extended by consent of the parties or
by the court for good cause shown.
(6) If
(A) a petition is filed under paragraph (3); and
(B) the claimant demonstrates that the requirements of paragraph (1) have been met, the district
court shall order that the property be returned to the claimant, pending completion of
proceedings by the Government to obtain forfeiture of the property.
(7) If the court grants a petition under paragraph (3)

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(A) the court may enter any order necessary to ensure that the value of the property is maintained
while the forfeiture action is pending, including
(i) permitting the inspection, photographing, and inventory of the property;
(ii) fixing a bond in accordance with rule E(5) of the Supplemental Rules for Certain Admiralty
and Maritime Claims; and
(iii) requiring the claimant to obtain or maintain insurance on the subject property; and
(B) the Government may place a lien against the property or file a lis pendens to ensure that the
property is not transferred to another person.
(8) This subsection shall not apply if the seized property
(A) is contraband, currency, or other monetary instrument, or electronic funds unless such
currency or other monetary instrument or electronic funds constitutes the assets of a legitimate
business which has been seized;
(B) is to be used as evidence of a violation of the law;
(C) by reason of design or other characteristic, is particularly suited for use in illegal activities;
or
(D) is likely to be used to commit additional criminal acts if returned to the claimant.
(g) Proportionality.
(1) The claimant under subsection (a)(4) may petition the court to determine whether the
forfeiture was constitutionally excessive.
(2) In making this determination, the court shall compare the forfeiture to the gravity of the
offense giving rise to the forfeiture.
(3) The claimant shall have the burden of establishing that the forfeiture is grossly
disproportional by a preponderance of the evidence at a hearing conducted by the court without a
jury.
(4) If the court finds that the forfeiture is grossly disproportional to the offense it shall reduce or
eliminate the forfeiture as necessary to avoid a violation of the Excessive Fines Clause of the
Eighth Amendment of the Constitution.
(h) Civil fine.

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(1) In any civil forfeiture proceeding under a civil forfeiture statute in which the Government
prevails, if the court finds that the claimant's assertion of an interest in the property was
frivolous, the court may impose a civil fine on the claimant of an amount equal to 10 percent of
the value of the forfeited property, but in no event shall the fine be less than $ 250 or greater than
$ 5,000.
(2) Any civil fine imposed under this subsection shall not preclude the court from imposing
sanctions under rule 11 of the Federal Rules of Civil Procedure.
(3) In addition to the limitations of section 1915 of title 28, United States Code, in no event shall
a prisoner file a claim under a civil forfeiture statute or appeal a judgment in a civil action or
proceeding based on a civil forfeiture statute if the prisoner has, on three or more prior occasions,
while incarcerated or detained in any facility, brought an action or appeal in a court of the United
States that was dismissed on the grounds that it is frivolous or malicious, unless the prisoner
shows extraordinary and exceptional circumstances.
(i) Civil forfeiture statute defined. In this section, the term "civil forfeiture statute"
(1) means any provision of Federal law providing for the forfeiture of property other than as a
sentence imposed upon conviction of a criminal offense; and
(2) does not include
(A) the Tariff Act of 1930 or any other provision of law codified in title 19;
(B) the Internal Revenue Code of 1986 [26 USCS 1 et seq.];
(C) the Federal Food, Drug, and Cosmetic Act (21 U.S.C. 301 et seq.);
(D) the Trading with the Enemy Act (50 U.S.C. App. 1 et seq.) or the International Emergency
Economic Powers Act (IEEPA) (50 U.S.C. 1701 et seq.); or
(E) section 1 of title VI of the Act of June 15, 1917 (40 Stat. 233; 22 U.S.C. 401).
(j) Restraining orders; protective orders.
(1) Upon application of the United States, the court may enter a restraining order or injunction,
require the execution of satisfactory performance bonds, create receiverships, appoint
conservators, custodians, appraisers, accountants, or trustees, or take any other action to seize,
secure, maintain, or preserve the availability of property subject to civil forfeiture
(A) upon the filing of a civil forfeiture complaint alleging that the property with respect to which
the order is sought is subject to civil forfeiture; or
(B) prior to the filing of such a complaint, if, after notice to persons appearing to have an interest
in the property and opportunity for a hearing, the court determines that

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(i) there is a substantial probability that the United States will prevail on the issue of forfeiture
and that failure to enter the order will result in the property being destroyed, removed from the
jurisdiction of the court, or otherwise made unavailable for forfeiture; and
(ii) the need to preserve the availability of the property through the entry of the requested order
outweighs the hardship on any party against whom the order is to be entered.
(2) An order entered pursuant to paragraph (1)(B) shall be effective for not more than 90 days,
unless extended by the court for good cause shown, or unless a complaint described in paragraph
(1)(A) has been filed.
(3) A temporary restraining order under this subsection may be entered upon application of the
United States without notice or opportunity for a hearing when a complaint has not yet been filed
with respect to the property, if the United States demonstrates that there is probable cause to
believe that the property with respect to which the order is sought is subject to civil forfeiture
and that provision of notice will jeopardize the availability of the property for forfeiture. Such a
temporary order shall expire not more than 10 days after the date on which it is entered, unless
extended for good cause shown or unless the party against whom it is entered consents to an
extension for a longer period. A hearing requested concerning an order entered under this
paragraph shall be held at the earliest possible time and prior to the expiration of the temporary
order.
(4) The court may receive and consider, at a hearing held pursuant to this subsection, evidence
and information that would be inadmissible under the Federal Rules of Evidence.
CHAPTER 8: USA PATRIOT ACT
I. Learning Objectives
1. To learn the primary purposes for the passage of Title III of the USA PATRIOT Act
(hereinafter USA Patriot Act).
2. To learn key definitions, such as correspondent account, interbank account, payable-through
account and covered financial institutions.
3. To learn the requirements with respect to required anti-money laundering programs, and
specific cases showing the consequences for failure to establish anti-money laundering programs
and failure to file suspicious activity reports timely or properly.
4. To learn the requirements for a foreign bank to establish a U.S. correspondent account in the
U.S. and the identification and verification of accountholders.
5. To learn the meaning of special measure matters with respect to jurisdictions, banks or a bank.
6. To learn the rules and consequences of the cooperation and information sharing procedures.

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7. To learn how the requirements of the Financial Crimes Enforcement Network coincide with
the requirements of the Federal Banking Agencies with respect to anti-money laundering
programs and the requirement to file suspicious activity reports.
8. To learn about the Gatekeeper Initiative and how it affects financial institutions and the impact
upon lawyers in the U.S. if they become subject to this initiative.
9. To learn about the requirements under the USA Patriot Act, the Bank Secrecy Act, Federal
Reserve and others with respect to record keeping and the requirements to file suspicious activity
reports.
II. Introduction to the USA Patriot Act. The USA PATRIOT ACT463 (hereafter USA Patriot
Act) provides the U.S. Government with new and substantialmaybe extremepowers in the
publicized war against terrorism. However, the USA Patriot Act also provides these same powers
to the U.S. Government with respect to money laundering concerns.
A. USA Patriot Act. Title III of the USA Patriot Act is titled International Money Laundering
Abatement and Anti-Terrorist Financing Act of 2001. 302(b) of the USA Patriot Act states the
purposes of Title III. The purposes stated places money laundering on equal footing with the
financing of terrorism. The purposes of Title III are stated as follows:
(1) to increase the strength of United States measures to prevent, detect, and
prosecute international money laundering and the financing of terrorism;
(2) to ensure that banking transactions and financial relationships and the
conduct of such transactions and relationships, do not contravene the purposes of
subchapter II of chapter 53 of title 31, United States Code, section 21 of the
Federal Deposit Insurance Act, or chapter 2 of title I of Public Law 91508 (84
Stat. 1116), or facilitate the evasion of any such provision; and the purposes of
such provisions of law continue to be fulfilled, and such provisions of law are
effectively and efficiently administered;
(3) to strengthen the provisions put into place by the Money Laundering Control
Act of 1986 (18 U.S.C. 981 note), especially with respect to crimes by non-United
States nationals and foreign financial institutions; (4) to provide a clear national
mandate for subjecting to special scrutiny those foreign jurisdictions, financial
institutions operating outside of the United States, and classes of international
transactions or types of accounts that pose particular, identifiable opportunities for
criminal abuse;
(5) to provide the Secretary of the Treasury (in this title referred to as the
Secretary) with broad discretion, subject to the safeguards provided by the
463 See H.R. 3162, Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and
Obstruct Terrorism (USA PATRIOT) Act of 2001, Pub. L. No. 107-56 (2001) (hereafter referred to as USA Patriot
Act).

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Administrative Procedure Act under title 5, United States Code, to take measures
tailored to the particular money laundering problems presented by specific foreign
jurisdictions, financial institutions operating outside of the United States, and
classes of international transactions or types of accounts;
(6) to ensure that the employment of such measures by the Secretary permits
appropriate opportunity for comment by affected financial institutions;
(7) to provide guidance to domestic financial institutions on particular foreign
jurisdictions, financial institutions operating outside of the United States, and
classes of international transactions that are of primary money laundering concern
to the United States Government;
(8) to ensure that the forfeiture of any assets in connection with the anti-terrorist
efforts of the United States permits for adequate challenge consistent with
providing due process rights;
(9) to clarify the terms of the safe harbor from civil liability for filing suspicious
activity reports;
(10) to strengthen the authority of the Secretary to issue and administer
geographic targeting orders, and to clarify that violations of such orders or any
other requirement imposed under the authority contained in chapter 2 of title I of
Public Law 91508 and subchapters II and III of chapter 53 of title 31, United
States Code, may result in criminal and civil penalties;
(11) to ensure that all appropriate elements of the financial services industry are
subject to appropriate requirements to report potential money laundering
transactions to proper authorities, and that jurisdictional disputes do not hinder
examination of compliance by financial institutions with relevant reporting
requirements;
(12) to strengthen the ability of financial institutions to maintain the integrity of
their employee population; and
(13) to strengthen measures to prevent the use of the United States financial
system for personal gain by corrupt foreign officials and to facilitate the
repatriation of any stolen assets to the citizens of countries to whom such assets
belong.
B. Definitions.
1. Account. The term account means a formal banking or business relationship established to
provide regular services, dealings, and other financial transactions; and includes a demand

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deposit, savings deposit, or other transaction or asset account and a credit account or other
extension of credit.464
2. Correspondent Account. The term correspondent account means an account established to
receive deposits from or make payments on behalf of a foreign financial institution, or handle
other financial transactions related to such institution.465
3. Covered Financial InstitutionForeign Shell Banks. For purposes of the prohibition on U.S.
correspondent accounts with foreign shell banks,466 the term covered financial institution
means any financial institution described in subparagraphs (A) through (G) of 31 U.S.C.
5312(a)(2): (A) an insured bank; (B) a commercial bank or trust company; (C) a private banker:
(D) an agency or branch of a foreign bank in the U.S.; (E) any credit union; (F) a thrift
institution; and (G) a broker or dealer registered with the SEC under the Securities Exchange Act
of 1934.
4. Covered Financial InstitutionU.S. Correspondent Account. For a correspondent account in
the U.S. that requires a foreign bank to identify its owners and the name of the person in the U.S.
to accept legal service of process,467 the term covered financial institution has the same
meaning as provided in the foregoing sentence,468 except that such term does not include a broker
or dealer registered with the Securities and Exchange Commissioner under the Securities
Exchange Act of 1934.469 The Secretary of the Treasury intends to propose similar record keeping
requirements for such brokers and dealers.470
5. Financial Agency. The term financial agency means a person acting for a person as a
financial institution, bailee, depository trustee, or agent, or acting in a similar way related to
money, credit, securities, gold, or a transaction in money, credit, securities or gold.471
6. Financial Institution. The term financial institution includes:
(A) an insured bank (as defined in 3(h) of the Federal Deposit Insurance Act (12
U.S.C. 1813(h)); (B) a commercial bank or trust company; (C) a private banker;
(D) an agency or branch of a foreign bank in the United States; (E) any credit
union; (F) a thrift institution; (G) a broker or dealer registered with the Securities
and Exchange Commission under the Securities Exchange Act of 1934 (15 U.S.C.
78a et seq.); (H) a broker or dealer in securities or commodities; (I) an
investment banker or investment company; (J) a currency exchange: (K) an issuer,
464 USA Patriot Act, 311(e)(1)(A).
465 USA Patriot Act, 311(e)(1)(B).
466 USA Patriot Act, 313(a).
467 USA Patriot Act, 319(b).
468 See 31 U.S.C. 5318(j).
469 See U.S. Department of the Treasury, interim guidance concerning compliance by covered U-S-financial
institutions with new statutory anti-money laundering requirements regarding correspondent accounts established or
maintained for foreign banking institutions (Nov. 20, 2001).
470 Id.
471 See 31 U.S.C. 5312(a)(1).

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redeemer, or cashier of travelers checks, checks, money orders, or similar

instruments; (L) an operator of a credit card system; (M) an insurance company;
(N) a dealer in precious metals, stones, or jewels; (O) a pawnbroker; (P) a loan or
finance company; (Q) a travel agency; (R) a licensed sender of money or any
other person who engages as a business in the transmission of funds, including
any person who engages as a business in an informal money transfer system or
any network of people who engage as a business in facilitating the transfer of
money domestically or internationally outside of the conventional financial
institutions system; (S) a telegraph company; (T) a business engaged in vehicle
sales, including automobile, airplane, and boat sales; (U) persons involved in real
estate closing and settlements; (V) the United States Postal Service; (W) an
agency of the United States Government or of a State or local government
carrying out a duty or power of a business described in this paragraph and (X) a
casino, gambling casino, or gaming establishment with an annual gaming revenue
of more than $1,000,000 which (i) is licensed as a casino, gambling casino, or
gaming establishment under the laws of any State or any political subdivision of
any State; or (ii) is an Indian gaming operation conducted under or pursuant to the
Indian Gaming Regulatory Act other than an operation which is limited to class I
gaming (as defined in 4(6) of such Act).472
In addition, the term financial institution includes futures commission merchant, commodity
trading advisor or, commodity pool operator registered, or required to register, under the
Commodity Exchange Act.473
7. Money Laundering; Terrorist Activity.474
[S]ection 314 [of the USA PATRIOT Act] authorizes the sharing of information
between the federal government and financial institutions, and among financial
institutions, for the purpose of identifying possible money laundering or terrorist
activities. Although section 314 does not define money laundering or terrorist
activity, each of these terms has well-established definitions. Accordingly, and
consistent with the broad intent underlying section 314, section 103.90(a) defines
money laundering to mean any activity described in section 1956 or 1957 of
title 18, United States Code. Similarly, section 103.90(b) defines terrorist
activity to mean an act of domestic terrorism or international terrorism as defined
in section 2331 of title 18, United States Code.
8. Interbank Account. The term interbank account is defined as [a]n account held by one
financial institution at another financial institution primarily for the purpose of facilitating
customer transactions.475 The term interbank account has the same meaning as it has in 18
U.S.C. 984(c)(2)(B).476
472 31 U.S.C. 5312(a)(2).
473 USA Patriot Act, 321(c)(1)(A), adding 31 U.S.C. 5312(c).
474 Id.
475 USA Patriot Act, 319(a)(4)(A); 18 U.S.C. 984(c)(2)(B).
476 USA Patriot Act, 319(a)(4)(A).
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9. Payable-Through Account. The term payable-through account means an account, including

a transaction account opened at a depository institution by a foreign financial institution by
means of which the foreign financial institution permits its customers to engage, either directly
or through a subaccount, in banking activity usually in connection with the business of banking
in the U.S.
10. Transaction Account. Under 19(b)(1)(C) of the Federal Reserve Act, the term transaction
account means a deposit or account on which the depositor or account holder is permitted to
make withdrawals by negotiable or transferable instrument, payment orders of withdrawal,
telephone transfers, or other similar items for the purpose of making payments or transfers to
third parties or others under 19(b)(1)(C) of the Federal Reserve Act. Such term includes
demand deposits, negotiable order of withdrawal accounts, savings deposits subject to automatic
transfers, and share draft accounts.477
C. Office of Foreign Assets Control. The mission of the Office of Foreign Assets Control
(OFAC) of the U.S. Department of Treasury is as follows:
The [OFAC] of the U.S. Department of the Treasury administers and enforces
economic and trade sanctions based on US foreign policy and national security
goals against targeted foreign countries, terrorists, international narcotics
traffickers, and those engaged in activities related to the proliferation of weapons
of mass destruction. OFAC acts under Presidential wartime and national
emergency powers, as well as authority granted by specific legislation, to impose
controls on transactions and freeze foreign assets under US jurisdiction. Many of
the sanctions are based on United Nations and other international mandates, are
multilateral in scope, and involve close cooperation with allied governments.478
1. Information Available to Subscribers. E-mail information is available to subscribers (without
cost) from the OFAC web site, including: (i) The OFAC Financial Operations Bulletin; and (ii)
Whats New File (recent OFAC actions of interest).479
2. Other Information. The OFAC web site includes a National Money Laundering Strategy and
the 2002 National Money Laundering Strategy may be downloaded from a PDF file. The 2002
National Money Laundering Strategy is a blueprint for how the government will address critical
issues surrounding the enforcement of financial crimes. One may also subscribe to U.S. Treasury
e-mail lists.480
D. The Domestic Security Enhancement Act of 2003Drafted.
477 12 U.S.C. 461(b)(1)(C). See also definition of payable-through accounts in Minority Staff of the U.S. Senate
permanent Subcommittee on Investigations Report on Correspondent Banking: A Gateway to Money Laundering,
Feb. 5, 2001, at 15 n. 14. (Payable-through accounts allow a respondent banks clients to write checks that draw
directly on the respondent banks correspondent account.) USA Patriot Act, 311(e)(1)(C).
478 See http://www.treas.gov/offices/enforcement/ofac/.
479 Id.
480 See http://www.treas.gov/press/email/subscribe.html.

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1. USA Patriot Act Sequel. The Center for Public Integrity Exposed the U.S. Attorney Generals
sequel to the USA Patriot Act. The U.S. Department of Justice draft of the Domestic Security
Enhancement Act of 2003 is labeled confidential but is not classified. The document can be
downloaded at http://www.publicintegrity.org.
2. General Aspects of the U.S. Department of Justice Draft. The U.S. Department of Justice draft
is apparently referred to internally as Patriot Act II and is more far reaching than the USA
Patriot Act. This draft, if passed, radically expands law enforcement and intelligence gathering
authorization, reduces or eliminates judicial oversight over surveillance, authorizes secret arrests,
creates a DNA database for suspected terrorists based on unchecked executive suspicion,
creates new death penalties, and seeks to take U.S. citizenship away from an American citizen
who provided material support to a group the U.S. has designated as a terrorist organization.481
III. Anti-Money Laundering Programs. 352 of the USA Patriot Act requires the establishment
of anti-money laundering programs.
A. Financial Institutions Required to Establish Anti-Money Laundering Programs. 31 U.S.C.
5318(h) is amended482 to guard against money laundering by requiring financial institutions to
establish anti-money laundering programs, including: the development of internal policies,
procedures and controls, designation of a compliance officer, ongoing employee training
programs, and an independent audit function to test programs.483
B. Program Standards. The Secretary of the Treasury will establish minimum standards for
programs for financial institutions with respect to the foregoing anti-money laundering programs.
C. Effective Date. The foregoing amendment to 31 U.S.C. 5318(h) takes effect 180 days after
the beginning of the date of the enactment of the USA Patriot Act.
D. Examples of Failure to Implement Required Due Diligence Programs. Banks and other
financial institutions are being fined and penalized for failure to implement proper anti-money
laundering and due diligence programs and failure to file suspicious activity reports (SARs).
Below are some of the banks that have failed to comply with various laws.484

481 The ACLU discussion of the Domestic Security Enhancement Act of 2003 is at
http://www.acluutah.org/PatriotII.htm.
482 USA Patriot Act, 352(a).
483 See The American Council of Life Insurers, Subcommittee on Money Laundering, issued a final IAIS
[International Association of Insurance Supervisors] Anti-Money Laundering Guidance Paper, January 9, 2002.
This 58 page Guidance Paper sets forth anti-money laundering guidance notes for insurance supervisors and
insurance entities. See Financial Crimes Enforcement Network, 31 CFR Part 103 (2003) regarding the USA Patriot
Act and real estate transactions.
484 Some other banks that failed to implement required due diligence programs
include: Sovereign Bank Wyomissing P.A.; Great Eastern Bank of Florida; Western
Union Financial Services Inc., Greenwood Village, Colorado; and Korean Exchange
Bank
.

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1. Banco Popular de Puerto Rico. On January 16, 2003, the U.S. Attorney General, Justice
Department Criminal Division, U.S. Customs Commissioner, Criminal Investigation Division at
the Internal Revenue Service (IRS), Financial Crimes Enforcement Network (FinCEN), and
the Board of Governors of the Federal Reserve System announced that Banco Popular de Puerto
Rico must forfeit $21.6 million to the U.S. as part of a Deferred Prosecution Agreement on
charges of failing to report suspicious financial activity.485 From June 1995 to June 2000, several
unusual or suspicious transactions were conducted in connection with certain accounts at the
bank. The bank did file SARs but they were untimely and, in some cases, inaccurate. Millions of
dollars of drug proceeds were laundered through the bank and the bank failed to have a
comprehensive anti-money laundering program as required by the Bank Secrecy Act.
2. Riggs Bank. Riggs Bank entered into a Consent Order with the Office of the Comptroller of
the Currency on May 13, 2004, agreeing to pay $25 million in civil penalties for a willful,
systematic violation of anti-money laundering law. The Consent Order required Riggs Banks
board to review and produce a written report regarding the staffing skills and levels required to
fulfill the banks obligations pursuant to the order within 60 days.486 The Office of the
Comptroller of the Currency, in assessing the penalty, found that Riggs Bank failed to implement
an effective anti-money laundering program and did not detect or investigate suspicious
transactions and had not filed SARs as required under the law. Also, the bank did not collect or
maintain sufficient information about its foreign banking customers. The Office of the
Comptroller of the Currency found a number of problems with Riggs account relationship with
foreign governments, including Saudi Arabia and Equatorial Guinea.487 The Office of the
Comptroller of the Currency further found that Riggs failed to properly monitor, and report as
suspicious, transactions involving tens of billions of dollars in cash withdrawals, international
drafts that were returned to the bank, and numerous sequentially-numbered cashiers checks.488
3. ABN Amro Bank N.V. On July 23, 2004, the Board of Governors of the Federal Reserve
System, the State of Illinois Department of Financial and Professional Regulation, and the New
York State Banking Department entered into an agreement with this foreign bank and the New
York branch. The bank was required to take steps, within 60 days, to submit with respect to its
New York bank an acceptable written anti-money laundering program, improve the system of
internal controls with respect to clearing operations and to ensure compliance with all record
keeping and reporting requirements, including controls to ensure compliance with requirements
relating to correspondent accounts with non-U.S. persons. In addition, it provided for thorough
assessment of legal and reputational risks associated with correspondent accounts, and retain
outside consultant assistance as necessary and appropriate to assess risks and to design and
implement controls to manage risks, and to design same to ensure identification verification of
accountholders.
489

485 See http://www.usdoj.gov/opa/pr/2003/January/03_crm_024.htm; http://www.fincen.gov/bancofinalpr1.pdf;

http://www.fincen.gov/bancopopular.pdf.
486 In the matter of Riggs Bank N.A., McLean, Virginia, U.S. Department of the Treasury, Office of the
Comptroller of the Currency, AA-EC-04-54, #2004-43 (May 13, 2004).
487 See Bruce Zagaris, Riggs Banks Agrees to Record $25 Million Fine for Anti-Money Laundering Violations, 1-2,
INT.L ENFORCEMENT L. REP. 20, 7 (Jul. 2004).
488 OCC, OCC assesses $25 million penalty Against Riggs Bank N.A., News Release Nr 2004-34, May 13, 2004.

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4. AmSouth Bank. AmSouth Bank was assessed with a $10 million fine and paid $40 million to
the U.S. to avoid criminal prosecution.
a. Civil Penalty. On October 12, 2004, the Board of Governors of the Federal Reserve System,
Washington, D.C., and the State of Alabama, Alabama Department of Banking, Montgomery,
Alabama, issued a Cease and Desist Order and Order of Assessment of a Civil Money Penalty
Issued Upon Consent Pursuant to the Federal Deposit Insurance Act, as amended, against
AmSouth Bancorporation and AmSouth Bank (hereinafter jointly referred to as AmSouth).
AmSouth mutually agreed with the petitioners to enter into the order. The order states that
AmSouth: (i) engaged in violations of 208.63 of Regulation H of the Board of Governors by
failing to establish and maintain procedures reasonably designed to assure and monitor
compliance with the Bank Secrecy Act; (ii) violated 208.62 of Regulation H of the Board of
Governors by failing to file accurate, and complete, or timely SARs; and (iii) engaged in unsafe
and unsound practices by failing to have adequate systems in place to prevent, identify, and
report criminal activity conducted through AmSouth, and failing to promptly and fully cooperate
with law enforcement authorities in the review and investigation of such activity.490 The bank
will immediately pay a $10 million fine for the foregoing violations of law, regulation and unsafe
and unsound practices assessed by the Board of Governors, and by FinCEN for violations of the
anti-money laundering program required by the USA Patriot Act and SAR requirements of the
Bank Secrecy Act.491
b. Deferring Prosecution Agreement. AmSouth agreed to pay an additional $40 million, pursuant
to a Deferred Prosecution Agreement, to the U.S. and in order for the Department of Justice to
defer criminal charges for 12 months while the bank improves its controls. As a part of this
agreement, AmSouth waived indictment and agreed to the filing of one count in the U.S. District
Court for the Southern District of Mississippi that charged it with failing to file SARs in a timely,

489 See http://www.federalreserve.gov/boarddocs/press/enforcement/2004/20040726/default.htm; http://www.

federalreserve.gov/boarddocs/press/enforcement/2004/20040726/attachment.pdf. See also Glenn R. Simpson, Amid
Probe, ABN Amro Cuts Off Nearly 100 Banks: Regulators Fraud Concerns Drive Moves by U.S. Arm; A Focus on
Russian Accounts, WALL ST. J. (Sept. 29, 2004). OCC assesses $25 million penalty Against Riggs Bank N.A., News
Release Nr 2004-34, May 13, 2004.
See http://www.federalreserve.gov/boarddocs/press/enforcement/2004/20040726/default.htm; http://www.
federalreserve.gov/boarddocs/press/enforcement/2004/20040726/attachment.pdf. See also Glenn R. Simpson, Amid
Probe, ABN Amro Cuts Off Nearly 100 Banks: Regulators Fraud Concerns Drive Move
490 In re AmSouth Bank, No. 2004-2 (Department of the Treasury Financial Crimes Enforcement Network),
available at http://www.federalreserve.gov/boarddocs/press/enforcement/2004/20041012/attachment2.pdf (Oct. 12,
2004); See http://www.federalreserve.gov/boarddocs/press/enforcement/2004/20041012/default.htm. See also
United States of America before the Board of Governors of the Federal Reserve System, In the Matter of AmSouth
Bancorporation and AmSouth Bank, Nos. 04-021-B-HC, 04-021-B-SM, 04-021-CMP-HC and 04-021-CMP-SM,
available at http://www.federalreserve.gov/boarddocs/press/enforcement/2004/20041012/attachment.pdf (Oct. 12,
2004). See also Carrick Mollencamp, AmSouth Inquiry Results in Fines of $50 Million, WALL ST. J. (Oct. 13, 2004);
and Fed, Tsy Assess AmSouth Bank $10 Mln Civil Money Penalty, DOW JONES NEWSWIRES (Oct. 21, 2004).
491 In re AmSouth Bank, No. 2004-2 (Department of the Treasury Financial Crimes Enforcement Network),
available at http://www.federalreserve.gov/boarddocs/press/enforcement/2004/20041012/attachment2.pdf (Oct. 12,
2004).

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complete and accurate manner in violation of 31 U.S.C. 5318(g)(1) and 5322(b) and 31 C.F.R.
103.18.492
5. Treasury Imposes Sanctions Against Two Foreign Financial Institutions. On August 24, 2004,
the Federal Register included two notices of proposed rulemaking of FinCEN, U.S. Department
of Treasury, announcing the imposition of special measures against two foreign financial
institutions for their standing as primary money laundering concerns, under the authority of the
Bank Secrecy Act.493 In both cases, FinCEN proposes to prohibit certain financial institutions
from opening and maintaining correspondent or payable-through accounts for, or on behalf of,
Infobank of Belarus and the First Merchant Bank OSH Ltd. of the Turkish Republic of Northern
Cyprus.494
IV. Bank Records Related to Anti-Money Laundering Programs. 31 U.S.C. 5318(k) is added by
the USA Patriot Act495 authorizing access to bank records, by the Secretary of the Treasury or the
Attorney General, of a foreign bank that has a U.S. correspondent bank account.
A. Summons or Subpoena of Records. The Secretary of the Treasury or the Attorney General
may issue a summons or subpoena to any foreign bank maintaining a U.S. correspondent bank
account and request records related to such correspondent account including records maintained
outside the U.S. relating to the deposit of funds into the foreign bank.496
B. 120-Hour RuleResponding to a Request by a Covered Financial Institution. An appropriate
Federal banking agency may request information related to anti-money laundering compliance
by a covered financial institution, or its customer. No later than 120 hours after such request, the
covered financial institution shall provide information and account documentation for any
account opened, maintained, administered or managed in the United States by the covered
financial institution.497
C. Identification of Owners and Acceptance of Service by the Foreign Bank. Any covered
financial institution that maintains a correspondent account in the U.S. for a foreign bank shall
maintain records in the U.S. identifying the owners of the foreign bank and the name and address

492 See
http://www.usdoj.gov/usao/mss/documents/pressreleases/october2004/amprsrels.
htm; United States v. AmSouth Bancorporation and AmSouth Bank, available at
http://www.usdoj.gov/usao/mss/documents/
pressreleases/october2004/was15759061.pdf (S. D. Miss., Jackson Division Oct.
2004) AmSouth Enters Into Agreements With U.S. Attorney In Mississippi, Federal
Reserve And FinCEN, DOW JONES NEWSWIRES (Oct. 12, 2004).
493 31 U.S.C. 5318A.
494 See Bruce Zagaris, Money Laundering and Bank Secrecy, 1-3, INT.L ENFORCEMENT L. REP. 20, 11 (Nov.
2004).
495 USA Patriot Act, 319(b).
496 31 U.S.C. 5318(k)(3)(A)(i).
497 31 U.S.C. 5318(k)(2).

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of a person residing in the U.S. who is authorized to accept service of legal process for records
regarding the correspondent account.498 The term owner is a defined term.499
D. Service of Summons or Subpoena. A summons or subpoena may be served on the U.S. person
appointed by the foreign bank to accept service of legal process for records regarding the
correspondent account.500
E. Termination of Correspondent Relationship. A covered financial institution shall terminate any
correspondent relationship with a foreign bank no later than 10 business days after receipt of
written notice from the Secretary of the Treasury or the Attorney General stating that the foreign
bank failed to comply with a summons or subpoena, or failed to initiate proceedings in the U.S.
court contesting such summons or subpoena.501
F. Failure to Terminate a Relationship. Failure to terminate a correspondent relationship in
accordance with the foregoing provision results in a civil penalty of a maximum of $10,000 per
day until the correspondent relationship is terminated.502
G. Limitation on Liability. The covered financial institution is not liable to any person in a court
or arbitration proceeding for terminating a correspondent relationship as required by the
Secretary of Treasury or the Attorney General.503
H. Grace Period. Financial institutions have 60 days from the date of enactment of the USA
Patriot Act to comply with the provisions of 31 U.S.C. 5318(k).504
V. Identification and Verification of Accountholders. 31 U.S.C. 5318(l) is added505 to require
identification and verification of accountholders.
A. Minimum Standards for the Identity of Customers. The Secretary of the Treasury shall
prescribe regulations providing the minimum standards for financial institutions and their
customers regarding the identity of each customer with respect to the opening of an account.506
B. Minimum Requirements. The regulations, at a minimum, shall require financial institutions to
implement, and customers (after receiving adequate notice) to comply with, reasonable
procedures for: verifying the identity of any person seeking to open an account to the extent
reasonable and practicable; maintaining records of the information used to verify a persons
identity, including name, address and other identifying information; consulting lists of known
or suspected terrorists or terrorist organizations provided to the financial institution by any
498 31 U.S.C. 5318(k)(3)(B).
499 18 U.S.C. 981(k)(4)(B).
500 31 U.S.C. 5318(k)(3)(A)(ii).
501 31 U.S.C. 5318(k)(3)(C)(i).
502 31 U.S.C. 5318(k)(3)(C)(iii).
503 31 U.S.C. 5318(k)(3)(C)(ii).
504 USA Patriot Act, 319(c).
505 USA Patriot Act, 326(a).
506 31 U.S.C. 5318(l)(1).
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government agency to determine whether a person seeking to open an account appears on any
such list.507
C. Study and Report Required. Within six months after the enactment of the USA Patriot Act, the
Secretary of the Treasury, in consultation with other governmental agencies, is required to submit
a report to Congress providing recommendations for determining how foreign nationals will
provide domestic financial institutions and agencies with appropriate and accurate information.
This information shall be comparable to that required of U.S. nationals relating to the identity,
address and other related information in order to enable institutions and agencies to comply with
identification and verification of accountholders. In addition, this report to Congress shall
recommend methods for requiring foreign nationals to apply for and obtain, for opening accounts
with a domestic financial institution, an identification number that functions similar to a Social
Security number or tax identification number. Furthermore, the report to Congress shall
establish a system for domestic financial institutions and agencies to review information
maintained by U.S. Government agencies that relate to verifying the identities of foreign
nationals who are seeking to open accounts at such institutions and agencies.508
D. Effective Date. Final regulations shall take effect before one year from the enactment of Title
III of the USA Patriot Act.509
E. Politically Exposed Persons. The Financial Action Task Force Revised Forty
Recommendations focused extensively on customer due diligence and identification.
Recommendations Six and Seven provide for enhanced due diligence requirements for
politically exposed persons (certain prominent public officials)510 and foreign correspondent
banking accounts.
VI. Forfeiture of Funds in U.S. Interbank Accounts. The U.S. Government is now provided with
additional civil forfeiture rights under 18 U.S.C. 981(k)511 with respect to funds deposited into
an account at a foreign bank if that bank has an interbank account in the U.S. with a covered
financial institution.
A. Interbank Account in a Covered Financial Institution. The funds in the foreign bank account
are deemed to be deposited into the interbank account in a U.S. covered financial institution.
Such funds are subject to any restraining order, seizure warrant, or arrest warrant in rem
regarding the funds may be served on the covered financial institution, and funds in the interbank
507 31 U.S.C. 5318(l)(2).
508 USA Patriot Act, 326(b).
509 31 U.S.C. 5318(l)(6).
510 The Glossary to the Forty Recommendations of the Financial Action Task Force defines politically exposed
persons (PEPs) as individuals are or have been entrusted with prominent public functions in a foreign country,
for example Heads of State or of government, senior politicians, senior government, judicial or military officials,
senior executives of state owned corporations, important political party officials. Business relationships with family
members or close associates of PEPs involve reputational risks similar to those with PEPs themselves. The
definition is not intended to cover middle ranking or more junior individuals in the foregoing categories. See
Glossary at http://www.fatf-gif.org/40Recs_en.htm.
511 USA Patriot Act, 319(a).

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account, or up to the value of the funds deposited into the account at the foreign bank, may be
restrained, seized or arrested.512
B. No Requirement for U.S. Government to Trace Funds. In an action under 18 U.S.C. 981(k),
the U.S. Government is not required to establish that the funds are directly traceable to funds
deposited into a foreign bank nor is the U.S. Government required to rely on the application of
18 U.S.C. 984.513
C. Authority to Suspend; Defense Against Forfeiture. The Attorney General, in consultation with
the Secretary of the Treasury, may suspend or terminate such a forfeiture if the Attorney General
determines that a conflict of law with respect to liabilities arising from the restraint, seizure or
arrest of such funds and that such action could be in the interest of justice and harm national
interests of the U.S. The owner of the funds deposited into a foreign account may contest the
forfeiture by providing a claim under 18 U.S.C. 983.
D. Example of Seizing Correspondent Account of Foreign Bank. The U.S. Government is
provided with new forfeiture and seizure rights with respect to a covered financial institution and
funds in an interbank account equal to the value of funds deposited in a foreign bank that has an
interbank account514 in the U.S. with a covered financial institution.515 The U.S. Government may
now seize the funds in the interbank account of the covered financial institution without having
to trace the funds deposited in the covered financial institution to the account in the foreign bank
because the funds are deemed to have been deposited into the U.S. interbank account. The
Secretary of the Treasury or the Attorney General may issue a summons or subpoena against a
U.S. correspondent account that is maintained by any foreign bank and may request records with
respect to such correspondent account, including records maintained outside the U.S. relating to
the deposit of funds into the foreign bank.516
1. Testimony at U.S. Senate Banking Committee. Tax Analysts, in its Worldwide Tax Daily
(January 31, 2002), reported the Justice Department testimony at the U.S. Senate Banking
Committee hearing on money laundering. WTD 2127. Michael Chertoff of the Justice
Department testified to the following:
[27]Some of the new provisions in the Act have already been deployed with
successful results. For example, the Department of Justice relied on the new civil
forfeiture authority provided in the PATRIOT Act to seize six bank accounts in
New Jersey and three in Florida related to the 11 September terrorists. On 8
November, 2001, the United States Attorneys Office for the District of New
Jersey obtained nine seizure warrants for bank accounts used by the terrorists
based on the newly enacted PATRIOT Act authority codified at 18 U.S.C. 981(a)
512 As defined in 31 U.S.C. 5318(j)(1).
513 18 U.S.C. 981(k)(2).
514 The term interbank account is defined as [a]n account held by one financial institution at another financial
institution primarily for the purpose of facilitating customer transactions. The term interbank account has the
same meaning as it has in 18 U.S.C. 984(c)(2)(B). USA Patriot Act, 319(a)(4)(A).
515 USA Patriot Act, 319(a), adding 18 U.S.C. 981(k).
516 USA Patriot Act, 319(b), adding 31 U.S.C. 5318(k)(3).

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(1)(G), which provides for the seizure of all assets owned, acquired or used by
any individual or organization engaged in domestic or international terrorism.
Notice of the proposed forfeiture of these accounts has been made and, not
surprisingly, no one has claimed an interest in the accounts.
[28] In addition, we recently used Section 319 of the PATRIOT Act to good
effect. Section 319(a) provided us with a new tool to seize and forfeit criminal
assets deposited into a foreign bank account through the foreign banks
correspondent bank account in the United States. This section provides that assets
which are subject to forfeiture in the United States, but which are deposited
abroad in a foreign bank may be deemed to be held in the foreign banks
correspondent account in the United States. Thus, where a criminal deposits funds
in a bank account in a foreign country and that bank maintains a correspondent
account in the United States, the government may seize and forfeit an equivalent
sum of money in the correspondent account, irrespective of whether the money in
the correspondent account is traceable to the proceeds deposited in an account
held by the foreign bank.
[29] Although I was recused from the case because of a past representation, I
can report that last month we recovered almost US $ 1.7 million in funds using
Section 319, which will be used to compensate the victims of a fraud scheme. On
18 January 2001, a grand jury in the Southern District of Illinois indicted James
R. Gibson for various offenses, including conspiracy to commit money
laundering, mail and wire fraud. Gibson defrauded clients of millions of dollars
by fraudulently structuring settlement agreements for numerous tort victims.
Gibson and his wife, who was indicted later, fled to Belize, depositing some of the
proceeds of their fraud scheme in two Belizean banks.
[30] Our efforts to recover the proceeds at first were unsuccessful. Although
the government of Belize initially agreed to restrain the assets, a Belizean court
ordered the freeze lifted, because local law prohibited legal assistance to the
United States: the treaty providing for legal assistance between the two countries
has not entered into force. The court also prohibited the government from
assisting the United States law enforcement agencies further, including providing
information regarding Gibsons money laundering activities. Efforts to break the
impasse failed, and all the while the Gibsons systematically looted their accounts
in Belize.
[31] Following the passage of the PATRIOT Act, and interagency consultation,
the Criminal Division authorized the use of the Section 319(a) authority. A seizure
warrant was served on the correspondent bank, and the remaining funds were
recovered. In our judgment, this case presents a compelling example of the need
for, and appropriate use of, the new authority under Section 319(a).
[32] While this instance involved fraud, the facts of this case demonstrate the
utility of this particular tool, particularly in the area of terrorist financing. Section

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319(a) is, of course, an important enhancement to the law enforcements ability to

pursue assets overseas. It is also a very powerful tool and one that can affect our
international relationships. Accordingly, the Criminal Division is developing a
policy to provide prosecutorial oversight regarding the use of this new provision.
[33] Similarly, Section 319(b) of the Act provides new summons and subpoena
authority with respect to foreign banks that have correspondent accounts in the
United States. This section authorizes the Attorney General and the Secretary of
the Treasury to issue subpoenas and summonses to foreign banks that maintain
correspondent accounts with banks in the United States in order to obtain records
related to the U.S. correspondent accounts. We also anticipate delegating authority
to use Section 319(b) to a level below the Attorney General, but because of the
international sensitivities involved, we anticipate that the use of such authority
will remain subject to departmental review and approval and interagency
consultation. I am currently reviewing a proposal regarding the best way to
implement this important new authority.
2. The Gibson Case.517 The court refused to order the Belize bank to return these assets to the
U.S. because local law prohibited legal assistance to the United States: the Mutual Legal
Assistance Treaty (MLAT) between the two countries was not in force. The court also prohibited
the Belize government from assisting U.S. law enforcement agencies, including providing
information regarding Gibsons money laundering activities.
a. Facts of the Gibson Case. Mr. and Mrs. Gibson, who fled the U.S. and moved to Belize,
opened an account at Provident Bank & Trust of Belize Limited. Provident Bank & Trust of
Belize Limited filed an action, as a bank or financial institution, due to Governor of the Central
Bank of Belize issuing an Affidavit instructing Provident Bank & Trust of Belize Limited to
freeze the deposits of Mr. and Mrs. Gibson. This action by the Governor of the Central Bank of
Belize was based on the Belize police advising him that these deposits may involve money
laundering proceeds, as determined pursuant to statements made by the F.B.I. in the U.S.
Provident Bank & Trust of Belize Limited asked the court what action it should take as a bank.
b. Reasoning of the Gibson Case. The court held that the Governor of the Central Bank of Belize
was not given the power to effect a freeze on bank accounts of customers. The court further
stated that if the Governor received information that money laundering had occurred, he must
send that information to the law enforcement authorities. The court further stated: To freeze a
customers account with his bank is a grave and serious action which can only be allowed by
express words of a statute I cannot overemphasize the need for coordination, speed and
secrecy and timely action for the provisions of the Act [Belize Money Laundering (Prevention)
Act] to be deployed in the fight against the pernicious practice of money laundering but all this
must be done in consonance with the law. The court further noted that there was no action
contemplated or pending against Mr. Gibson in any Court in Belize; and all evidence had been
proceeded in the U.S. due to the approach by authorities in the U.S. with the Belize police
517 The Queen v. James R. Gibson, Action No. 306 of 2001, June 25, 2001 (the cite
for the consolidated cases is: Provident Bank & Trust of Belize Ltd. v. Emerald
Inc., Action No. 306 of 2001, June 25, 2003).

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regarding Mr. Gibson. The court further stated: In my view, in the circumstances of this
application, the requirements of subsection (6) of section 23 of the Money Laundering
(Prevention) Act, are mandatory assistance by this court for the purposes of money laundering
offenses shall be provided only to those countries with whom Belize has entered into mutual
assistance treaties either on a bilateral or a multilateral basis. The court concluded that there
was not yet an operative mutual assistance treaty in force between Belize and the U.S.,
notwithstanding the evident unilateral ratification by Belize of the Mutual Legal Assistance in
Criminal Matters Treaty between the two countries signed on, 19th September 2000 in Belize
and ratified Belize on 8th January 2001. To bring this treaty into force, there has to be its
ratification by the United States and the exchange of its instrument of ratification with Belize.518
c. Current Status of MLAT with Belize. The MLAT with Belize, signed on September 18-19,
2000, was ratified on July 15, 2002.519
3. Criminal Information Charge Against BDO Seidman, LLP. The U.S. Attorney for the Southern
District of Illinois, as a part of a pretrial diversion agreement, filed a criminal information
charging BDO Seidman, LLP, on April 12, 2002, with misprision of a felony, in violation of 18
U.S.C. 4.520
a. Facts Leading to Criminal Information Charge. BDO Seidman, LLP, represented SBU, Inc.,
Flag Finance Corporation, and Family Company of America and knew that SBU, Inc., was a
third-party settlement company owned and operated by James R. Gibson engaged in the business
of structuring personal injury plaintiffs settlements and judgments through the establishment of
a revocable trust funded with U.S. Treasury obligations intended to qualify as tax-exempt
transactions. The criminal information showed the BDO Seidman, LLP, through its former St.
Louis office, knew in October 1995 that SBU, Inc., and James R. Gibson failed to purchase
promised U.S. Treasury obligations to fund approximately 22 of SBU, Inc.s clients trusts.
Instead, the money was diverted to finance the purchase and operations of a chain of 23 grocery
stores, purchased in March 1996. In addition, the IRS, on July 7, 1997, sent a Notice of Tax
Examination to SBU, Inc., for the tax year ending October 31, 1993. During the tax
examination, the IRS requested information relating to tax years 1994 and 1995. BDO Seidman,
LLP, submitted documents on behalf of SBU, Inc., pursuant to this request, on January 8, 1998.
The U.S. Attorneys office states: At that time, BDO knew that James R. Gibson had
committed a felonyattempted tax evasionin connection with the tax year 1995 return. In the
January 8, 1998 submission, BDO failed to inform the IRS of information that was material to
the determination of income for year 1995, i.e., that James R. Gibson had not purchased U.S.
Treasury obligations with settlement funds received and that James R. Gibson had, instead, used
those funds to purchase and operate the grocery stores which were not qualified assets under the
Internal Revenue Code, and BDO failed to inform the IRS that James R. Gibson had
committed attempted tax evasion.521
518 See http://belizelaw.org/judgements/no_306_of_2001.html.
519 See http://www.whitehouse.gov/news/releases/2002/07/20020715-6.html.
520 News Release, Miriam F. Miquelon, United States Attorney, on BDO Seidman, LLP (April 12, 2002) (on file
with U.S. Attorneys Office, Southern District of Illinois) available at http://www.usdoj.gov/usao/ils/newsreleases.
521 Id.

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b. Agreement with BDO Seidman, LLP. BDO Seidman, LLP, must cooperate with the agreement
and pay a total of $16 million into fund established as victim restitution for former clients of
SBU, Inc.
c. Prosecution. The office of the U.S. Attorney states that prosecution will be deferred with a
view toward dismissal of information after eighteen months.
E. Privacy Versus Concerns About Money Laundering. A case in London shows the problems
that a bank faces with respect to concerns about the privacy of its bank depositors and the
concerns about financial crimes related to those deposits, even with the help of a court.522
VII. Special Measures for Jurisdictions, Financial Institutions, or International Transactions of
Primary Money Laundering Concern. 31 U.S.C. 5318A is added523 to provide for special
measures with respect to primary money laundering concern.
A. International Counter-Money Laundering Requirements. The Secretary of the Treasury may
require domestic financial institutions and domestic financial agencies to take one or more
special measures.524
B. Definitions.
1. Special Measure Matters. For purposes of 31 U.S.C. 5318(a), special measures are required
for special measure matters which means that the Secretary of the Treasury finds a
jurisdiction outside of the United States, 1 or more foreign financial institutions operating outside
of the United States, 1 or more classes of transactions within, or involving, a jurisdiction outside
the United States, or 1 or more types of accounts is a primary money laundering concern .525
2. Primary Money Laundering Concern. The Secretary of the Treasury shall consult with the
Secretary of State and the Attorney General with respect to finding money laundering concern
regarding special measure matters.526 In finding primary money laundering concern, the
Secretary of the Treasury shall consider, in addition to what the Secretary determines to be
relevant, additional factors, including: (i) jurisdictional factors; and (ii) institutional factors.527
Jurisdictional factors for a particular jurisdiction include: (i) governments that organize criminal
groups for international terrorist transacted business in that jurisdiction: (ii) extent to which the
jurisdiction offers bank secrecy or special regulatory advantages to non-residents or nondomiciliaries of that jurisdiction; (iii) the substance and quality of administration of the bank
supervisory and counter-money laundering laws of the jurisdiction; (iv) the volume of financial
transactions in relationship to the size of the economy of the jurisdiction; (v) whether the
jurisdiction is characterized as an offshore banking or secrecy haven by a credible financial
organization or multi-lateral expert groups; vi) whether the U.S. has a mutual legal assistance
522 Bank of Scotland v. A. Ltd., [2001] 1 W.L.R. 751, [2001] 3 All E.R. 58, [2001] 1 All E.R. (Comm) 1023.
523 USA Patriot Act, 311.
524 31 U.S.C. 5318A(a)(1).
525 Id.
526 31 U.S.C. 5318A(c)(1).
527 31 U.S.C. 5318A(c)(2).
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treaty with the jurisdiction and the experience of U.S. law enforcement officials in obtaining
information under such a treaty; and (vii) the extent the jurisdiction has high levels of official or
institutional corruption.528 Institutional factors include: (i) the extent to which money laundering
facilitated or promoted in and through a jurisdiction; (ii) the extent which an institutions
transactions or accounts are used for legitimate business purposes in the jurisdiction; and (iii) the
extent to which action is taken by the jurisdiction that the purposes of USA Patriot Act 311(c)
is fulfilled in order to guard against international money laundering or other financial crimes.
3. Special Measures. With respect to special measure matters, the Secretary of the Treasury
may require any domestic financial institution or domestic financial agency to maintain records,
file reports, or both, concerning the aggregate amount of transactions or concerning each
transaction with respect to such special measure matters if the Secretary finds such to be a money
laundering concern.529 The records shall be made as required by the Secretary of the Treasury
and shall include the identity and address of the participants in a transaction or relationship,
including the identity of the originator of any funds, the legal capacity in which a participant is
acting and the identity of the beneficial owner of the funds involved in any transaction.530
Records and reports shall be made and retained in the manner determined by the Secretary of
Treasury.531
C. Information Relating to Beneficial Ownership. The Secretary of Treasury may require any
domestic financial institution or domestic financial agency, if the Secretary of Treasury
determines to be reasonable and practicable, to obtain and retain information concerning the
beneficial ownership of any account opened and maintained in the U.S. by a foreign person
(other than a foreign entity whose shares are subject to reporting requirements or listed on a
regulated stock exchange) or a representative of such person that involves special measure
matters to be a primary money laundering concern.532
D. Information Relating to Certain Payable-Through Accounts. If the Secretary of Treasury finds
special measure matters, the Secretary of the Treasury may require any domestic financial
institution or domestic financial agency to meet certain conditions before opening or maintaining
a payable-through account for a foreign financial institution involving a foreign jurisdiction or
foreign institution or payable-through account through which a transaction may be conducted.
Such conditions may include identifying each customer (and the representative of each customer)
of each financial institution who is permitted to use or whose transactions pass through the
payable-through account and obtaining, with respect to such customer, information that is
substantially comparable to records obtained from U.S. customers in the ordinary course of
business.533
E. Information Relating to Certain Correspondent Accounts. If the Secretary of the Treasury
finds special measure matters to be a primary money laundering concern, the Secretary of the
528 USA Patriot Act, 311.
529 31 U.S.C. 5318A(b)(1)(A).
530 31 U.S.C. 5318A(b)(1)(B).
531 Id.
532 31 U.S.C. 5318A(b)(2).
533 31 U.S.C. 5318A(b)(3).
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Treasury, in consultation with the Attorney General and the chairman of the board of governors
of the Federal Reserve System, may prohibit or impose conditions on the opening or maintaining
of a correspondent account or payable-through account by any domestic financial institution or
domestic financial agency for or on behalf of a foreign banking institution if such account or any
transaction involves such a jurisdiction or institution.534

VIII. Special Due Diligence for Correspondent Accounts and Private Banking Accounts. 31
U.S.C. 5318(i) is added535 to provide special due diligence requirements for correspondent
accounts and private banking accounts.
A. Due Diligence for Accounts Involving Foreign Persons. Each financial institution that
establishes, maintains, administers or manages a private banking account or a correspondent
account in the U.S. for a non-U.S. person shall establish appropriate, specific and, where
necessary, enhanced due diligence policies, procedures and controls that are reasonably designed
to detect and report money laundering transactions passing through those accounts.536
B. Enhanced Due Diligence for Certain Correspondent Accounts.
1. Enhanced Due Diligence for Correspondent Accounts for Offshore Bank Designated as NonCooperative. Enhanced due diligence is required of a correspondent account requested or
maintained by or on behalf of a foreign bank operating under an offshore banking license or
under a banking license issued by a foreign country that has been designated as non-cooperative
with international anti-money laundering principles or procedures by an inter-governmental
group or organization of which the U.S. is a member or by the Secretary of the Treasury as
warranting special measures due to money laundering concerns.537
2. Obtaining Identity of Owners of Certain Foreign Banks and Reporting Suspicious Activities.
The enhanced due diligence policies, procedures and controls are required to ensure that a
financial institution in the U.S. takes reasonable steps to ascertain, for any such foreign bank
whose shares are not publicly traded, the identity of each of the owners of the foreign bank and
the nature and extent of the ownership interests of each owner. The enhanced due diligence
policies, procedures and controls are also necessary to conduct enhanced scrutiny of the accounts
to guard against money laundering, to report suspicious activities and to ascertain whether such
foreign bank provides correspondent accounts to other foreign banks and, if so, the ability of
those foreign banks and related due diligence information.
IX. Prohibition on U.S. Correspondent Accounts with Foreign Shell Banks. 31 U.S.C. 5318(j)
is added538 to prohibit U.S. correspondent bank accounts to be established for foreign shell banks.
534 31 U.S.C. 5318A(b)(5).
535 USA Patriot Act, 312(a).
536 31 U.S.C. 5318(i)(1).
537 31 U.S.C. 5318(i)(2)(A).
538 USA Patriot Act, 313(a).
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A. Definitions.
1. Affiliate. Affiliate means a foreign bank controlled by or under common control with a
depository institution, credit union or foreign bank.539
2. Physical Presence. Physical presence is a place of business that is maintained by a foreign
bank and is located at a fixed address in which the bank is authorized to conduct business
activities at its location and employs one or more individuals on a full-time basis, maintains
operating records relating to banking activities; and is subject to inspection by the banking
authority that licenses the foreign bank to conduct banking activities.540
B. Covered Financial Institution Shall not Establish or Maintain a Correspondent Account for a
Foreign Shell Bank. A covered financial institution shall not establish, maintain, administer, or
manage a correspondent account in the United States for, or on behalf of, a foreign bank that
does not have physical presence in any country.541 The Secretary of the Treasury indicates that
this prohibition applies to non-bank covered financial institutions, including broker-dealers.542
C. Ensuring that Indirect Service is not Provided to Foreign Shell Banks. A covered financial
institution shall take steps necessary to ensure that any U.S. correspondent account is not being
used by a foreign bank to indirectly provide banking services to another foreign bank that does
not have a physical presence in any country.543
D. Exception to the General Rules of Prohibition. A correspondent account may be provided to a
foreign bank if the foreign bank is: (i) an affiliate of the depository institution or foreign bank
that maintains a physical presence in the U.S. or a foreign country; and (ii) subject to supervision
by a banking authority in the country regulating affiliated depository institutions, credit unions,
or foreign banks.544 The Secretary of the Treasury terms such entities regulated affiliates and
adds to the definition, entities that are controlled by or are under common control with the
depository institution, credit union, or foreign bank.545
E. Effective Date.546 Covered financial institutions have 60 days from the date of enactment of
the USA Patriot Act to comply with the provisions of 31 U.S.C. 5318(j).
X. Cooperative Efforts to Deter Money Laundering. The USA Patriot Act, 314 provides for
cooperation among financial institutions, regulatory parties, and law enforcement authorities.
539 31 U.S.C. 5318(j)(4)(A).
540 31 U.S.C. 5318(j)(4)(B).
541 31 U.S.C. 5318(j)(1).
542 See U.S. Department of the Treasury, Interim Guidance Concerning Compliance by Covered U.S. Financial
Institutions with New Statutory Anti-Money Laundering Requirements Regarding Correspondent Accounts
Established or Maintained for Foreign Banking Institutions (Nov. 20, 2001).
543 31 U.S.C. 5318(j)(2).
544 31 U.S.C. 5318(j)(3).
545 See U.S. Department of the Treasury, Interim Guidance Concerning Compliance by Covered U.S. Financial
Institutions with New Statutory Anti-Money Laundering Requirements Regarding Correspondent Accounts
Established or Maintained for Foreign Banking Institutions (Nov. 20, 2001).
546 USA Patriot Act, 313(b).

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A. Adoption of Regulations. Provision is made for adoption of regulations within 120 days of
enactment of the USA Patriot Act (or by February 25, 2002).547 The Secretary of the Treasury
shall adopt regulations to encourage further cooperation between these parties, specifically in
regard to individuals, entities and organizations engaged in or reasonably suspected to be
engaged in terrorist acts or money laundering activities.548
1. Cooperation and Information Sharing Procedures. The regulations may include procedures for
cooperation and information sharing focusing on matters specifically related to the finances of
terrorist groups, the means by which they transfer funds around the world (including within the
U.S.), the use of charities, non-profit organizations and non-governmental organizations to make
transfers, and the extent to which financial institutions in the U.S. are unwillingly involved in
such transactions.549 In addition, the regulations may include a clear procedure for cooperation
and information sharing focusing on international narcotics traffickers and foreign terrorist
organizations;550 and the means for identifying the accounts and transactions that involve terrorist
groups in facilitating exchange of information among law enforcement and regulatory
personnel.551
2. Contents of Regulations. The regulations may require that each financial institution designate
1 or more persons to receive information concerning, and to monitor accounts of individuals,
entities, and organizations that are identified in the regulations and further establish
procedures for the protection of the shared information, consistent with the capacity, size and
nature of the institution in which particular procedures apply.552
B. Rule of Construction; Use of Information. The receipt of information hereunder does not
relieve or otherwise modify the obligation of a financial institution with respect to any other
person or account.553 Information obtained pursuant to this section shall not be used for any
purpose other than identifying and reporting on activities that may involve terrorist acts or
money laundering activities.554
C. Cooperation Among Financial Institutions. Upon notice of the Secretary of the Treasury,
financial institutions may share information with another regarding individuals, entities, or
organizations, and countries suspected of possible terrorists or money laundering activities.555 A
safe harbor provision applies that states financial institutions shall not be liable to any person
under any law or regulation of the United States, any constitution, law, or regulation of any State
or political subdivision thereof, or under any contract or other legally enforceable agreement
(including any arbitration agreement), for such disclosure or for any failure to provide notice of
547 USA Patriot Act, 314(a)(1).
548 USA Patriot Act, 314(a)(1).
549 USA Patriot Act, 314(a)(2)(A).
550 USA Patriot Act, 314(a)(2)(B).
551 USA Patriot Act, 314(a)(2)(C).
552 USA Patriot Act, 314(a)(3)(A) and (B).
553 USA Patriot Act, 314(a)(4).
554 USA Patriot Act, 314(a)(5).
555 USA Patriot Act, 314(b).
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such disclosure to the person who is the subject of such disclosure, or any other person identified
in the disclosure, except where such transmission, receipt, or sharing violates this section or
regulations promulgated pursuant to this section.556
D. Reports on Suspicious Financial Activities. The Secretary of the Treasury shall publish a
semi-annual report, to be distributed to financial institutions, containing a detailed analysis
identifying patterns of suspicious activity and other investigative insights derived from
suspicious activity reports and investigations conducted by Federal, State and local law
enforcement agencies and distribute such report to financial institutions .557
E. Regulations Improve Information Sharing Among Financial Institutions. Amendments were
made to the Code of Federal Regulations to improve information sharing among financial
institutions.558 All financial institutions,559 unless the financial institution is within a class of
financial institutions that FinCEN designated as ineligible to share information under this
section,560 shall be subject to information sharing.561
1. Financial Institution. A financial institution means any financial institution as described in 31
U.S.C. 5312(a)(2),562 except one that FinCEN has designated as ineligible to share information
under this section.563
2. Voluntary Information Sharing Among Financial Institutions. Financial institutions or
associations of financial institutions may, with safe harbor protection from liability, transmit,
receive, or otherwise share information with any other financial institution or association of
financial institutions regarding individuals, entities, organizations and countries for purposes of
identifying and, where appropriate, reporting activities that the financial institution or association
suspects may involve possible terrorist activity or money laundering.564
3. Notice Requirement. A financial institution or association of financial institutions that intends
to share information shall submit to FinCEN a prescribed notice that shall be effective for one
year beginning on the date of the notice.565
4. Verification Requirement. Prior to sharing information, a financial institution or association of
financial institutions must take reasonable steps to verify that the other financial institution or
association of financial institutions with which it intends to share information has submitted to
FinCEN the notice required by 31 C.F.R. 103.110(b)(2).566
556 Id.
557 USA Patriot Act, 314(d).
558 See 31 C.F.R. 103.110(a)(2)(i).
559 31 C.F.R. 103.110(b).
560 31 C.F.R. 103.110(a)(2)(ii).
561 31 C.F.R. 103.110(b)(1).
562 31 C.F.R. 103.110(a)(2)(i).
563 31 C.F.R. 103.110(a)(2)(ii).
564 31 C.F.R. 103.110(b)(i).
565 31 C.F.R. 103.110(b)(2).
566 31 C.F.R. 103.110(b)(3).
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5. Use and Security of Information. A financial institution or association of financial institutions

shall use information only for the purposes of identifying and, where appropriate, reporting on
money laundering and terrorist activities;567 or determining whether to establish or maintain an
account, or to engage in a transaction;568 or assisting the financial institution in complying with
any requirement of this part.569
6. Protecting Security and Confidentiality of Information. Each financial institution or
association of financial institutions that engage in the sharing of information under these
provisions shall maintain adequate procedures to protect the security and the confidentiality of
such information.570
7. Safe Harbor From Liability. A financial institution or association of financial institutions that
shares information under these provisions shall be protected from liability for such sharing, or
for any failure to provide notice of such sharing, to any individual, entity or organization that is
identified.571 This safe harbor does not apply to a financial institution or association of financial
institutions if failure to comply with the notice requirement,572 verification requirement,573 or use
and security of information574 requirement occurs.575
8. Information Sharing Between Financial Institutions and the Federal Government. If, as a result
of sharing information under these provisions, a financial institution knows, suspects or has
reason to suspect that an individual, entity or organization is involved in, or may be involved in,
terrorist activity or money laundering, and such institution is subject to SAR reporting, the
institution shall file a SAR as required by regulations.576
F. Information Sharing Between Federal Law Enforcement Agencies and Financial Institutions.
Amendments were made to the Code of Federal Regulations to improve information sharing
between federal law enforcement agencies and financial institutions.577
1. Financial Institution. Financial Institution means any financial institution described in 31
U.S.C. 5312(a)(2).578
2. Information Request Based on Credible Evidence Concerning Terrorist Activity or Money
Laundering. A federal law enforcement agency investigating terrorist activity or money
567 31 C.F.R. 103.110(b)(4)(i)(A).
568 31 C.F.R. 103.110(b)(4)(i)(B).
569 31 C.F.R. 103.110(b)(4)(i)(C).
570 31 C.F.R. 103.110(b)(4)(ii).
571 31 C.F.R. 103.110(b)(5)(i).
572 31 C.F.R. 103.110(b)(2).
573 31 C.F.R. 103.110(b)(3).
574 31 C.F.R. 103.110(b)(4).
575 31 C.F.R. 103.110(b)(5)(ii).
576 31 C.F.R. 103.110(c).
577 31 C.F.R. 103.100.
578 31 C.F.R. 103.100(a)(2).
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laundering may request that FinCEN solicit certain information from a financial institution or a
group of financial institutions.579 A written certification, as may be prescribed by FinCEN, is
required to be submitted and must set forth the particulars with respect to the party being
investigated.
3. Obligation of Financial Institution Receiving Information Request. A financial institution or a
group of financial institutions that receives a FinCEN request shall expeditiously search its
records to determine whether it maintains an account or is engaged in a transaction with the
person or entity that is subject to the request.580
4. Maintain Adequate Procedure to Protect Security and Confidentiality. Each financial
institution shall maintain adequate procedures to protect the security and confidentiality of
requests from FinCEN.581
XI. Four-Year Congressional Review; Expedited Consideration.
A. In General. Effective the first day after the fiscal year 2005,582 Title III of the USA Patriot Act
and any amendments thereto shall terminate if Congress enacts a joint resolution that reads as
follows: That provisions of the International Money Laundering Abatement and Anti-Terrorist
Financing Act of 2001, and the amendments made thereby, shall no longer have the force of
law.583
B. Expedited Consideration. Congress shall consider any joint resolution submitted hereunder
expeditiously.584
XII. FinCEN, Federal Banking Agencies, Bank Secrecy Act and Other Federal Statutes. Pursuant
to the delegated authority from the Secretary of the Treasury, FinCEN is the administrator of the
Bank Secrecy Act.585 FinCEN is provided the authority586 to examine financial institutions for
compliance with the Bank Secrecy Act and regulations promulgated under the Bank Secrecy
Act,587 as well as to take enforcement actions for violations of the Bank Secrecy Act and the
implementing regulations under 31 U.S.C. 5320-23. The Secretary of the Treasury may
impose civil penalties,588 criminal penalties,589 and may pay rewards to and for informants590 to a
domestic financial institution or nonfinancial trade or business, and a partner, director, officer,
579 31 C.F.R. 103.100(b)(1).
580 31 C.F.R. 103.100(b)(2)(i).
581 31 C.F.R. 103.100(b)(2)(iv)(C).
582 October 1 through September 30.
583 USA Patriot Act, 303(a).
584 USA Patriot Act, 303(b).
585 See Treasury Order 108-01, dated September 26, 2002. The Secretary is authorized to delegate such
responsibilities to FinCEN pursuant to 31 U.S.C. 310(b)(2)(I) and (J).
586 31 U.S.C. 5318(a)(3).
587 31 C.F.R. Part 103.
588 31 U.S.C. 5321.
589 31 U.S.C. 5322.
590 31 U.S.C. 5323.

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or employee of a domestic financial institution or nonfinancial trade or business, willfully

violating this subchapter or regulation prescribed or order issued under this subchapter (except
sections 5314 and 5315 of this title or a regulation prescribed under sections 5314 and 5315), or
willfully violating a regulation prescribed under section 21 of the Federal Deposit Insurance Act
or section 123 of Public Law 91-508, is liable to the United States government for a civil penalty
.591 The Secretary of the Treasury delegated Bank Secrecy Act examination authority, but not
enforcement authority, to each of the federal banking agencies, discussed below, with respect to
banking organizations supervised by the federal banking agencies. The federal banking agencies
have separate authority pursuant to 12 U.S.C. 1786 and 1818 to ensure that banking
organizations comply with all laws and regulations, including the Bank Secrecy Act. FinCENs
regulations state that each agency that performs FinCENs delegated examination authority shall
make periodic reports to FinCEN.592
XIII. Definition of Suspicious Activity. A suspicious activity is one that appears to involve the
proceeds of criminal activity or is related to terrorist financing, or one that has no apparent
economic or visible lawful purpose. FinCEN includes a definition of suspicious activity that is
almost the same as the definition under the Financial Action Task Force Recommendations.593
XIV. Banks and Financial Institutions Requirement to File SARs. Financial Intermediaries are
those who handle financial transactions and they include banks, thrift institutions, bank holding
companies and non-bank subsidiaries, credit unions, U.S. branches and agencies of foreign
banks, and certain other financial institutions are required to file SARs.594
A. Federal Banking Agencies. Five federal financial institution supervisory agencies
(collectively, the federal banking agencies) and FinCEN require the filing of SARs. The five
federal financial institutions and the federal banking agencies include the Board of Governors of
the Federal Reserve System, Federal Deposit Insurance Corporation, National Credit Union
Administration, Office of the Comptroller of the Currency, and Office of Thrift Supervision.
B. The Agencies SAR Rules. The federal banking agencies, and certain other financial
institutions, are required to file SARs pursuant to regulations issued by the federal banking
agencies595 and FinCEN.596 The federal banking agencies SAR rules are authorized by various
federal law, including the Bank Secrecy Act597 and generally require those financial institutions
591 31 U.S.C. 5321(a)(1).
592 31 C.F.R. 103.56(e).
593 See Financial Crimes Enforcement Network, Money Laundering Prevention: A Money Services Business
Guide, at 15, available at www.fincen.gov/msb_prevention_guide.pdf. This guide includes a number of red flags that
may trigger a reasonable suspicion.
594 See http://www.irs.ustreas.gov/pub/irs-pdf/f9022-47.pdf for the SAR that is required to be filed by financial
institutions.
595 See http://www.fincen.gov/reg_guidance.html. See also Memorandum of Understanding to Strengthen Bank
Secrecy Act Compliance Enhanced Info Sharing, Denying Criminals Access to the U.S. Financial System, JS-1973,
available at http://www.treas.gov/press/releases/reports/fincenbankingregulatorsmou.pdf (Oct. 1, 2004).
596 31 U.S.C. 5318(a)(3).
597 Titles I and II of Pub. L. 91-508, as amended, codified at 12 U.S.C. 1829b, 12
U.S.C. 1951-1959, and 31 U.S.C. 5311-5332. For a history of the Bank Secrecy
Act, see http://www.fincen.gov/helpfin.html;

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to file SARs with law enforcement and bank supervisory authorities whenever they know or
suspect suspicious or potential criminal activity.
C. Secretary of the Treasury Authorized to Require Filing of SARs. The Secretary of the
Treasury has the power to require banks and other financial institutions to file SARs with the
appropriate authorities. In 1992, the U.S. Congress passed the Annunzio-Wylie Anti-Money
Laundering Act,598 providing the Secretary of the Treasury with the power to require banks and
other financial institutions to file SARs, as well as mandatory and voluntary disclosure of
suspicious activities.599
1. Regulations Requiring a SAR to be Filed. SARs are required to be filed, by sending a
completed SAR to FinCEN, in the following circumstances:
(c) SARs required. A national bank shall file a SAR with the appropriate Federal
law enforcement agencies and the Department of the Treasury in accordance with
the forms instructions, by sending a completed SAR to FinCEN in the following
circumstances:
(1) Insider abuse involving any amount. Whenever the national bank detects any
known or suspected Federal criminal violation, or pattern of criminal violations,
committed or attempted against the bank or involving a transaction or transactions
conducted through the bank, where the bank believes that it was either an actual
or potential victim of a criminal violation, or series of criminal violations, or that
the bank was used to facilitate a criminal transaction, and the bank has a
substantial basis for identifying one of its directors, officers, employees, agents or
other institution-affiliated parties as having committed or aided in the commission
of a criminal act, regardless of the amount involved in the violation.
(2) Violations aggregating $ 5,000 or more where a suspect can be identified.
Whenever the national bank detects any known or suspected Federal criminal
violation, or pattern of criminal violations, committed or attempted against the
bank or involving a transaction or transactions conducted through the bank and
involving or aggregating $ 5,000 or more in funds or other assets where the bank
believes that it was either an actual or potential victim of a criminal violation, or
series of criminal violations or that it was used to facilitate a criminal transaction,
and the bank has a substantial basis for identifying a possible suspect or group of
suspects. If it is determined prior to filing this report that the identified suspect or
group of suspects has used an alias, then information regarding the true identity of
the suspect or group of suspects, as well as alias identifiers, such as drivers
license or social security numbers, addresses and telephone numbers, must be
reported.
http://www.freedom.orlingrabbe.com/money_laundering/mlcombat.pdf; and
http://www.gao.gov/new.items/
d04833t.pdf.
598 See Annunzio-Wylie Anti-Money Laundering Act, 102 Pub. L. No. 550, 106 Stat. 4044 (1992) (codified in
various sections of 12, 18, 31 and 42 U.S.C.).
599 See 31 U.S.C. 5318(g)(1); 31 C.F.R. 103.100.

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(3) Violations aggregating $ 25,000 or more regardless of potential suspects.

Whenever the national bank detects any known or suspected Federal criminal
violation, or pattern of criminal violations, committed or attempted against the
bank or involving a transaction or transactions conducted through the bank and
involving or aggregating $ 25,000 or more in funds or other assets where the bank
believes that it was either an actual or potential victim of a criminal violation, or
series of criminal violations, or that the bank was used to facilitate a criminal
transaction, even though there is no substantial basis for identifying a possible
suspect or group of suspects.
(4) Transactions aggregating $ 5,000 or more that involve potential money
laundering or violate the Bank Secrecy Act. Any transaction (which for purposes
of this paragraph (c)(4) means a deposit, withdrawal, transfer between accounts,
exchange of currency, loan, extension of credit, or purchase or sale of any stock,
bond, certificate of deposit, or other monetary instrument or investment security,
or any other payment, transfer, or delivery by, through, or to a financial
institution, by whatever means effected) conducted or attempted by, at or through
the national bank and involving or aggregating $ 5,000 or more in funds or other
assets, if the bank knows, suspects, or has reason to suspect that:
(i) The transaction involves funds derived from illegal activities or is intended or
conducted in order to hide or disguise funds or assets derived from illegal
activities (including, without limitation, the ownership, nature, source, location, or
control of such funds or assets) as part of a plan to violate or evade any law or
regulation or to avoid any transaction reporting requirement under Federal law;
(ii) The transaction is designed to evade any regulations promulgated under the
Bank Secrecy Act; or
(iii) The transaction has no business or apparent lawful purpose or is not the sort
in which the particular customer would normally be expected to engage, and the
institution knows of no reasonable explanation for the transaction after examining
the available facts, including the background and possible purpose of the
transaction.
(d) Time for reporting. A national bank is required to file a SAR no later than 30
calendar days after the date of the initial detection of facts that may constitute a
basis for filing a SAR. If no suspect was identified on the date of detection of the
incident requiring the filing, a national bank may delay filing a SAR for an
additional 30 calendar days to identify a suspect. In no case shall reporting be
delayed more than 60 calendar days after the date of initial detection of a
reportable transaction. In situations involving violations requiring immediate
attention, such as when a reportable violation is ongoing, the financial institution

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shall immediately notify, by telephone, an appropriate law enforcement authority

and the OCC in addition to filing a timely SAR.600
2. Financial Institutions Prohibited From Disclosing Existence of SARs. Financial institutions
are prohibited from disclosing the existence of SARs or other reports of suspicious transactions
to a government agency, in accordance with the following:
(g) Reporting of suspicious transactions. -(1) In general. -- The Secretary may require any financial institution, and any
director, officer, employee, or agent of any financial institution, to report any
suspicious transaction relevant to a possible violation of law or regulation.
(2) Notification prohibited. -(A) In general. -- If a financial institution or any director, officer, employee, or
agent of any financial institution, voluntarily or pursuant to this section or any
other authority, reports a suspicious transaction to a government agency-(i) The financial institution, director, officer, employee, or agent may not notify
any person involved in the transaction that the transaction has been reported; and
(ii) No officer or employee of the Federal Government or of any State, local,
tribal, or territorial government within the United States, who has any knowledge
that such report was made may disclose to any person involved in the transaction
that the transaction has been reported, other than as necessary to fulfill the official
duties of such officer or employee.601
3. Safe Harbor From Civil Liability for Filing SARs. The Bank Secrecy Act and the federal
banking agencies SAR regulations provide protection from civil liability to the financial
institutions and their employees for filing a SAR or making disclosures in a SAR.602
(3) Liability for disclosures. -(A) In general. -- Any financial institution that makes a voluntary disclosure of
any possible violation of law or regulation to a government agency or makes a
disclosure pursuant to this subsection or any other authority, and any director,
officer, employee, or agent of such institution who makes, or requires another to
make any such disclosure, shall not be liable to any person under any law or
regulation of the United States, any constitution, law, or regulation of any State or
political subdivision of any State, or under any contract or other legally
enforceable agreement (including any arbitration agreement), for such disclosure
600 See 12 C.F.R. 21.11(c) and (d).
601 See 31 U.S.C. 5318(g)(1) and (2).
602 See 31 U.S.C. 5318(g)(3). See also 31 C.F.R. 103.110(b)(5).
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or for any failure to provide notice of such disclosure to the person who is the
subject of such disclosure or any other person identified in the disclosure.603
4. Protection From Reporting Possible Criminal Activity. Financial institutions and officers,
employees, and agents are granted immunity from suit based on their having filed a SAR that
discloses a possible crime.604
5. Case Law Interpreting Safe Harbor Protection to Financial Institutions. U.S. courts have
disagreed about the scope of protection available with respect to the safe harbor provisions.
Some courts limit the safe harbor protection to disclosures made on a good faith belief that a
violation occurred. Other courts decline to extend the safe harbor protection to financial
institutions that may have misrepresented material facts. A majority of the courts, however,
provide unqualified protection under the safe harbor provisions to financial institutions and their
employees from civil liability for filing a SAR. Other cases provide qualified protection under
the safe harbor provisions to financial institutions and their employees from civil liability for
filing a SAR.605
D. Memorandum of Understanding, September 2004. A Memorandum of Understanding was
entered into by the federal banking agencies and FinCEN that set forth procedures for the
exchange of certain information among the federal banking agencies and FinCEN.606
XV. Financial Action Task Force. The Financial Action Task Force (FATF) is an intergovernmental body consisting of 33 Members (31 countries, including the U.S., and two
international organizations) that studies money laundering trends and issues non-binding
recommendations expected to be implemented by national government authorities. The Task
Force is a policy-making body that works to generate the necessary political will to bring
about national legislative and regulatory reforms in these areas.
A. The FATF Monitors Members. The FATF monitors members progress in implementing
necessary measures, reviews money laundering and terrorist financing techniques and countermeasures, and promotes the adoption and implementation of appropriate measures globally. In
performing these activities, the FATF collaborates with other international bodies involved in
combating money laundering and the financing of terrorism.

603 See 31 U.S.C. 5318(g)(3).

604 Id.
605 Whitney National Bank v. Karam, 306 F. Supp. 2d 678 (S.D. Tex., Feb. 2004);
Lee v. Bankers Trust Co., 166 F.3d 540, 542-44 (2nd Cir. 1999); Gregory v. Bank
One, Indiana, 200 F. Supp. 2d 1000 (S.D. Ind., May 2002); Stoutt et al. v. Banco
Popular de Puerto Rico, 158 F. Supp. 2d 167 (P.R., July 2001); Lopez v. First Union
Natl Bank, 129 F.3d 1186, 1195 (11th Cir. 1997) and Coranado v. BankAtlantic
Bancorp, 129 F.3d 1186, 1195 (11th Cir. 1997) (consolidated cases); and Bank of
Eureka Springs v. Evans, 109 S.W.3d 672 (Ark. Sup. Ct. 2003).
606 Memorandum of Understanding to Strengthen Bank Secrecy Act Compliance Enhanced Info Sharing, Denying
Criminals Access to the U.S. Financial System, JS-1973, available at http://www.treas.gov/press/releases/reports/
fincenbankingregulatorsmou.pdf (Oct. 1, 2004).

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B. The FATF Has No Constitution. The FATF does not have a tightly defined constitution or an
unlimited life span. The Task Force reviews its mission every five years. The FATF began in
1989, and it has been agreed that its current mandate extends through the end of 2004. It will
only continue to exist and to perform its function after this date provided the member
governments agree that this is necessary.
C. FATF Working Group. An FATF working group, with U.S government involvement,
developed options for future recommendations on the Gatekeeper Initiative. The FATF first
published a Consultation Paper and later issued Revised Anti-Money Laundering
Recommendations (hereinafter FATF Recommendations).
D. FATF Mandate Review for Eight Years. The representatives from the FATF Members
reaffirmed their commitment to the FATF and renewed the FATFs mandate to combat money
laundering and terrorist financing for a further eight years.607
XVI. The Gatekeeper Initiative. The Gatekeeper Initiative is a concept for anti-money
laundering initiatives directed specifically at certain professionals, like lawyers, accountants and
auditors. It stems from a Communiqu of the G-8 Finance Ministers in Moscow in October 1999
calling upon countries to consider various means to address money laundering through the efforts
of professional gatekeepers to the international financial/business markets.608
A. Consultation Paper. On May 31, 2002, FATF published a Consultation Paper that identifies
several areas where possible changes could be made to the FATF anti-money laundering
framework.609 The options identified in the Consultation Paper include (1) imposing enhanced
due diligence requirements on lawyers regarding clients and source of funds used in
transactions, and maintaining records on client activities that could be produced to law
enforcement agencies; (2) requiring lawyers to file suspicious activity reports (also referred to
as suspicious transaction reports) regarding certain client activities that may involve money
laundering; and (3) prohibiting lawyers form informing clients that such reports have been filed
with the government enforcement authorities. The Consultation Paper recognizes the need to
protect the attorney-client privilege.610
B. American Bar Association Task Force. In February 2002 then American Bar Association
(ABA) President Bob Hirshon created an ABA Task Force on Gatekeeper Regulation and the
Profession to respond to initiatives by the FATF, the U.S. Department of Justice and other
organizations that would impact the attorney-client relationship in the context of money
laundering enforcement. ABA President Alfred P. Carlton, Jr., has continued strong support for
the Task Force in its mission. The Task Force has met on numerous occasions with the U.S.
Department of Justice and Treasury Department officials involved in the Gatekeeper Initiative, to
discuss the Initiative and the concerns of the profession. The Task Force provided comments to
607 See FATF Mandate Renewed for Eight Years, http://www1.oecd.org/fatf/Newsarchive_en.htm (May 14, 2004).
608 See http://www.abanet.org/poladv/priorities/gatekeeper.html.
609 Financial Action Task Force on Anti-Money Laundering, Review of the FATF Forty Recommendations:
Consultation Paper (May 30, 2002) (www.fatf-gafi.org). See
http://www.abanet.org/poladv/priorities/gatekeeper.html.
610 See http://www.abanet.org/poladv/priorities/gatekeeper.html.

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the FATF on its Consultation Paper, and also participated in an FATF public forum that took
place in October 2002, where other organizations also voiced their opinions and concerns. The
Task Force has also been instrumental in promoting education of bar members on money
laundering risks and responsibilities, and the Gatekeeper Initiative.611
1. ABA Response to Consultation Paper. The ABA responded to the consultation paper and stated
that to the extent that the FATF Recommendations apply to lawyers, it must be carefully tailored
and focused primarily on attorneys who receive a transfer of funds on behalf of clients. The ABA
Task Force supported the principal recommendations that require attorneys, when acting as
financial intermediaries, to verify the identities of clients, maintain records on domestic and
international transactions, and develop training programs that help attorneys identify potential
money laundering schemes or other situations in which the domestic or international monetary
system may be used for criminal purposes. The ABA Task Force opposed proposals that require
attorneys to identify and report suspicious activities to authorities and the related proposal that
prevents attorneys from notifying a client that such information has been so reportedtipping
off.
2. ABA House of Delegates Adopts Resolution 104. In 2003, the ABA House of Delegates
adopted Resolution 104. This resolution regards the attorney-client relationship and
confidentiality as it relates to U.S. anti-money laundering enforcement objectives. The
Resolution opposes any law or regulation, implemented for anti-money laundering or terrorist
financing purposes, that compels lawyers to disclose client confidential information to law
enforcement authorities through SAR reporting requirements that otherwise compromises the
independence of the bar or attorney-client relationship. The Resolution recognizes the
importance of continued education of the profession as a result of the legitimate interests of the
government in preventing money laundering and terrorist financing. The Resolution also
commits the bar to review ethical rules regarding permissive disclosure of confidential
information to determine if modifications may be appropriate to address law enforcement
concerns.
C. U.S. Embraces and Implements the Initiative. The following information is from Bruce A.
Zagaris, The Gatekeepers Initiative: An Emerging Challenge For Professional Advisors of
International Business and Tax Matters, 2002 ABA/ABA Money Laundering Enforcement
Seminar (October 27-29, 2002).612
1. Actions of U.S. Treasury and U.S. Department of Justice. As a result of the G-8 Summit in
Moscow and other initiatives to prevent and combat transnational crime, the U.S. Treasury and
Justice Departments in the National Money Laundering Strategy for 2000 offered an initiative to
develop a partnership with associations of legal and financial professionals to ensure that money
launderers are denied access to the financial system. In particular, lawyers, accountants and
auditors serve as the gatekeepers to the domestic and international financial system and hence are
uniquely in a position either to facilitate money laundering or, on the other hand, to deter and
detect the crime. The initiative is designed to ensure that such gatekeepers are not unwitting
facilitators of money laundering schemes. Two action items are in play under the
611 Id.
612 See http://www.abanet.org/crimjust/taskforce/articles/gatekeepter2.pdf.
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implementation of the Strategy. The first is that a study group has been established consisting of
the Departments of the Treasury and Justice, FinCEN, the SEC, and the federal bank regulators
to examine how best to utilize accountants and auditors in the detection and deterrence of money
laundering. A second is that the Chief of the Asset Forfeiture and Money Laundering Section of
the Department of Justice is reviewing the professional responsibilities of lawyers and
accountants with regard to money laundering and will make recommendations ranging from
enhanced professional education, standards or rules, to legislation as might be needed.613
2. Interagency Working Group to Propose Preliminary Recommendations. With respect to the
review of professional responsibilities of gatekeepers, the Strategy requires an interagency
working group to propose preliminary recommendations to the Money Laundering Steering
Committee by the end of June. There seem to be three options: (1) increased education; (2)
application of new rules with respect to professional responsibility; and (3) application of SARs
[sic Suspicious Activity Reports] on the federal and/or state levels to gatekeepers.614
3. Interagency Task Force Meetings with ABA. To explore these options, an interagency task
force has held initial meetings with members of the ABA. These meetings have been exploratory
in nature, whereby the task force has set forth the conceptual nature of the initiative, the options,
and solicited help and support of the ABA groups. Officials in the Inter-Agency Task Force have
reported that their efforts are somewhat in arrears because of the press of work on the FATF on
Anti-Money Laundering report on non-cooperative countries. In other words, the Task Force has
prioritized compliance by other countries over that in the U.S.
4. U.S. National Money Laundering Strategy Report 2002. A priority in the U.S. National Money
Laundering Strategy Report 2002 is to work with FATF countries to complete the revisions of the
Forty Recommendations. In this regard, the U.S. will start drafting the revised FATF
Recommendations during fall 2002 with an anticipated completion date of spring 2003.615
5. U.S. Lawyers Involved in Business and Estate Planning Ask to be Exempted. In particular,
many U.S. lawyers involved in business and estate planning do not believe they should be
covered. Tax shelter laws in the U.S. already impose on lawyers reporting requirements with
respect to this activity. For instance Section 6111 of the Internal Revenue Code of 1986, as
amended, already requires a tax shelter organizer to register the shelter with the Secretary, no
later than the day on which the shelter is first offered for sale, by filing a Form 8264
(.Application for Registration of a Tax Shelter.). In addition, Section 6112 of the Code requires a
person who organizes a potentially abusive tax shelter or sells an interest therein to maintain for
a period of seven years a list identifying each person who was sold an interest in any tax shelter
with respect to which registration was required under Section 6111 or which the Secretary
determines has a potential for tax avoidance. Treasury Regulations issued under Section 6112
require detailed information about the shelter. On international transactions, lawyers and clients
613 U.S. Department of the Treasury and Department of Justice, THE NATIONAL
MONEY LAUNDERING STRATEGY FOR 2000 44-46 (Mar. 2000).
614 For background see European Professional Associations Agree on Due
Diligence Against Organized Crime and U.S. Starts Gatekeepers Initiatives, 16
INT.L ENFORCEMENT L. REP. 719, 720.
615 U.S. Department of the Treasury, NATIONAL MONEY LAUNDERING STRATEGY
(July 2002) (www.treas.gov).

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must already comply with the Qualified Intermediary Regulations, Section 6038 regulations for
foreign persons with ownership of U.S. corporations, foreign trust reporting, correspondent bank
regulations under the USA Patriot Act, the Customs and Monetary Instruments Report for crossborder payments, IRS Form 8300 under I.R.C. Sec. 5060I for cash payments received in a
business, and a host of other laws and regulations. In addition, U.S. lawyers already operate
under a complex mix of regulations, especially with respect to international transactions. Many
of these laws apply uniquely in the U.S. and mean that additional (e.g., anti-money laundering
reporting) laws would be duplicative.
D. Due Diligence Implications for U.S. Professionals. The following information is also from
Bruce A. Zagaris, The Gatekeepers Initiative: An Emerging Challenge For Professional Advisors
of International Business and Tax Matters, 2002 ABA/ABA Money Laundering Enforcement
Seminar (October 27-29, 2002).616
1. Implications to Professionals From Anti-Money Laundering Due Diligence Requirements.
Many implications may flow from subjecting attorneys, accountants, auditors, and other
independent professionals to anti-money laundering due diligence, such as the requirements to
know your customer and identify and report suspicious activities.
2. Businesses Must Have a Compliance Officer to Develop Mechanisms to Prepare Due
Diligence Plan. In the other lines of business to which anti-money laundering due diligence
applies (e.g., banks, money-service businesses, savings & loans, credit institutions, and brokerdealers), the business must hire a compliance officer and develop mechanisms to prepare a due
diligence plan [to] help implement it. This includes the development of training, as well as
internal and external audit procedures. It is no excuse that the business is small and cannot
afford such mechanisms. A distinction between banks and financial institutions and law firms is
that, unlike banks and financial institutions, some law firms are very small.
3. No State Has Adopted the Gatekeeper Initiative with Respect to Lawyers. Clearly the
implications raised in this section do not apply yet to lawyers because no state has proactively
applied the gatekeepers initiative. For instance, although the United Kingdom has a law
requiring professionals to make SARs and occasionally issues reports, citing the low incidence of
the reports and warning enforcement actions against lawyers who do not obey the law, such
actions have been rare.617 This section assumes that the U.S., if it adopts its anti-money
laundering laws to professionals, will continue to proactively implement and enforce them.618
4. Issues with Respect to Lawyer Reporting a Suspicious Activity and the Tipping Off
Criminal Offense. Some issues that are likely to arise include the proper steps a lawyer/law firm
616 See http://www.abanet.org/crimjust/taskforce/articles/gatekeepter2.pdf.
617 However, recently the British Fraud Office has charged two senior solicitors
and are investigating four others with respect to alleged major money laundering
activities. See Robert Verkaik, City Lawyers Face Charges Over Money Laundering
Charges, THE INDEPENDENT (London), Mar. 12, 2001, website.
618 For a discussion of defending money laundering charges against attorneys,
among others, see Bruce Zagaris and Ben Hinceman, Defending Money
Laundering Charges, 1 INTERNATIONAL WEALTH TRANSFER PRACTICE 23-26
(International Bar Assoc., Mar. 12-14, 2001).

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should take after it must report a suspicious activity. Currently anti-money laundering law would
preclude them from disclosing the report to their client, since this would be tipping off a criminal
offense. The more difficult issues include what does a law firm do vis-a-vis an existing client
after it files a suspicious activity (transaction) report (SAR). Banks and financial institutions
must grapple with this same problem. Sometimes they obtain guidance from regulatory or law
enforcement authorities. However, in the bulk of cases they are not able to obtain initially any
reliable information. Continuing to do business with a client against whom a law firm has filed a
SAR is precarious. Terminating a relationship is sensitive, especially if the report does not result
in a prosecution or even a criminal investigation. Terminating a relationship in the middle of an
assignment may lead to liability due to breach of contract, malpractice, breach of ethical
obligations (e.g., obligation of confidentiality, obligation to zealously represent the client) or
commercial losses to the law firm (e.g., due to loss of work and overall loss of clients).
5. Potential Criminal Liability to Law Firm Upon Filing a SAR. Another issue is whether filing a
SAR would lead to criminal liability on the part of the law firm. For instance, the filing of a
SAR may trigger investigation into prior conduct between the law firm and the client and lead
the regulatory and/or law enforcement authority to believe that the law firm should have known
and acted earlier or that the law firm was a co-conspirator, aider, or abetter in some related
activity. In addition to the SAR violating the right to client confidentiality, the law firm may
violate the clients right to attorney-client privilege and right against self-incrimination. In
addition, in the event law enforcement authorities prosecute the law firm, the lawyer would have
waived his or her own right against self-incrimination.
6. Lawyers Protected From Criminal and Civil Liability. Under the FATF Recommendations,
lawyers receive protection from criminal and civil liability where the reporting requirements
cause them to breach a contractual, legislative, regulatory, or administrative restriction regarding
disclosure. However, it is unclear if this protection extends to the violation of ethical rules and
whether a lawyer may withdraw from representing clients for whom they have filed a SAR.
7. Implications of Countries Exchanging SAR Information. In the international context, SAR
information has gained increased significance because some countries are exchanging SAR
information. The EU has a policy on exchanging SARs.619
8. U.S. Policy is to Exchange SAR Information. In accordance with the USA Patriot Act
314(a) and (b), the U.S. is trying as a matter of policy to exchange SAR information. One
fundamental obstacle is that, whereas the U.S. treats SAR as intelligence information that can be
kept indefinitely, the EU policy is that, unless used for prosecution purposes, such intelligence
information must be destroyed after a period of years. Just as importantly, the U.S. and many
other countries prefer informal cooperation, whereby there are no formal rules. The problem with
informal cooperation is that the rights of private individuals and entities, whether they are the
targets or just third party stakeholders, are not protected. Recent mutual assistance treaties in
619 Bruce Zagaris, EU Council Initiates Arrangements for Exchange of Information
Between FIUs, 17 INT.L ENFORCEMENT L. REP. 3 (Jan. 2001), discussing Council
Decision of Oct. 17, 2000 Concerning Arrangements for Cooperation Between
Financial Intelligence Units of the Member States in Respect of Exchanging
Information (2000.642.JHA), OFF. J. EUR. COMM., Oct. 24, 2000 (L 2714).

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criminal matters (MLATs) that grant the government compulsory process rights, as delimited by
the respective treaties, expressly state that the treaties do not create a right for a private person
to obtain evidence. In such MLATs, the U.S. has insisted on a provision that states as follows:
This Treaty is intended solely for mutual legal assistance between the Parties.
The provisions of this Treaty shall not create any right on the part of any private
person to obtain, suppress, or exclude any evidence, or to impede the execution of
a request.620
9. Preventing MLATs From Being Used to Suppress or Exclude Evidence to Impede Criminal
Investigations. The purpose is to prevent MLATs from being used to suppress or exclude
evidence or to impede criminal investigations. Hence, if adversely affected persons want to
prevent the execution of requests that they believe were made in violation of the treaty, their only
recourse under the treaty is to the executive authority of the requested country, not its courts.
Similarly, if they want to contest that the requested country violated the terms of the treaty in
executing a request, they can complain only to the executive authorities of the respective
countries.621 Hence, the CCBE [Conseil Consultative Europen de Barreau] has urged that Bars
and Law Societies throughout the EU [European Union] work with national governments to
maintain consistency in implementing legislation with respect to the expression ascertaining the
legal position and its interaction with the knowledge requirement for money laundering.
10. Impact on the Attorney-Client Privilege. A major issue that will be impacted by anti-money
laundering due diligence and the gatekeepers initiative is the attorney-client privilege. One of
the problems is that the privilege varies considerably among countries and among professionals
(attorney-client vs. accountant-client). In a global world a client, whether intending to conduct
legitimate or illegitimate activities, will be able to spot and take advantage of the gaps in the law.
11. Professionals Warning Clients of Their Obligations with Respect to Anti-Money Laundering
Due Diligence Requirements. To reduce risks and potential liabilities from any actions from
potentially disgruntled clients, law firms are likely to follow the lead of banks and financial
institutions: they will insert into professional service agreements broad clauses, warning
potential clients of their obligations as part of the anti-money laundering due diligence and
seeking a waiver in such cases of their ethical obligations, such as privacy, obligation to
zealously represent the client, and so forth.
12. Problems with Respect to Filing of SARs. The ability to send SARs to bar associations rather
than the regulatory agency is not satisfactory for attorneys or their clients. Ultimately, the bar
association is faced with the same requirements as the regulatory agency. Decisions must be
made on whether to quickly undertake further investigations of a criminal nature or whether to
defer action. The decision may result not from the quality of the SAR, but from the prioritization
of resources in the context of the number of ongoing leads from other sources. Nevertheless, the
620 See Art. 1(3) of the Treaty between the U.S. and the U.K. Concerning the
Cayman Islands Relating to Mutual Legal Assistance in Criminal Matters, signed
July 3, 1986, entered into force, Mar. 19, 1990.
621 For additional discussion of the preclusion of private persons from using
MLATs, see Bruce Zagaris, U.S. Extends Its Reach for Evidence, 15 CRIM. JUST. 8,
56 (Winter 2001).

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above-mentioned concerns about privacy, liability, and so forth are not eliminated by investing
the bar as a middleman. Further, reliance on the bar raises many sensitive issues about the
capabilities of bar associations to act as a financial intelligence unit and the nature of the
relationship between the bar association, attorneys, and clients once the bar association assumes
the role of intermediary for the regulatory agencies.
E. ABA Opposes Gatekeeper Initiative for Lawyers. The following information is from the ABA
Task Force on Gatekeeper Regulation and the Professional Section of Real Property, Probate and
Trust Law Criminal Justice Section, Section of Litigation, Section of International Law and
Practice Report to the House of Delegates:622
RECOMMENDATION
RESOLVED, That the American Bar Association supports the enactment of
reasonable and balanced initiatives designed to detect and prevent domestic and
international money laundering and terrorist financing.
FURTHER RESOLVED, That any efforts to establish and implement
international and United States policies to combat domestic and international
money laundering and terrorist financing should be consistent with the following
principles:
(1) lawyers play a critical and independent role in the administration of justice
and in ensuring lawful compliance by persons and entities involved in commercial
and financial activities;
(2) the judiciary and the organized bar are responsible for establishing ethical
rules governing the activities of lawyers and for ensuring that the profession
adheres to the highest standards of professional and lawful conduct; and
(3) there is a critical need for confidentiality in client communications with
lawyers to ensure the independence of the bar, protect the lawyer-client
relationship, and support the proper functioning of the legal system;
FURTHER RESOLVED, That the American Bar Association:
(1) opposes any law or regulation that, while taking action to combat money
laundering or terrorist financing, would compel lawyers to disclose confidential
information to government officials or otherwise compromise the lawyer-client
relationship or the independence of the bar; and
(2) will continue to review the Model Rules of Professional Responsibility and
evaluate whether the rules permitting, in appropriate circumstances, disclosure of
confidential information should be modified to permit disclosure of information
622 See http://www.abanet.org/leadership/recommendations03/104.pdf.
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demonstrating the clear intent of a client to commit criminal acts such as money
laundering; and
(3) urges bar associations and law schools to undertake education efforts to ensure
that lawyers are informed regarding the scope of money laundering laws and the
anti-money laundering requirements that apply to lawyers to safeguard the
profession from being used to facilitate money laundering or terrorist financing
activity.
F. Implications for Transactional Lawyers. A chilling effect on the attorney-client relationship for
transactional lawyers, such as tax lawyers, corporate lawyers, estate planning attorneys and
business lawyers, will result from the Gatekeeper Initiative. The client will have no assurance
that his or her disclosures will be kept in confidence. The Gatekeeper Initiative will also affect
transactional lawyers and their clients engaged in international practices.623
1. Definition of Gatekeeper. A gatekeeper is one who controls access.624 In the context of
international money laundering and terrorist financing, lawyers are viewed as gatekeepers to
the domestic and international monetary system. Some believe that the special relationship
between lawyers and their clients gives lawyers an early inside view into crimes that could make
their insights invaluable in the war on domestic and international criminal activity. Indeed, the
confidentiality obligations of lawyers make them particularly attractive to those who desire to
engage in money laundering activities.625 The Gatekeeper Initiative is designed to create
additional hurdles for those who seek to gain access to this monetary system.626
2. Genesis of The Gatekeeper Initiative. The Gatekeeper Initiative, which seeks to define the
roles and responsibilities of lawyers in combating money laundering activities, has its genesis in
the Ministerial Conference of the G-8 Countries on Combating Transnational Organized Crime
held October 19-20, 1999, in Moscow. In a document known as the Moscow Communiqu, the
G-8 Members agreed to bring their respective anti-money laundering regimes into closer
alignment and to consider putting certain responsibilities, as appropriate, on those professionals,
such as lawyers, accountants, company formation agents, auditors, and other financial
intermediaries who can either block or facilitate the entry of organized crime money into the
financial system.627
3. Erosion of Attorney-Client Relationship. The horrifying events of September 11 have led to
comprehensive laws and regulations designed to prevent these events from occurring again. But
623 See Edward J. Krauland and Stephane Lagonico, Lawyers and Anti-Money Laundering: The Gatekeeper
Initiative, 31 INTL LAW NEWS 1,18, SECTION OF INTERNATIONAL LAW AND PRACTICE, American Bar Association
(Fall 2002); James Roselle, Combating Money Laundering and Terrorist Activity: The Lawyers Role and Recent
SILP/ABA Initiatives, Id at 1, 19.
624 Merriam-Websters Collegiate Dictionary.
625 John Gibeaut, Lining Up Help Online, A.B.A.J., Jan. 2002, at 49.
626 See Kevin L. Shepherd, USA PATRIOT Act and the Gatekeeper Initiative: Surprising
Implications for Transactional Lawyers, American Bar Association, Probate and Property, Section of Real
Property, Probate, and Trust Law (September/October 2002). See also
http://www.abanet.org/rppt/publications/magazine/2002/so/shepherd.html.
627 Communiqu available at http://www.library.utoronto.ca/g7/adhoc/crime99.htm (emphasis added).

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the quest to extinguish all forms of money laundering and terrorist financing may have the real,
but unintended, consequence of severely eroding the attorney-client relationship and forever
altering this relationship of trust and confidence clients place in their lawyers.
G. ABA Opposes Lawyers Filing SARs. The Letter from Alfred P. Carlton, Jr., ABA, The
Honorable Orrin H. Hatch, Chair and The Honorable Patrick Leahy Ranking Democratic
Member Committee on the Judiciary, 108th Congress (March 6, 2003) states that the ABA
opposes requiring lawyers to file suspicious-transaction reports on their clients activities
because of the unprecedented and significant adverse impact on the attorney-client relationship,
the independence of the bar, and the compliance-counseling role of lawyers in our society.628
H. FATF Revised Anti-Money Laundering Recommendations. The FATF Recommendations
issued in June 2003, have significant ethical implications for the legal profession.629 The FATF
Recommendations provide that Countries should apply the crime of money laundering to all
serious offenses including predicate offenses. The FATF designates twenty categories of
predicate offenses to be adopted in the laws of each country. Tax crimes are not included in the
list of predicate offenses unless they fall under a broader category such as fraud, and each
country will decide whether to include tax crimes on its list of predicate offenses.630
1. Financial Transactions Extended to Lawyers. Customer due diligence and record-keeping
requirements governing financial institutions are extended to lawyers, notaries, and other
independent legal professions, and accountants when they prepare for or carry on transactions for
their client relating to certain specified activities including: (1) buying or selling real estate; (2)
managing client money, securities, or other assets; (3) managing bank, savings, or securities
accounts; (4) organizing contributions for the creation, operation, or management of companies;
and (5) creating, operating, or managing legal persons or arrangements, and buying and selling
business entities.631 These activities are referred to as financial transactions.
2. Verify Parties, Beneficial Owners and Business Purpose. The due diligence provisions require
that lawyers verify identities of the parties and beneficial owners and the business purpose of the
transaction. In addition, continuing due diligence on the source of the subject funds may also be
required. Enhanced due diligence is required by lawyers with respect to high-risk transactions,
such as those involving politically exposed persons.
628 See http://www.abanet.org/poladv/letters/108th/gatekeeper1.html.
629 See Krauland and Coats, International Regulation of the Legal Profession: An Impending Possibility?
INTERNATIONAL LAW NEWS, 6-8 (Spring 2004).
630 Predicate offenses include the fo1lowing: participation in an organized
criminal group and racketeering; terrorism, including terrorist financing;
trafficking in human beings and migrant smuggling; sexual exploitation, including
sexual exploitation of children; illicit trafficking in narcotic drugs and
psychotropic substances; illicit arms trafficking; illicit trafficking in stolen and
other goods; corruption and bribery; fraud; counterfeiting currency;
counterfeiting and piracy of products; environmental crime; murder, grievous
bodily injury; kidnapping, illegal restraint and hostage-taking; robbery or theft;
smuggling; extortion; forgery; piracy; and insider trading and market
manipulation. American Bar Association, Real Property, Probate and Trust Section,
Report on Best Practice Standards, Annual Meeting (August 2004).
631 Recommendation 12(d), Financial Action Task Force Forty Reccomendations.

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3. Maintain All Necessary Records. Lawyers are required to maintain all necessary records
regarding the specified transactions, including information obtained through due diligence, for at
least five years after the client relationship ends. The involvement of a complex, unusual large
transaction that lack an apparent economic or visible lawful purpose requires lawyers to
investigate the background and purpose of the transaction and memorialize their findings and
make this writing available to authorities upon appropriate authorization and subject to any legal
privilege that applies.
4. Tipping Off Rule. Under the June 2003 FATF Recommendations, lawyers, notaries, or other
independent legal professions, and accountants must report suspicious activities to government
authorities or self-regulatory organizations, when the lawyer is engaging in a financial
transaction on behalf of or for clients in the five areas described in connection with the due
diligence requirements. It does not appear that contemplated financial transactions will trigger
the SAR reporting requirements.
5. Definition of Suspicious Activity. Determining whether a transaction is suspicious is to be
judged on an objective standard and whether the lawyer suspects or has reasonable grounds to
suspect money laundering. The FATF Recommendations contain an exception to the SAR
requirement if the information that leads to the suspicion is obtained in circumstances where
lawyers are subject to professional secrecy or legal professional privilege, but it is not clear
whether the term professional secrecy includes confidential communications. ABA Model
Rule 1.6, as well as most states, permits lawyers to disclose client confidential information only
when the lawyer reasonably believes that the client is engaged in specified illegal conduct.
Mandatory disclosures of suspicious activity represents a serious departure from ethical
obligations of lawyers and jeopardizes the lawyer-client communications that are required for
proper legal advice and assistance provided to law-abiding clients.
I. ABA Response to Revised FATF Recommendations. The ABA Task Force on Gatekeeper
Regulations and the Profession, which includes representatives from the Section of International
Law and Practice, expressed to the FATF its concerns that imposing requirements on lawyers,
similar to those on financial institutions, will be unreasonably and unnecessarily burdensome,
especially for small firms and sole practitioners. Furthermore, the ABA states strongly that any
anti-money laundering requirements must focus on lawyer activities that involve the actual
transferring, holding, or moving of money for the client in order to avoid infringing on the
attorney-client relationship.
J. Recommended Best Practices for a Lawyer Acting Solely as a Lawyer. The International
Committee of the Real Property, Probate and Trust Law Section of the ABA recommends a best
practices approach for U.S. lawyers who engage solely in the practice of law. It is proposed that
those best practices for meeting the requirement of Knowing Your Client and due
diligence include the following:
1. Know Ones Client:
1. Identify the Client

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.
a. Request a copy of the prospective clients passport or other clear means of
identification such as a drivers license with a picture.
b. Insure the prospective c1ient is the principal and not an agent for someone else.
If an agent, determine who the principal is and obtain the requisite identification.
c. Ascertain a home address for the principal and, if relevant, the agent.
d. Ascertain a work address for the principal and, if relevant, the agent.
e. If the prospective client is an entity, obtain proof of creation and good
standing, addresses of offices, names of officers and directors, partners or
members and the purpose(s) of the entity.
f. If the prospective client is a law, accounting or investment firm acting for a
principal see 1.b. above.
g. If the prospective client is a trust, obtain the identity of, and addresses for, the
trustee(s) and/or beneficiaries, as well as a copy of the trust agreement.
h. Obtain one or two letters of recommendation from a reputable, independent
source, such as a financial institution, professional advisor or the like.
i. If the engagement is ongoing, the required information should be updated
periodically, at least annually.
2. Identify and understand the nature of the engagement
a. Identify the parties involved.
b. Determine the nature of the engagement.
c. Identify any pertinent relevant information necessary to represent the client for
the engagement, such as insuring there are no conflicts of interest, or, if there are,
obtaining appropriate waivers.
d. If any information is unclear it should be verified.
e. An engagement letter, including a description of the services to be rendered,
should be prepared and executed by the client.
2. Due Diligence and Record Maintenance.

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1. The lawyer should obtain full details regarding the (i) prospective clients
source of funds and (ii) contemplated transaction.
2. If the transaction is complex or unusual, the lawyer should insure (i) it has
economic substance and (ii) a lawful purpose.
3. The lawyer should, when practicable, meet the client at the clients place of
business or home.
4. The lawyer should obtain independent corroborative support of any relevant
information that may be unclear or suspect.
5. If the engagement expands, the lawyer should apply the above principles to the
new aspects of the engagement.
6. The lawyer should maintain records for at least 5 years.
XVII. Discussion Questions
1. What are the primary purposes of Title III of the USA Patriot Act?
2. What are the definitions of correspondent account, interbank account, payable-through
account and covered financial institution?
3. What are the requirements with respect to establishing an anti-money laundering
program under the USA Patriot Act?
4. What are some examples of failures by banks and financial institutions to establish
anti-money laundering programs?
5. What are the requirements with respect to a foreign bank establishing a U.S.
correspondent account with a U.S. bank?
6. What are the minimum requirements with respect to identification and verification of
accountholders?
7. What are special measure matters and who can determine whether a special measure
matter exits?
8. What are the special due diligence requirements for correspondent accounts and private
banking accounts?
9. What are the prohibitions on U.S. correspondent accounts with foreign shell banks?
10. What are the rules and consequences of the cooperation and information sharing
procedures?

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11. Who do the Federal Banking Agencies consist of?

12. What are the requirements with respect to the filing of suspicious activity reports?
13. What is the Financial Action Task Force and the purpose of its Forty Revised
Recommendations?
14. What is the Gatekeeper Initiative and discuss how it affects financial institutions and
the potential impact on practicing lawyers?
15. What are the record keeping requirements and the requirements to file suspicious
activity reports under the USA Patriot Act, Bank Secrecy Act, Federal Reserve and
others?
16. What are the recommended best practices for a lawyer who is acting solely as a
lawyer?

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APPENDIX A
USA PATRIOT Act
TITLE IIIINTERNATIONAL MONEY LAUNDERING ABATEMENT AND ANTITERRORIST FINANCING ACT OF 2001 SEC. 301. SHORT TITLE.
This title may be cited as the International Money Laundering Abatement and Financial AntiTerrorism Act of 2001.
SEC. 302. FINDINGS AND PURPOSES.
(a) FINDINGS.The Congress finds that
(1) money laundering, estimated by the International Monetary Fund to amount to between 2 and
5 percent of global gross domestic product, which is at least $600,000,000,000 annually,
provides the financial fuel that permits transnational criminal enterprises to conduct and expand
their operations to the detriment of the safety and security of American citizens; (2) money
laundering, and the defects in financial transparency on which money launderers rely, are critical
to the financing of global terrorism and the provision of funds for terrorist attacks; (3) money
launderers subvert legitimate financial mechanisms and banking relationships by using them as
protective covering for the movement of criminal proceeds and the financing of crime and
terrorism, and, by so doing, can threaten the safety of United States citizens and undermine the
integrity of United States financial institutions and of the global financial and trading systems
upon which prosperity and growth depend; (4) certain jurisdictions outside of the United States
that offer offshore banking and related facilities designed to provide anonymity, coupled with
weak financial supervisory and enforcement regimes, provide essential tools to disguise
ownership and movement of criminal funds, derived from, or used to commit, offenses ranging
from narcotics trafficking, terrorism, arms smuggling, and trafficking in human beings, to
financial frauds that prey on law-abiding citizens; (5) transactions involving such offshore
jurisdictions make it difficult for law enforcement officials and regulators to follow the trail of
money earned by criminals, organized international criminal enterprises, and global terrorist
organizations; (6) correspondent banking facilities are one of the banking mechanisms
susceptible in some circumstances to manipulation by foreign banks to permit the laundering of
funds by hiding the identity of real parties in interest to financial transactions; (7) private
banking services can be susceptible to manipulation by money launderers, for example corrupt
foreign government officials, particularly if those services include the creation of offshore
accounts and facilities for large personal funds transfers to channel funds into accounts around
the globe; (8) United States anti-money laundering efforts are impeded by outmoded and
inadequate statutory provisions that make investigations, prosecutions, and forfeitures more
difficult, particularly in cases in which money laundering involves foreign persons, foreign
banks, or foreign countries; (9) the ability to mount effective counter-measures to international
money launderers requires national, as well as bilateral and multilateral action, using tools
specially designed for that effort; and (10) the Basle Committee on Banking Regulation and
Supervisory Practices and the Financial Action Task Force on Money Laundering, of both of
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which the United States is a member, have each adopted international anti-money laundering
principles and recommendations.
(b) PURPOSES.The purposes of this title are
(1) to increase the strength of United States measures to prevent, detect, and prosecute
international money laundering and the financing of terrorism; (2) to ensure that
(A) banking transactions and financial relationships and the conduct of such transactions and
relationships, do not contravene the purposes of subchapter II of chapter 53 of title 31, United
States Code, section 21 of the Federal Deposit Insurance Act, or chapter 2 of title I of Public Law
91508 (84 Stat. 1116), or facilitate the evasion of any such provision; and (B) the purposes of
such provisions of law continue to be fulfilled, and such provisions of law are effectively and
efficiently administered; (3) to strengthen the provisions put into place by the Money Laundering
Control Act of 1986 (18 U.S.C. 981 note), especially with respect to crimes by non-United States
nationals and foreign financial institutions; (4) to provide a clear national mandate for subjecting
to special scrutiny those foreign jurisdictions, financial institutions operating outside of the
United States, and classes of international transactions or types of accounts that pose particular,
identifiable opportunities for criminal abuse; (5) to provide the Secretary of the Treasury (in this
title referred to as the Secretary) with broad discretion, subject to the safeguards provided by
the Administrative Procedure Act under title 5, United States Code, to take measures tailored to
the particular money laundering problems presented by specific foreign jurisdictions, financial
institutions operating outside of the United States, and classes of international transactions or
types of accounts; (6) to ensure that the employment of such measures by the Secretary permits
appropriate opportunity for comment by affected financial institutions; (7) to provide guidance to
domestic financial institutions on particular foreign jurisdictions, financial institutions operating
outside of the United States, and classes of international transactions that are of primary money
laundering concern to the United States Government; (8) to ensure that the forfeiture of any
assets in connection with the anti-terrorist efforts of the United States permits for adequate
challenge consistent with providing due process rights; (9) to clarify the terms of the safe harbor
from civil liability for filing suspicious activity reports; (10) to strengthen the authority of the
Secretary to issue and administer geographic targeting orders, and to clarify that violations of
such orders or any other requirement imposed under the authority contained in chapter 2 of title I
of Public Law 91508 and subchapters II and III of chapter 53 of title 31, United States Code,
may result in criminal and civil penalties; (11) to ensure that all appropriate elements of the
financial services industry are subject to appropriate requirements to report potential money
laundering transactions to proper authorities, and that jurisdictional disputes do not hinder
examination of compliance by financial institutions with relevant reporting requirements; (12) to
strengthen the ability of financial institutions to maintain the integrity of their employee
population; and (13) to strengthen measures to prevent the use of the United States financial
system for personal gain by corrupt foreign officials and to facilitate the repatriation of any
stolen assets to the citizens of countries to whom such assets belong.
SEC. 303. 4-YEAR CONGRESSIONAL REVIEW; EXPEDITED CONSIDERATION.
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(a) IN GENERAL.Effective on and after the first day of fiscal year 2005, the provisions of this
title and the amendments made by this title shall terminate if the Congress enacts a joint
resolution, the text after the resolving clause of which is as follows: That provisions of the
International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001, and the
amendments made thereby, shall no longer have the force of law.
(b) EXPEDITED CONSIDERATION.Any joint resolution submitted pursuant to this section
should be considered by the Congress expeditiously. In particular, it shall be considered in the
Senate in accordance with the provisions of section 601(b) of the International Security
Assistance and Arms Control Act of 1976.
Subtitle AInternational Counter Money Laundering and Related Measures
SEC. 311. SPECIAL MEASURES FOR JURISDICTIONS, FINANCIAL INSTITUTIONS, OR
INTERNATIONAL TRANSACTIONS OF PRIMARY MONEY LAUNDERING CONCERN.
(a) IN GENERAL.Subchapter II of chapter 53 of title 31, United States Code, is amended by
inserting after section 5318 the following new section:
5318A. Special measures for jurisdictions, financial institutions, or international transactions
of primary money laundering concern
(a) INTERNATIONAL COUNTER-MONEY LAUNDERING REQUIREMENTS.
(1) IN GENERAL.The Secretary of the Treasury may require domestic financial institutions
and domestic financial agencies to take 1 or more of the special measures described in subsection
(b) if the Secretary finds that reasonable grounds exist for concluding that a jurisdiction outside
of the United States, 1 or more financial institutions operating outside of the United States, 1 or
more classes of transactions within, or involving, a jurisdiction outside of the United States, or 1
or more types of accounts is of primary money laundering concern, in accordance with
subsection (c).
(2) FORM OF REQUIREMENT.The special measures described in
(A) subsection (b) may be imposed in such sequence or combination as the Secretary shall
determine;
(B) paragraphs (1) through (4) of subsection (b) may be imposed by regulation, order, or
otherwise as permitted by law; and
(C) subsection (b)(5) may be imposed only by regulation.
(3) DURATION OF ORDERS; RULEMAKING.
Any order by which a special measure described in paragraphs (1) through (4) of subsection (b)
is imposed (other than an order described in section 5326)

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(A) shall be issued together with a notice of proposed rulemaking relating to the imposition of
such special measure; and (B) may not remain in effect for more than 120 days, except pursuant
to a rule promulgated on or before the end of the 120-day period beginning on the date of
issuance of such order.
(4) PROCESS FOR SELECTING SPECIAL MEASURES.In selecting which special
measure or measures to take under this subsection, the Secretary of the Treasury
(A) shall consult with the Chairman of the Board of Governors of the Federal Reserve System,
any other appropriate Federal banking agency, as defined in section 3 of the Federal Deposit
Insurance Act, the Secretary of State, the Securities and Exchange Commission, the Commodity
Futures Trading Commission, the National Credit Union Administration Board, and in the sole
discretion of the Secretary, such other agencies and interested parties as the Secretary may find to
be appropriate; and
(B) shall consider
(i) whether similar action has been or is being taken by other nations or multilateral groups;
(ii) whether the imposition of any particular special measure would create a significant
competitive disadvantage, including any undue cost or burden associated with compliance, for
financial institutions organized or licensed in the United States;
(iii) the extent to which the action or the timing of the action would have a significant adverse
systemic impact on the international payment, clearance, and settlement system, or on legitimate
business activities involving the particular jurisdiction, institution, or class of transactions; and
(iv) the effect of the action on United States national security and foreign policy.
(5) NO LIMITATION ON OTHER AUTHORITY.
This section shall not be construed as superseding or otherwise restricting any other authority
granted to the Secretary, or to any other agency, by this subchapter or otherwise.
(b) SPECIAL MEASURES.The special measures referred to in subsection (a), with respect
to a jurisdiction outside of the United States, financial institution operating outside of the United
States, class of transaction within, or involving, a jurisdiction outside of the United States, or 1 or
more types of accounts are as follows:
(1) RECORDKEEPING AND REPORTING OF CERTAIN FINANCIAL TRANSACTIONS.

(A) IN GENERAL.The Secretary of the Treasury may require any domestic financial
institution or domestic financial agency to maintain records, file reports, or both, concerning the
aggregate amount of transactions, or concerning each transaction, with respect to a jurisdiction
outside of the United States, 1 or more financial institutions operating outside of the United
States, 1 or more classes of transactions within, or involving, a jurisdiction outside of the United
States, or 1 or more types of accounts if the Secretary finds any such jurisdiction, institution, or
class of transactions to be of primary money laundering concern.
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(B) FORM OF RECORDS AND REPORTS.

Such records and reports shall be made and retained at such time, in such manner, and for such
period of time, as the Secretary shall determine, and shall include such information as the
Secretary may determine, including
(i) the identity and address of the participants in a transaction or relationship, including the
identity of the originator of any funds transfer;
(ii) the legal capacity in which a participant in any transaction is acting;
(iii) the identity of the beneficial owner of the funds involved in any transaction, in accordance
with such procedures as the Secretary determines to be reasonable and practicable to obtain and
retain the information; and
(iv) a description of any transaction.
(2) INFORMATION RELATING TO BENEFICIAL OWNERSHIP.In addition to any other
requirement under any other provision of law, the Secretary may require any domestic financial
institution or domestic financial agency to take such steps as the Secretary may determine to be
reasonable and practicable to obtain and retain information concerning the beneficial ownership
of any account opened or maintained in the United States by a foreign person (other than a
foreign entity whose shares are subject to public reporting requirements or are listed and traded
on a regulated exchange or trading market), or a representative of such a foreign person, that
involves a jurisdiction outside of the United States, 1 or more financial institutions operating
outside of the United States, 1 or more classes of transactions within, or involving, a jurisdiction
outside of the United States, or 1 or more types of accounts if the Secretary finds any such
jurisdiction, institution, or transaction or type of account to be of primary money laundering
concern.
(3) INFORMATION RELATING TO CERTAIN PAYABLE-THROUGH ACCOUNTS.If the
Secretary finds a jurisdiction outside of the United States, 1 or more financial institutions
operating outside of the United States, or 1 or more classes of transactions within, or involving, a
jurisdiction outside of the United States to be of primary money laundering concern, the
Secretary may require any domestic financial institution or domestic financial agency that opens
or maintains a payable-through account in the United States for a foreign financial institution
involving any such jurisdiction or any such financial institution operating outside of the United
States, or a payable through account through which any such transaction may be conducted, as a
condition of opening or maintaining such account
(A) to identify each customer (and representative of such customer) of such financial institution
who is permitted to use, or whose transactions are routed through, such payable-through account;
and
(B) to obtain, with respect to each such customer (and each such representative), information
that is substantially comparable to that which the depository institution obtains in the ordinary
course of business with respect to its customers residing in the United States.
(4) INFORMATION RELATING TO CERTAIN CORRESPONDENT ACCOUNTS.If the
Secretary finds a jurisdiction outside of the United States, 1 or more financial institutions
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operating outside of the United States, or 1 or more classes of transactions within, or involving, a
jurisdiction outside of the United States to be of primary money laundering concern, the
Secretary may require any domestic financial institution or domestic financial agency that opens
or maintains a correspondent account in the United States for a foreign financial institution
involving any such jurisdiction or any such financial institution operating outside of the United
States, or a correspondent account through which any such transaction may be conducted, as a
condition of opening or maintaining such account
(A) to identify each customer (and representative of such customer) of any such financial
institution who is permitted to use, or whose transactions are routed through, such correspondent
account; and
(B) to obtain, with respect to each such customer (and each such representative), information
that is substantially comparable to that which the depository institution obtains in the ordinary
course of business with respect to its customers residing in the United States.
(5) PROHIBITIONS OR CONDITIONS ON OPENING OR MAINTAINING CERTAIN
CORRESPONDENT OR PAYABLE-THROUGH ACCOUNTS.If the Secretary finds a
jurisdiction outside of the United States, 1 or more financial institutions operating outside of the
United States, or 1 or more classes of transactions within, or involving, a jurisdiction outside of
the United States to be of primary money laundering concern, the Secretary, in consultation with
the Secretary of State, the Attorney General, and the Chairman of the Board of Governors of the
Federal Reserve System, may prohibit, or impose conditions upon, the opening or maintaining in
the United States of a correspondent account or payable-through account by any domestic
financial institution or domestic financial agency for or on behalf of a foreign banking
institution, if such correspondent account or payable-through account involves any such
jurisdiction or institution, or if any such transaction may be conducted through such
correspondent account or payable-through account.
(c) CONSULTATIONS AND INFORMATION TO BE CONSIDERED IN FINDING
JURISDICTIONS, INSTITUTIONS, TYPES OF ACCOUNTS, OR TRANSACTIONS TO BE
OF PRIMARY MONEY LAUNDERING CONCERN.
(1) IN GENERAL.In making a finding that reasonable grounds exist for concluding that a
jurisdiction outside of the United States, 1 or more financial institutions operating outside of the
United States, 1 or more classes of transactions within, or involving, a jurisdiction outside of the
United States, or 1 or more types of accounts is of primary money laundering concern so as to
authorize the Secretary of the Treasury to take 1 or more of the special measures described in
subsection (b), the Secretary shall consult with the Secretary of State and the Attorney General.
(2) ADDITIONAL CONSIDERATIONS.In making a finding described in paragraph (1), the
Secretary shall consider in addition such information as the Secretary determines to be relevant,
including the following potentially relevant factors:
(A) JURISDICTIONAL FACTORS.In the case of a particular jurisdiction
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(i) evidence that organized criminal groups, international terrorists, or both, have transacted
business in that jurisdiction;
(ii) the extent to which that jurisdiction or financial institutions operating in that jurisdiction
offer bank secrecy or special regulatory advantages to nonresidents or nondomiciliaries of that
jurisdiction;
(iii) the substance and quality of administration of the bank supervisory and counter-money
laundering laws of that jurisdiction;
(iv) the relationship between the volume of financial transactions occurring in that jurisdiction
and the size of the economy of the jurisdiction;
(v) the extent to which that jurisdiction is characterized as an offshore banking or secrecy haven
by credible international organizations or multilateral expert groups;
(vi) whether the United States has a mutual legal assistance treaty with that jurisdiction, and the
experience of United States law enforcement officials and regulatory officials in obtaining
information about transactions originating in or routed through or to such jurisdiction; and
(vii) the extent to which that jurisdiction is characterized by high levels of official or
institutional corruption.
(B) INSTITUTIONAL FACTORS.In the case of a decision to apply 1 or more of the special
measures described in subsection (b) only to a financial institution or institutions, or to a
transaction or class of transactions, or to a type of account, or to all 3, within or involving a
particular jurisdiction
(i) the extent to which such financial institutions, transactions, or types of accounts are used to
facilitate or promote money laundering in or through the jurisdiction;
(ii) the extent to which such institutions, transactions, or types of accounts are used for
legitimate business purposes in the jurisdiction; and
(iii) the extent to which such action is sufficient to ensure, with respect to transactions
involving the jurisdiction and institutions operating in the jurisdiction, that the purposes of this
subchapter continue to be fulfilled, and to guard against international money laundering and
other financial crimes.
(d) NOTIFICATION OF SPECIAL MEASURES INVOKED BY THE SECRETARY.Not
later than 10 days after the date of any action taken by the Secretary of the Treasury under
subsection (a)(1), the Secretary shall notify, in writing, the Committee on Financial Services of
the House of Representatives and the Committee on Banking, Housing, and Urban Affairs of the
Senate of any such action.
(e) DEFINITIONS.Notwithstanding any other provision of this subchapter, for purposes of
this section and subsections (i) and (j) of section 5318, the following definitions shall apply:
(1) BANK DEFINITIONS.The following definitions shall apply with respect to a bank:
(A) ACCOUNT.The term account
(i) means a formal banking or business relationship established to provide regular services,
dealings, and other financial transactions; and
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(ii) includes a demand deposit, savings deposit, or other transaction or asset account and a
credit account or other extension of credit.
(B) CORRESPONDENT ACCOUNT.The term correspondent account means an account
established to receive deposits from, make payments on behalf of a foreign financial institution,
or handle other financial transactions related to such institution.
(C) PAYABLE-THROUGH ACCOUNT.The term payable-through account means an
account, including a transaction account (as defined in section 19(b)(1)(C) of the Federal
Reserve Act), opened at a depository institution by a foreign financial institution by means of
which the foreign financial institution permits its customers to engage, either directly or through
a subaccount, in banking activities usual in connection with the business of banking in the United
States.
(2) DEFINITIONS APPLICABLE TO INSTITUTIONS OTHER THAN BANKS.With
respect to any financial institution other than a bank, the Secretary shall, after consultation with
the appropriate Federal functional regulators (as defined in section 509 of the Gramm-LeachBliley Act), define by regulation the term account, and shall include within the meaning of that
term, to the extent, if any, that the Secretary deems appropriate, arrangements similar to payablethrough and correspondent accounts.
(3) REGULATORY DEFINITION OF BENEFICIAL OWNERSHIP.The Secretary shall
promulgate regulations defining beneficial ownership of an account for purposes of this section
and subsections (i) and (j) of section 5318. Such regulations shall address issues related to an
individuals authority to fund, direct, or manage the account (including, without limitation, the
power to direct payments into or out of the account), and an individuals material interest in the
income or corpus of the account, and shall ensure that the identification of individuals under this
section does not extend to any individual whose beneficial interest in the income or corpus of the
account is immaterial.
(4) OTHER TERMS.The Secretary may, by regulation, further define the terms in
paragraphs (1), (2), and (3), and define other terms for the purposes of this section, as the
Secretary deems appropriate.
(b) CLERICAL AMENDMENT.The table of sections for subchapter II of chapter 53 of title
31, United States Code, is amended by inserting after the item relating to section 5318 the
following new item: 5318A. Special measures for jurisdictions, financial institutions, or
international transactions of primary money laundering concern.
SEC. 312. SPECIAL DUE DILIGENCE FOR CORRESPONDENT ACCOUNTS AND
PRIVATE BANKING ACCOUNTS.
(a) IN GENERAL.Section 5318 of title 31, United States Code, is amended by adding at the
end the following:
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(i) DUE DILIGENCE FOR UNITED STATES PRIVATE BANKING AND

CORRESPONDENT BANK ACCOUNTS INVOLVING FOREIGN PERSONS.
(1) IN GENERAL.Each financial institution that establishes, maintains, administers, or
manages a private banking account or a correspondent account in the United States for a nonUnited States person, including a foreign individual visiting the United States, or a representative
of a non-United States person shall establish appropriate, specific, and, where necessary,
enhanced, due diligence policies, procedures, and controls that are reasonably designed to detect
and report instances of money laundering through those accounts.
(2) ADDITIONAL STANDARDS FOR CERTAIN CORRESPONDENT ACCOUNTS.
(A) IN GENERAL.Subparagraph (B) shall apply if a correspondent account is requested or
maintained by, or on behalf of, a foreign bank operating
(i) under an offshore banking license; or
(ii) under a banking license issued by a foreign country that has been designated
(I) as noncooperative with international anti-money laundering principles or procedures by an
intergovernmental group or organization of which the United States is a member, with which
designation the United States representative to the group or organization concurs; or
(II) by the Secretary of the Treasury as warranting special measures due to money laundering
concerns.
(B) POLICIES, PROCEDURES, AND CONTROLS.The enhanced due diligence policies,
procedures, and controls required under paragraph (1) shall, at a minimum, ensure that the
financial institution in the United States takes reasonable steps
(i) to ascertain for any such foreign bank, the shares of which are not publicly traded, the
identity of each of the owners of the foreign bank, and the nature and extent of the ownership
interest of each such owner;
(ii) to conduct enhanced scrutiny of such account to guard against money laundering and report
any suspicious transactions under subsection (g); and
(iii) to ascertain whether such foreign bank provides correspondent accounts to other foreign
banks and, if so, the identity of those foreign banks and related due diligence information, as
appropriate under paragraph (1).
(3) MINIMUM STANDARDS FOR PRIVATE BANKING ACCOUNTS.If a private banking
account is requested or maintained by, or on behalf of, a non-United States person, then the due
diligence policies, procedures, and controls required under paragraph (1) shall, at a minimum,
ensure that the financial institution takes reasonable steps
(A) to ascertain the identity of the nominal and beneficial owners of, and the source of funds
deposited into, such account as needed to guard against money laundering and report any
suspicious transactions under subsection (g); and
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(B) to conduct enhanced scrutiny of any such account that is requested or maintained by, or on
behalf of, a senior foreign political figure, or any immediate family member or close associate of
a senior foreign political figure that is reasonably designed to detect and report transactions that
may involve the proceeds of foreign corruption.
(4) DEFINITION.For purposes of this subsection, the following definitions shall apply:
(A) OFFSHORE BANKING LICENSE.The term offshore banking license means a license
to conduct banking activities which, as a condition of the license, prohibits the licensed entity
from conducting banking activities with the citizens of, or with the local currency of, the country
which issued the license.
(B) PRIVATE BANKING ACCOUNT.The term private banking account means an account
(or any combination of accounts) that
(i) requires a minimum aggregate deposits of funds or other assets of not less than $1,000,000;
(ii) is established on behalf of 1 or more individuals who have a direct or beneficial ownership
interest in the account; and
(iii) is assigned to, or is administered or managed by, in whole or in part, an officer, employee,
or agent of a financial institution acting as a liaison between the financial institution and the
direct or beneficial owner of the account.
(b) REGULATORY AUTHORITY AND EFFECTIVE DATE.
(1) REGULATORY AUTHORITY.Not later than 180 days after the date of enactment of this
Act, the Secretary, in consultation with the appropriate Federal functional regulators (as defined
in section 509 of the Gramm-Leach-Bliley Act) of the affected financial institutions, shall further
delineate, by regulation, the due diligence policies, procedures, and controls required under
section 5318(i)(1) of title 31, United States Code, as added by this section.
(2) EFFECTIVE DATE.Section 5318(i) of title 31, United States Code, as added by this
section, shall take effect 270 days after the date of enactment of this Act, whether or not final
regulations are issued under paragraph (1), and the failure to issue such regulations shall in no
way affect the enforceability of this section or the amendments made by this section. Section
5318(i) of title 31, United States Code, as added by this section, shall apply with respect to
accounts covered by that section 5318(i), that are opened before, on, or after the date of
enactment of this Act.
SEC. 313. PROHIBITION ON UNITED STATES CORRESPONDENT ACCOUNTS WITH
FOREIGN SHELL BANKS.
(a) IN GENERAL.Section 5318 of title 31, United States Code, as amended by this title, is
amended by adding at the end the following:
(j) PROHIBITION ON UNITED STATES CORRESPONDENT ACCOUNTS WITH
FOREIGN SHELL BANKS.
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(1) IN GENERAL.A financial institution described in subparagraphs (A) through (G) of

section 5312(a)(2) (in this subsection referred to as a covered financial institution) shall not
establish, maintain, administer, or manage a correspondent account in the United States for, or on
behalf of, a foreign bank that does not have a physical presence in any country.
(2) PREVENTION OF INDIRECT SERVICE TO FOREIGN SHELL BANKS.A covered
financial institution shall take reasonable steps to ensure that any correspondent account
established, maintained, administered, or managed by that covered financial institution in the
United States for a foreign bank is not being used by that foreign bank to indirectly provide
banking services to another foreign bank that does not have a physical presence in any country.
The Secretary of the Treasury shall, by regulation, delineate the reasonable steps necessary to
comply with this paragraph.
(3) EXCEPTION.Paragraphs (1) and (2) do not prohibit a covered financial institution from
providing a correspondent account to a foreign bank, if the foreign bank
(A) is an affiliate of a depository institution, credit union, or foreign bank that maintains a
physical presence in the United States or a foreign country, as applicable; and (B) is subject to
supervision by a banking authority in the country regulating the affiliated depository institution,
credit union, or foreign bank described in subparagraph (A), as applicable.
(4) DEFINITIONS.For purposes of this subsection
(A) the term affiliate means a foreign bank that is controlled by or is under common control
with a depository institution, credit union, or foreign bank; and (B) the term physical presence
means a place of business that
(i) is maintained by a foreign bank;
(ii) is located at a fixed address (other than solely an electronic address) in a country in which
the foreign bank is authorized to conduct banking activities, at which location the foreign bank
(I) employs 1 or more individuals on a full-time basis; and (II) maintains operating records
related to its banking activities; and
(iii) is subject to inspection by the banking authority which licensed the foreign bank to conduct
banking activities.
(b) EFFECTIVE DATE.The amendment made by subsection (a) shall take effect at the end of
the 60-day period beginning on the date of enactment of this Act.
SEC. 314. COOPERATIVE EFFORTS TO DETER MONEY LAUNDERING.
(a) COOPERATION AMONG FINANCIAL INSTITUTIONS, REGULATORY
AUTHORITIES, AND LAW ENFORCEMENT AUTHORITIES.
(1) REGULATIONS.The Secretary shall, within 120 days after the date of enactment of this
Act, adopt regulations to encourage further cooperation among financial institutions, their
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regulatory authorities, and law enforcement authorities, with the specific purpose of encouraging
regulatory authorities and law enforcement authorities to share with financial institutions
information regarding individuals, entities, and organizations engaged in or reasonably suspected
based on credible evidence of engaging in terrorist acts or money laundering activities.
(2) COOPERATION AND INFORMATION SHARING PROCEDURES.The regulations
adopted under paragraph (1) may include or create procedures for cooperation and information
sharing focusing on
(A) matters specifically related to the finances of terrorist groups, the means by which terrorist
groups transfer funds around the world and within the United States, including through the use of
charitable organizations, nonprofit organizations, and nongovernmental organizations, and the
extent to which financial institutions in the United States are unwittingly involved in such
finances and the extent to which such institutions are at risk as a result;
(B) the relationship, particularly the financial relationship, between international narcotics
traffickers and foreign terrorist organizations, the extent to which their memberships overlap and
engage in joint activities, and the extent to which they cooperate with each other in raising and
transferring funds for their respective purposes; and
(C) means of facilitating the identification of accounts and transactions involving terrorist groups
and facilitating the exchange of information concerning such accounts and transactions between
financial institutions and law enforcement organizations.
(3) CONTENTS.The regulations adopted pursuant to paragraph (1) may
(A) require that each financial institution designate 1 or more persons to receive information
concerning, and to monitor accounts of individuals, entities, and organizations identified,
pursuant to paragraph (1); and (B) further establish procedures for the protection of the shared
information, consistent with the capacity, size, and nature of the institution to which the
particular procedures apply.
(4) RULE OF CONSTRUCTION.The receipt of information by a financial institution
pursuant to this section shall not relieve or otherwise modify the obligations of the financial
institution with respect to any other person or account.
(5) USE OF INFORMATION.Information received by a financial institution pursuant to this
section shall not be used for any purpose other than identifying and reporting on activities that
may involve terrorist acts or money laundering activities.
(b) COOPERATION AMONG FINANCIAL INSTITUTIONS.Upon notice provided to the
Secretary, 2 or more financial institutions and any association of financial institutions may share
information with one another regarding individuals, entities, organizations, and countries
suspected of possible terrorist or money laundering activities. A financial institution or
association that transmits, receives, or shares such information for the purposes of identifying
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and reporting activities that may involve terrorist acts or money laundering activities shall not be
liable to any person under any law or regulation of the United States, any constitution, law, or
regulation of any State or political subdivision thereof, or under any contract or other legally
enforceable agreement (including any arbitration agreement), for such disclosure or for any
failure to provide notice of such disclosure to the person who is the subject of such disclosure, or
any other person identified in the disclosure, except where such transmission, receipt, or sharing
violates this section or regulations promulgated pursuant to this section.
(c) RULE OF CONSTRUCTION.Compliance with the provisions of this title requiring or
allowing financial institutions and any association of financial institutions to disclose or share
information regarding individuals, entities, and organizations engaged in or suspected of
engaging in terrorist acts or money laundering activities shall not constitute a violation of the
provisions of title V of the Gramm-Leach-Bliley Act (Public Law 106102).
(d) REPORTS TO THE FINANCIAL SERVICES INDUSTRY ON SUSPICIOUS FINANCIAL
ACTIVITIES.At least semiannually, the Secretary shall
(1) publish a report containing a detailed analysis identifying patterns of suspicious activity and
other investigative insights derived from suspicious activity reports and investigations conducted
by Federal, State, and local law enforcement agencies to the extent appropriate; and
(2) distribute such report to financial institutions (as defined in section 5312 of title 31, United
States Code).
SEC. 315. INCLUSION OF FOREIGN CORRUPTION OFFENSES AS MONEY
LAUNDERING CRIMES.
Section 1956(c)(7) of title 18, United States Code, is amended
(1) in subparagraph (B)
(A) in clause (ii), by striking or destruction of property by means of explosive or fire and
inserting destruction of property by means of explosive or fire, or a crime of violence (as
defined in section 16);
(B) in clause (iii), by striking 1978 and inserting 1978); and
(C) by adding at the end the following: (iv) bribery of a public official, or the misappropriation,
theft, or embezzlement of public funds by or for the benefit of a public official; (v) smuggling
or export control violations involving
(I) an item controlled on the United States Munitions List established under section 38 of the
Arms Export Control Act (22 U.S.C. 2778); or (II) an item controlled under regulations under
the Export Administration Regulations (15 C.F.R. Parts 730774); or (vi) an offense with
respect to which the United States would be obligated by a multilateral treaty, either to extradite
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the alleged offender or to submit the case for prosecution, if the offender were found within the
territory of the United States; and
(2) in subparagraph (D)
(A) by inserting section 541 (relating to goods falsely classified), before section 542;
(B) by inserting section 922(1) (relating to the unlawful importation of firearms), section
924(n) (relating to firearms trafficking), before section 956;
(C) by inserting section 1030 (relating to computer fraud and abuse), before 1032; and
(D) by inserting any felony violation of the Foreign Agents Registration Act of 1938, before
or any felony violation of the Foreign Corrupt Practices Act.
SEC. 316. ANTI-TERRORIST FORFEITURE PROTECTION.
(a) RIGHT TO CONTEST.An owner of property that is confiscated under any provision of
law relating to the confiscation of assets of suspected international terrorists, may contest that
confiscation by filing a claim in the manner set forth in the Federal Rules of Civil Procedure
(Supplemental Rules for Certain Admiralty and Maritime Claims), and asserting as an
affirmative defense that
(1) the property is not subject to confiscation under such provision of law; or
(2) the innocent owner provisions of section 983(d) of title 18, United States Code, apply to the
case.
(b) EVIDENCE.In considering a claim filed under this section, a court may admit evidence
that is otherwise inadmissible under the Federal Rules of Evidence, if the court determines that
the evidence is reliable, and that compliance with the Federal Rules of Evidence may jeopardize
the national security interests of the United States.
(c) CLARIFICATIONS.
(1) PROTECTION OF RIGHTS.The exclusion of certain provisions of Federal law from the
definition of the term civil forfeiture statute in section 983(i) of title 18, United States Code,
shall not be construed to deny an owner of property the right to contest the confiscation of assets
of suspected international terrorists under
(A) subsection (a) of this section;
(B) the Constitution; or

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(C) subchapter II of chapter 5 of title 5, United States Code (commonly known as the
Administrative Procedure Act).
(2) SAVINGS CLAUSE.Nothing in this section shall limit or otherwise affect any other
remedies that may be available to an owner of property under section 983 of title 18, United
States Code, or any other provision of law.
(d) TECHNICAL CORRECTION.Section 983(i)(2)(D) of title 18, United States Code, is
amended by inserting or the International Emergency Economic Powers Act (IEEPA) (50
U.S.C. 1701 et seq.) before the semicolon.
SEC. 317. LONG-ARM JURISDICTION OVER FOREIGN MONEY LAUNDERERS.
Section 1956(b) of title 18, United States Code, is amended
(1) by redesignating paragraphs (1) and (2) as subparagraphs (A) and (B), respectively, and
moving the margins 2 ems to the right;
(2) by inserting after (b) the following: PENALTIES. (1) IN GENERAL.; (3) by
inserting , or section 1957 after or (a)(3); and (4) by adding at the end the following: (2)
JURISDICTION OVER FOREIGN PERSONS. For purposes of adjudicating an action filed or
enforcing a penalty ordered under this section, the district courts shall have jurisdiction over any
foreign person, including any financial institution authorized under the laws of a foreign country,
against whom the action is brought, if service of process upon the foreign person is made under
the Federal Rules of Civil Procedure or the laws of the country in which the foreign person is
found, and
(A) the foreign person commits an offense under subsection (a) involving a financial
transaction that occurs in whole or in part in the United States;
(B) the foreign person converts, to his or her own use, property in which the United States has
an ownership interest by virtue of the entry of an order of forfeiture by a court of the United
States; or
(C) the foreign person is a financial institution that maintains a bank account at a financial
institution in the United States.
(3) COURT AUTHORITY OVER ASSETS.A court described in paragraph (2) may issue a
pretrial restraining order or take any other action necessary to ensure that any bank account or
other property held by the defendant in the United States is available to satisfy a judgment under
this section.
(4) FEDERAL RECEIVER.

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(A) IN GENERAL.A court described in paragraph (2) may appoint a Federal Receiver, in
accordance with subparagraph (B) of this paragraph, to collect, marshal, and take custody,
control, and possession of all assets of the defendant, wherever located, to satisfy a civil
judgment under this subsection, a forfeiture judgment under section 981 or 982, or a criminal
sentence under section 1957 or subsection (a) of this section, including an order of restitution to
any victim of a specified unlawful activity.
(B) APPOINTMENT AND AUTHORITY.A Federal Receiver described in subparagraph (A)
7
(i) may be appointed upon application of a Federal prosecutor or a Federal or State regulator,
by the court having jurisdiction over the defendant in the case;
(ii) shall be an officer of the court, and the powers of the Federal Receiver shall include the
powers set out in section 754 of title 28, United States Code; and
(iii) shall have standing equivalent to that of a Federal prosecutor for the purpose of submitting
requests to obtain information regarding the assets of the defendant
(I) from the Financial Crimes Enforcement Network of the Department of the Treasury; or
(II) from a foreign country pursuant to a mutual legal assistance treaty, multilateral agreement,
or other arrangement for international law enforcement assistance, provided that such requests
are in accordance with the policies and procedures of the Attorney General.
SEC. 318. LAUNDERING MONEY THROUGH A FOREIGN BANK.
Section 1956(c) of title 18, United States Code, is amended by striking paragraph (6) and
inserting the following: (6) the term financial institution includes (A) any financial
institution, as defined in section 5312(a)(2) of title 31, United States Code, or the regulations
promulgated thereunder; and (B) any foreign bank, as defined in section 1 of the International
Banking Act of 1978 (12 U.S.C. 3101).
SEC. 319. FORFEITURE OF FUNDS IN UNITED STATES INTERBANK ACCOUNTS.
(a) FORFEITURE FROM UNITED STATES INTERBANK ACCOUNT.Section 981 of title
18, United States Code, is amended by adding at the end the following:
(k) INTERBANK ACCOUNTS.
(1) IN GENERAL.
(A) IN GENERAL.For the purpose of a forfeiture under this section or under the Controlled
Substances Act (21 U.S.C. 801 et seq.), if funds are deposited into an account at a foreign bank,
and that foreign bank has an interbank account in the United States with a covered financial
institution (as defined in section 5318(j)(1) of title 31), the funds shall be deemed to have been
deposited into the interbank account in the United States, and any restraining order, seizure
warrant, or arrest warrant in rem regarding the funds may be served on the covered financial
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institution, and funds in the interbank account, up to the value of the funds deposited into the
account at the foreign bank, may be restrained, seized, or arrested.
(B) AUTHORITY TO SUSPEND.The Attorney General, in consultation with the Secretary
of the Treasury, may suspend or terminate a forfeiture under this section if the Attorney General
determines that a conflict of law exists between the laws of the jurisdiction in which the foreign
bank is located and the laws of the United States with respect to liabilities arising from the
restraint, seizure, or arrest of such funds, and that such suspension or termination would be in the
interest of justice and would not harm the national interests of the United States.
(2) NO REQUIREMENT FOR GOVERNMENT TO TRACE FUNDS.If a forfeiture action
is brought against funds that are restrained, seized, or arrested under paragraph (1), it shall not be
necessary for the Government to establish that the funds are directly traceable to the funds that
were deposited into the foreign bank, nor shall it be necessary for the Government to rely on the
application of section 984.
(3) CLAIMS BROUGHT BY OWNER OF THE FUNDS.If a forfeiture action is instituted
against funds restrained, seized, or arrested under paragraph (1), the owner of the funds
deposited into the account at the foreign bank may contest the forfeiture by filing a claim under
section 983.
(4) DEFINITIONS.For purposes of this subsection, the following definitions shall apply:
(A) INTERBANK ACCOUNT.The term interbank account has the same meaning as in
section 984(c)(2)(B).
(B) OWNER.
(i) IN GENERAL.Except as provided in clause (ii), the term owner
(I) means the person who was the owner, as that term is defined in section 983(d)(6), of the
funds that were deposited into the foreign bank at the time such funds were deposited; and
(II) does not include either the foreign bank or any financial institution acting as an
intermediary in the transfer of the funds into the inter-bank account.
(ii) EXCEPTION.The foreign bank may be considered the owner of the funds (and no other
person shall qualify as the owner of such funds) only if
(I) the basis for the forfeiture action is wrongdoing committed by the foreign bank; or
(II) the foreign bank establishes, by a preponderance of the evidence, that prior to the restraint,
seizure, or arrest of the funds, the foreign bank had discharged all or part of its obligation to the
prior owner of the funds, in which case the foreign bank shall be deemed the owner of the funds
to the extent of such discharged obligation.
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(b) BANK RECORDS.Section 5318 of title 31, United States Code, as amended by this title,
is amended by adding at the end the following:
(k) BANK RECORDS RELATED TO ANTI-MONEY LAUNDERING PROGRAMS.
(1) DEFINITIONS.For purposes of this subsection, the following definitions shall apply:
(A) APPROPRIATE FEDERAL BANKING AGENCY.The term appropriate Federal
banking agency has the same meaning as in section 3 of the Federal Deposit Insurance Act (12
U.S.C. 1813).
(B) INCORPORATED TERM.The term correspondent account has the same meaning as in
section 5318A(f)(1)(B).
(2) 120-HOUR RULE.Not later than 120 hours after receiving a request by an appropriate
Federal banking agency for information related to anti-money laundering compliance by a
covered financial institution or a customer of such institution, a covered financial institution shall
provide to the appropriate Federal banking agency, or make available at a location specified by
the representative of the appropriate Federal banking agency, information and account
documentation for any account opened, maintained, administered or managed in the United
States by the covered financial institution.
(3) FOREIGN BANK RECORDS.
(A) SUMMONS OR SUBPOENA OF RECORDS.
(i) IN GENERAL.The Secretary of the Treasury or the Attorney General may issue a
summons or subpoena to any foreign bank that maintains a correspondent account in the United
States and request records related to such correspondent account, including records maintained
outside of the United States relating to the deposit of funds into the foreign bank.
(ii) SERVICE OF SUMMONS OR SUBPOENA.A summons or subpoena referred to in
clause (i) may be served on the foreign bank in the United States if the foreign bank has a
representative in the United States, or in a foreign country pursuant to any mutual legal
assistance treaty, multilateral agreement, or other request for international law enforcement
assistance.
(B) ACCEPTANCE OF SERVICE.
(i) MAINTAINING RECORDS IN THE UNITED STATES.Any covered financial
institution which maintains a correspondent account in the United States for a foreign bank shall
maintain records in the United States identifying the owners of such foreign bank and the name
and address of a person who resides in the United States and is authorized to accept service of
legal process for records regarding the correspondent account.
(ii) LAW ENFORCEMENT REQUEST. Upon receipt of a written request from a Federal
law enforcement officer for information required to be maintained under this paragraph, the
covered financial institution shall provide the information to the requesting officer not later than
7 days after receipt of the request.
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(C) TERMINATION OF CORRESPONDENT RELATIONSHIP.

(i) TERMINATION UPON RECEIPT OF NOTICE.A covered financial institution shall
terminate any correspondent relationship with a foreign bank not later than 10 business days after
receipt of written notice from the Secretary or the Attorney General (in each case, after
consultation with the other) that the foreign bank has failed
(I) to comply with a summons or subpoena issued under subparagraph (A); or
(II) to initiate proceedings in a United States court contesting such summons or subpoena.
(ii) LIMITATION ON LIABILITY.A covered financial institution shall not be liable to any
person in any court or arbitration proceeding for terminating a correspondent relationship in
accordance with this subsection.
(iii) FAILURE TO TERMINATE RELATIONSHIP.Failure to terminate a correspondent
relationship in accordance with this subsection shall render the covered financial institution
liable for a civil penalty of up to $10,000 per day until the correspondent relationship is so
terminated.
(c) GRACE PERIOD.Financial institutions shall have 60 days from the date of enactment of
this Act to comply with the provisions of section 5318(k) of title 31, United States Code, as
added by this section.
(d) AUTHORITY TO ORDER CONVICTED CRIMINAL TO RETURN PROPERTY
LOCATED ABROAD.
(1) FORFEITURE OF SUBSTITUTE PROPERTY. Section 413(p) of the Controlled
Substances Act (21 U.S.C. 853) is amended to read as follows: (p) FORFEITURE OF
SUBSTITUTE PROPERTY. (1) IN GENERAL.Paragraph (2) of this subsection shall
apply, if any property described in subsection (a), as a result of any act or omission of the
defendant (A) cannot be located upon the exercise of due diligence; (B) has been
transferred or sold to, or deposited with, a third party; (C) has been placed beyond the
jurisdiction of the court;
(D) has been substantially diminished in value; or (E) has been commingled with other
property which cannot be divided without difficulty.
(2) SUBSTITUTE PROPERTY.In any case described in any of subparagraphs (A) through
(E) of paragraph (1), the court shall order the forfeiture of any other property of the defendant,
up to the value of any property described in subparagraphs (A) through (E) of paragraph (1), as
applicable.
(3) RETURN OF PROPERTY TO JURISDICTION.In the case of property described in
paragraph (1)(C), the court may, in addition to any other action authorized by this subsection,
order the defendant to return the property to the jurisdiction of the court so that the property may
be seized and forfeited.
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(2) PROTECTIVE ORDERS.Section 413(e) of the Controlled Substances Act (21 U.S.C.
853(e)) is amended by adding at the end the following:
(4) ORDER TO REPATRIATE AND DEPOSIT.
(A) IN GENERAL.Pursuant to its authority to enter a pretrial restraining order under this
section, the court may order a defendant to repatriate any property that may be seized and
forfeited, and to deposit that property pending trial in the registry of the court, or with the United
States Marshals Service or the Secretary of the Treasury, in an interest-bearing account, if
appropriate.
(B) FAILURE TO COMPLY.Failure to comply with an order under this subsection, or an
order to repatriate property under subsection (p), shall be punishable as a civil or criminal
contempt of court, and may also result in an enhancement of the sentence of the defendant under
the obstruction of justice provision of the Federal Sentencing Guidelines.
SEC. 320. PROCEEDS OF FOREIGN CRIMES.
Section 981(a)(1)(B) of title 18, United States Code, is amended to read as follows:
(B) Any property, real or personal, within the jurisdiction of the United States, constituting,
derived from, or traceable to, any proceeds obtained directly or indirectly from an offense against
a foreign nation, or any property used to facilitate such an offense, if the offense
(i) involves the manufacture, importation, sale, or distribution of a controlled substance (as that
term is defined for purposes of the Controlled Substances Act), or any other conduct described in
section 1956(c)(7)(B);
(ii) would be punishable within the jurisdiction of the foreign nation by death or imprisonment
for a term exceeding 1 year; and
(iii) would be punishable under the laws of the United States by imprisonment for a term
exceeding 1 year, if the act or activity constituting the offense had occurred within the
jurisdiction of the United States.
SEC. 321. FINANCIAL INSTITUTIONS SPECIFIED IN SUB-CHAPTER II OF CHAPTER 53
OF TITLE 31, UNITED STATES CODE.
(a) CREDIT UNIONS.Subparagraph (E) of section 5312(2) of title 31, United States Code, is
amended to read as follows:
(E) any credit union;
(b) FUTURES COMMISSION MERCHANT; COMMODITY TRADING ADVISOR;
COMMODITY POOL OPERATOR.Section 5312 of title 31, United States Code, is amended
by adding at the end the following new subsection:
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(c) ADDITIONAL DEFINITIONS.For purposes of this subchapter, the following definitions

shall apply:
(1) CERTAIN INSTITUTIONS INCLUDED IN DEFINITION.The term financial
institution (as defined in subsection (a)) includes the following:
(A) Any futures commission merchant, commodity trading advisor, or commodity pool
operator registered, or required to register, under the Commodity Exchange Act.
(c) CFTC INCLUDED.For purposes of this Act and any amendment made by this Act to any
other provision of law, the term Federal functional regulator includes the Commodity Futures
Trading Commission.
SEC. 322. CORPORATION REPRESENTED BY A FUGITIVE.
Section 2466 of title 18, United States Code, is amended by designating the present matter as
subsection (a), and adding at the end the following:
(b) Subsection (a) may be applied to a claim filed by a corporation if any majority shareholder,
or individual filing the claim on behalf of the corporation is a person to whom subsection (a)
applies.
SEC. 323. ENFORCEMENT OF FOREIGN JUDGMENTS.
Section 2467 of title 28, United States Code, is amended (1) in subsection (d), by adding the
following after paragraph (2): (3) PRESERVATION OF PROPERTY.
(A) IN GENERAL.To preserve the availability of property subject to a foreign forfeiture or
confiscation judgment, the Government may apply for, and the court may issue, a restraining
order pursuant to section 983(j) of title 18, at any time before or after an application is filed
pursuant to subsection (c)(1) of this section.
(B) EVIDENCE.The court, in issuing a restraining order under subparagraph (A)
(i) may rely on information set forth in an affidavit describing the nature of the proceeding or
investigation underway in the foreign country, and setting forth a reasonable basis to believe that
the property to be restrained will be named in a judgment of forfeiture at the conclusion of such
proceeding; or
(ii) may register and enforce a restraining order that has been issued by a court of competent
jurisdiction in the foreign country and certified by the Attorney General pursuant to subsection
(b)(2).
(C) LIMIT ON GROUNDS FOR OBJECTION.No person may object to a restraining order
under subparagraph (A) on any ground that is the subject of parallel litigation involving the same
property that is pending in a foreign court.; (2) in subsection (b)(1)(C), by striking
establishing that the defendant received notice of the proceedings in sufficient time to enable
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the defendant and inserting establishing that the foreign nation took steps, in accordance with
the principles of due process, to give notice of the proceedings to all persons with an interest in
the property in sufficient time to enable such persons; (3) in subsection (d)(1)(D), by striking
the defendant in the proceedings in the foreign court did not receive notice and inserting the
foreign nation did not take steps, in accordance with the principles of due process, to give notice
of the proceedings to a person with an interest in the property; and (4) in subsection (a)(2)(A),
by inserting , any violation of foreign law that would constitute a violation or an offense for
which property could be forfeited under Federal law if the offense were committed in the United
States after United Nations Convention.
SEC. 324. REPORT AND RECOMMENDATION.
Not later than 30 months after the date of enactment of this Act, the Secretary, in consultation
with the Attorney General, the Federal banking agencies (as defined at section 3 of the Federal
Deposit Insurance Act), the National Credit Union Administration Board, the Securities and
Exchange Commission, and such other agencies as the Secretary may determine, at the discretion
of the Secretary, shall evaluate the operations of the provisions of this subtitle and make
recommendations to Congress as to any legislative action with respect to this subtitle as the
Secretary may determine to be necessary or advisable.
SEC. 325. CONCENTRATION ACCOUNTS AT FINANCIAL INSTITUTIONS.
Section 5318(h) of title 31, United States Code, as amended by section 202 of this title, is
amended by adding at the end the following:
(3) CONCENTRATION ACCOUNTS.The Secretary may prescribe regulations under this
subsection that govern maintenance of concentration accounts by financial institutions, in order
to ensure that such accounts are not used to prevent association of the identity of an individual
customer with the movement of funds of which the customer is the direct or beneficial owner,
which regulations shall, at a minimum
(A) prohibit financial institutions from allowing clients to direct transactions that move their
funds into, out of, or through the concentration accounts of the financial institution;
(B) prohibit financial institutions and their employees from informing customers of the
existence of, or the means of identifying, the concentration accounts of the institution; and
(C) require each financial institution to establish written procedures governing the
documentation of all transactions involving a concentration account, which procedures shall
ensure that, any time a transaction involving a concentration account commingles funds
belonging to 1 or more customers, the identity of, and specific amount belonging to, each
customer is documented.
SEC. 326. VERIFICATION OF IDENTIFICATION.
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(a) IN GENERAL.Section 5318 of title 31, United States Code, as amended by this title, is
amended by adding at the end the following:
(l) IDENTIFICATION AND VERIFICATION OF ACCOUNTHOLDERS.
(1) IN GENERAL.Subject to the requirements of this subsection, the Secretary of the
Treasury shall prescribe regulations setting forth the minimum standards for financial institutions
and their customers regarding the identity of the customer that shall apply in connection with the
opening of an account at a financial institution.
(2) MINIMUM REQUIREMENTS.The regulations shall, at a minimum, require financial
institutions to implement, and customers (after being given adequate notice) to comply with,
reasonable procedures for
(A) verifying the identity of any person seeking to open an account to the extent reasonable and
practicable;
(B) maintaining records of the information used to verify a persons identity, including name,
address, and other identifying information; and
(C) consulting lists of known or suspected terrorists or terrorist organizations provided to the
financial institution by any government agency to determine whether a person seeking to open an
account appears on any such list.
(3) FACTORS TO BE CONSIDERED.In prescribing regulations under this subsection, the
Secretary shall take into consideration the various types of accounts maintained by various types
of financial institutions, the various methods of opening accounts, and the various types of
identifying information available.
(4) CERTAIN FINANCIAL INSTITUTIONS.In the case of any financial institution the
business of which is engaging in financial activities described in section 4(k) of the Bank
Holding Company Act of 1956 (including financial activities subject to the jurisdiction of the
Commodity Futures Trading Commission), the regulations prescribed by the Secretary under
paragraph (1) shall be prescribed jointly with each Federal functional regulator (as defined in
section 509 of the Gramm-Leach-Bliley Act, including the Commodity Futures Trading
Commission) appropriate for such financial institution.
(5) EXEMPTIONS.The Secretary (and, in the case of any financial institution described in
paragraph (4), any Federal agency described in such paragraph) may, by regulation or order,
exempt any financial institution or type of account from the requirements of any regulation
prescribed under this subsection in accordance with such standards and procedures as the
Secretary may prescribe.

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(6) EFFECTIVE DATE.Final regulations prescribed under this subsection shall take effect
before the end of the 1-year period beginning on the date of enactment of the International
Money Laundering Abatement and Financial Anti-Terrorism Act of 2001.
(b) STUDY AND REPORT REQUIRED.Within 6 months after the date of enactment of this
Act, the Secretary, in consultation with the Federal functional regulators (as defined in section
509 of the Gramm-Leach-Bliley Act) and other appropriate Government agencies, shall submit a
report to the Congress containing recommendations for
(1) determining the most timely and effective way to require foreign nationals to provide
domestic financial institutions and agencies with appropriate and accurate information,
comparable to that which is required of United States nationals, concerning the identity, address,
and other related information about such foreign nationals necessary to enable such institutions
and agencies to comply with the requirements of this section;
(2) requiring foreign nationals to apply for and obtain, before opening an account with a
domestic financial institution, an identification number which would function similarly to a
Social Security number or tax identification number; and
(3) establishing a system for domestic financial institutions and agencies to review information
maintained by relevant Government agencies for purposes of verifying the identities of foreign
nationals seeking to open accounts at those institutions and agencies.
SEC. 327. CONSIDERATION OF ANTI-MONEY LAUNDERING RECORD.
(a) BANK HOLDING COMPANY ACT OF 1956.
(1) IN GENERAL.Section 3(c) of the Bank Holding Company Act of 1956 (12 U.S.C.
1842(c)) is amended by adding at the end the following new paragraph: (6) MONEY
LAUNDERING.In every case, the Board shall take into consideration the effectiveness of the
company or companies in combatting money laundering activities, including in overseas
branches.
(2) SCOPE OF APPLICATION.The amendment made by paragraph (1) shall apply with
respect to any application submitted to the Board of Governors of the Federal Reserve System
under section 3 of the Bank Holding Company Act of 1956 after December 31, 2001, which has
not been approved by the Board before the date of enactment of this Act.
(b) MERGERS SUBJECT TO REVIEW UNDER FEDERAL DEPOSIT INSURANCE ACT.
(1) IN GENERAL.Section 18(c) of the Federal Deposit Insurance Act (12 U.S.C. 1828(c)) is
amended
(A) by redesignating paragraph (11) as paragraph (12); and
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(B) by inserting after paragraph (10), the following new paragraph: (11) MONEY
LAUNDERING.In every case, the responsible agency, shall take into consideration the
effectiveness of any insured depository institution involved in the proposed merger transaction in
combatting money laundering activities, including in overseas branches.
(2) SCOPE OF APPLICATION.The amendment made by paragraph (1) shall apply with
respect to any application submitted to the responsible agency under section 18(c) of the Federal
Deposit Insurance Act after December 31, 2001, which has not been approved by all appropriate
responsible agencies before the date of enactment of this Act.
SEC. 328. INTERNATIONAL COOPERATION ON IDENTIFICATION OF ORIGINATORS
OF WIRE TRANSFERS.
The Secretary shall
(1) in consultation with the Attorney General and the Secretary of State, take all reasonable steps
to encourage foreign governments to require the inclusion of the name of the originator in wire
transfer instructions sent to the United States and other countries, with the information to remain
with the transfer from its origination until the point of disbursement; and
(2) report annually to the Committee on Financial Services of the House of Representatives and
the Committee on Banking, Housing, and Urban Affairs of the Senate on
(A) progress toward the goal enumerated in paragraph (1), as well as impediments to
implementation and an estimated compliance rate; and
(B) impediments to instituting a regime in which all appropriate identification, as defined by the
Secretary, about wire transfer recipients shall be included with wire transfers from their point of
origination until disbursement.
SEC. 329. CRIMINAL PENALTIES.
Any person who is an official or employee of any department, agency, bureau, office,
commission, or other entity of the Federal Government, and any other person who is acting for or
on behalf of any such entity, who, directly or indirectly, in connection with the administration of
this title, corruptly demands, seeks, receives, accepts, or agrees to receive or accept anything of
value personally or for any other person or entity in return for
(1) being influenced in the performance of any official act;
(2) being influenced to commit or aid in the committing, or to collude in, or allow, any fraud, or
make opportunity for the commission of any fraud, on the United States; or
(3) being induced to do or omit to do any act in violation of the official duty of such official or
person, shall be fined in an amount not more than 3 times the monetary equivalent of the thing of
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value, or imprisoned for not more than 15 years, or both. A violation of this section shall be
subject to chapter 227 of title 18, United States Code, and the provisions of the United States
Sentencing Guidelines.
SEC. 330. INTERNATIONAL COOPERATION IN INVESTIGATIONS OF MONEY
LAUNDERING, FINANCIAL CRIMES, AND THE FINANCES OF TERRORIST GROUPS.
(a) NEGOTIATIONS.It is the sense of the Congress that the President should direct the
Secretary of State, the Attorney General, or the Secretary of the Treasury, as appropriate, and in
consultation with the Board of Governors of the Federal Reserve System, to seek to enter into
negotiations with the appropriate financial supervisory agencies and other officials of any foreign
country the financial institutions of which do business with United States financial institutions or
which may be utilized by any foreign terrorist organization (as designated under section 219 of
the Immigration and Nationality Act), any person who is a member or representative of any such
organization, or any person engaged in money laundering or financial or other crimes.
(b) PURPOSES OF NEGOTIATIONS.It is the sense of the Congress that, in carrying out any
negotiations described in paragraph (1), the President should direct the Secretary of State, the
Attorney General, or the Secretary of the Treasury, as appropriate, to seek to enter into and
further cooperative efforts, voluntary information exchanges, the use of letters rogatory, mutual
legal assistance treaties, and international agreements to
(1) ensure that foreign banks and other financial institutions maintain adequate records of
transaction and account information relating to any foreign terrorist organization (as designated
under section 219 of the Immigration and Nationality Act), any person who is a member or
representative of any such organization, or any person engaged in money laundering or financial
or other crimes; and
(2) establish a mechanism whereby such records may be made available to United States law
enforcement officials and domestic financial institution supervisors, when appropriate.
Subtitle BBank Secrecy Act Amendments and Related Improvements SEC. 351.
AMENDMENTS RELATING TO REPORTING OF SUSPICIOUS ACTIVITIES.
(a) AMENDMENT RELATING TO CIVIL LIABILITY IMMUNITY FOR DISCLOSURES.
Section 5318(g)(3) of title 31, United States Code, is amended to read as follows:
(3) LIABILITY FOR DISCLOSURES.
(A) IN GENERAL.Any financial institution that makes a voluntary disclosure of any
possible violation of law or regulation to a government agency or makes a disclosure pursuant to
this subsection or any other authority, and any director, officer, employee, or agent of such
institution who makes, or requires another to make any such disclosure, shall not be liable to any
person under any law or regulation of the United States, any constitution, law, or regulation of
any State or political subdivision of any State, or under any contract or other legally enforceable
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agreement (including any arbitration agreement), for such disclosure or for any failure to provide
notice of such disclosure to the person who is the subject of such disclosure or any other person
identified in the disclosure.
(B) RULE OF CONSTRUCTION.Subparagraph (A) shall not be construed as creating
(i) any inference that the term person, as used in such subparagraph, may be construed more
broadly than its ordinary usage so as to include any government or agency of government; or
(ii) any immunity against, or otherwise affecting, any civil or criminal action brought by any
government or agency of government to enforce any constitution, law, or regulation of such
government or agency.
(b) PROHIBITION ON NOTIFICATION OF DISCLOSURES.Section 5318(g)(2) of title 31,
United States Code, is amended to read as follows:
(2) NOTIFICATION PROHIBITED.
(A) IN GENERAL.If a financial institution or any director, officer, employee, or agent of any
financial institution, voluntarily or pursuant to this section or any other authority, reports a
suspicious transaction to a government agency
(i) the financial institution, director, officer, employee, or agent may not notify any person
involved in the transaction that the transaction has been reported; and
(ii) no officer or employee of the Federal Government or of any State, local, tribal, or territorial
government within the United States, who has any knowledge that such report was made may
disclose to any person involved in the transaction that the transaction has been reported, other
than as necessary to fulfill the official duties of such officer or employee.
(B) DISCLOSURES IN CERTAIN EMPLOYMENT REFERENCES.
(i) RULE OF CONSTRUCTION.Notwithstanding the application of subparagraph (A) in
any other context, subparagraph (A) shall not be construed as prohibiting any financial
institution, or any director, officer, employee, or agent of such institution, from including
information that was included in a report to which subparagraph (A) applies
(I) in a written employment reference that is provided in accordance with section 18(w) of the
Federal Deposit Insurance Act in response to a request from another financial institution; or
(II) in a written termination notice or employment reference that is provided in accordance with
the rules of a self-regulatory organization registered with the Securities and Exchange
Commission or the Commodity Futures Trading Commission, except that such written reference
or notice may not disclose that such information was also included in any such report, or that
such report was made.
(ii) INFORMATION NOT REQUIRED. Clause (i) shall not be construed, by itself, to create
any affirmative duty to include any information described in clause (i) in any employment
reference or termination notice referred to in clause (i)..
SEC. 352. ANTI-MONEY LAUNDERING PROGRAMS.
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(a) IN GENERAL.Section 5318(h) of title 31, United States Code, is amended to read as
follows:
(h) ANTI-MONEY LAUNDERING PROGRAMS.
(1) IN GENERAL.In order to guard against money laundering through financial institutions,
each financial institution shall establish anti-money laundering programs, including, at a
minimum
(A) the development of internal policies, procedures, and controls;
(B) the designation of a compliance officer;
(C) an ongoing employee training program; and
(D) an independent audit function to test programs.
(2) REGULATIONS.The Secretary of the Treasury, after consultation with the appropriate
Federal functional regulator (as defined in section 509 of the Gramm-Leach-Bliley Act), may
prescribe minimum standards for programs established under paragraph (1), and may exempt
from the application of those standards any financial institution that is not subject to the
provisions of the rules contained in part 103 of title 31, of the Code of Federal Regulations, or
any successor rule thereto, for so long as such financial institution is not subject to the provisions
of such rules.
(b) EFFECTIVE DATE.The amendment made by subsection (a) shall take effect at the end of
the 180-day period beginning on the date of enactment of this Act.
(c) DATE OF APPLICATION OF REGULATIONS; FACTORS TO BE TAKEN INTO
ACCOUNT.Before the end of the 180-day period beginning on the date of enactment of this
Act, the Secretary shall prescribe regulations that consider the extent to which the requirements
imposed under this section are commensurate with the size, location, and activities of the
financial institutions to which such regulations apply.
SEC. 353. PENALTIES FOR VIOLATIONS OF GEOGRAPHIC TARGETING ORDERS AND
CERTAIN RECORD-KEEPING REQUIREMENTS, AND LENGTHENING EFFECTIVE
PERIOD OF GEOGRAPHIC TARGETING ORDERS.
(a) CIVIL PENALTY FOR VIOLATION OF TARGETING ORDER.Section 5321(a)(1) of
title 31, United States Code, is amended
(1) by inserting or order issued after subchapter or a regulation prescribed; and

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(2) by inserting , or willfully violating a regulation prescribed under section 21 of the Federal
Deposit Insurance Act or section 123 of Public Law 91508, after sections 5314 and 5315).
(b) CRIMINAL PENALTIES FOR VIOLATION OF TARGETING ORDER.Section 5322 of
title 31, United States Code, is amended
(1) in subsection (a)
(A) by inserting or order issued after willfully violating this subchapter or a regulation
prescribed; and
(B) by inserting , or willfully violating a regulation prescribed under section 21 of the Federal
Deposit Insurance Act or section 123 of Public Law 91508, after under section 5315 or
5324); and
(2) in subsection (b)
(A) by inserting or order issued after willfully violating this subchapter or a regulation
prescribed; and
(B) by inserting or willfully violating a regulation prescribed under section 21 of the Federal
Deposit Insurance Act or section 123 of Public Law 91508, after under section 5315 or
5324),.
(c) STRUCTURING TRANSACTIONS TO EVADE TARGETING ORDER OR CERTAIN
RECORDKEEPING REQUIREMENTS.Section 5324(a) of title 31, United States Code, is
amended
(1) by inserting a comma after shall;
(2) by striking section and inserting section, the reporting or recordkeeping requirements
imposed by any order issued under section 5326, or the recordkeeping requirements imposed by
any regulation prescribed under section 21 of the Federal Deposit Insurance Act or section 123 of
Public Law 91508;
(3) in paragraph (1), by inserting , to file a report or to maintain a record required by an order
issued under section 5326, or to maintain a record required pursuant to any regulation prescribed
under section 21 of the Federal Deposit Insurance Act or section 123 of Public Law 91508
after regulation prescribed under any such section; and
(4) in paragraph (2), by inserting , to file a report or to maintain a record required by any order
issued under section 5326, or to maintain a record required pursuant to any regulation prescribed
under section 5326, or to maintain a record required pursuant to any regulation prescribed under
section 21 of the Federal Deposit Insurance Act or section 123 of Public Law 91508, after
regulation prescribed under any such section.
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(d) LENGTHENING EFFECTIVE PERIOD OF GEOGRAPHIC TARGETING ORDERS.

Section 5326(d) of title 31, United States Code, is amended by striking more than 60 and
inserting more than 180
SEC. 354. ANTI-MONEY LAUNDERING STRATEGY.
Section 5341(b) of title 31, United States Code, is amended by adding at the end the following:
(12) DATA REGARDING FUNDING OF TERRORISM.Data concerning money laundering
efforts related to the funding of acts of international terrorism, and efforts directed at the
prevention, detection, and prosecution of such funding.
SEC. 355. AUTHORIZATION TO INCLUDE SUSPICIONS OF ILLEGAL ACTIVITY IN
WRITTEN EMPLOYMENT REFERENCES.
Section 18 of the Federal Deposit Insurance Act (12 U.S.C. 1828) is amended by adding at the
end the following:
(w) WRITTEN EMPLOYMENT REFERENCES MAY CONTAIN SUSPICIONS OF
INVOLVEMENT IN ILLEGAL ACTIVITY.
(1) AUTHORITY TO DISCLOSE INFORMATION.Notwithstanding any other provision of
law, any insured depository institution, and any director, officer, employee, or agent of such
institution, may disclose in any written employment reference relating to a current or former
institution-affiliated party of such institution which is provided to another insured depository
institution in response to a request from such other institution, information concerning the
possible involvement of such institution-affiliated party in potentially unlawful activity.
(2) INFORMATION NOT REQUIRED.Nothing in paragraph (1) shall be construed, by
itself, to create any affirmative duty to include any information described in paragraph (1) in any
employment reference referred to in paragraph (1).
(3) MALICIOUS INTENT.Notwithstanding any other provision of this subsection, voluntary
disclosure made by an insured depository institution, and any director, officer, employee, or
agent of such institution under this subsection concerning potentially unlawful activity that is
made with malicious intent, shall not be shielded from liability from the person identified in the
disclosure.
(4) DEFINITION.For purposes of this subsection, the term insured depository institution
includes any uninsured branch or agency of a foreign bank.
SEC. 356. REPORTING OF SUSPICIOUS ACTIVITIES BY SECURITIES BROKERS AND
DEALERS; INVESTMENT COMPANY STUDY.
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(a) DEADLINE FOR SUSPICIOUS ACTIVITY REPORTING REQUIREMENTS FOR

REGISTERED BROKERS AND DEALERS.The Secretary, after consultation with the
Securities and Exchange Commission and the Board of Governors of the Federal Reserve
System, shall publish proposed regulations in the Federal Register before January 1, 2002,
requiring brokers and dealers registered with the Securities and Exchange Commission under the
Securities Exchange Act of 1934 to submit suspicious activity reports under section 5318(g) of
title 31, United States Code. Such regulations shall be published in final form not later than July
1, 2002.
(b) SUSPICIOUS ACTIVITY REPORTING REQUIREMENTS FOR FUTURES
COMMISSION MERCHANTS, COMMODITY TRADING ADVISORS, AND COMMODITY
POOL OPERATORS.The Secretary, in consultation with the Commodity Futures Trading
Commission, may prescribe regulations requiring futures commission merchants, commodity
trading advisors, and commodity pool operators registered under the Commodity Exchange Act
to submit suspicious activity reports under section 5318(g) of title 31, United States Code.
(c) REPORT ON INVESTMENT COMPANIES.
(1) IN GENERAL.Not later than 1 year after the date of enactment of this Act, the Secretary,
the Board of Governors of the Federal Reserve System, and the Securities and Exchange
Commission shall jointly submit a report to the Congress on recommendations for effective
regulations to apply the requirements of subchapter II of chapter 53 of title 31, United States
Code, to investment companies pursuant to section 5312(a)(2)(I) of title 31, United States Code.
(2) DEFINITION.For purposes of this subsection, the term investment company
(A) has the same meaning as in section 3 of the Investment Company Act of 1940 (15 U.S.C.
80a3); and
(B) includes any person that, but for the exceptions provided for in paragraph (1) or (7) of
section 3(c) of the Investment Company Act of 1940 (15 U.S.C. 80a3(c)), would be an
investment company.
(3) ADDITIONAL RECOMMENDATIONS.The report required by paragraph (1) may make
different recommendations for different types of entities covered by this subsection.
(4) BENEFICIAL OWNERSHIP OF PERSONAL HOLDING COMPANIES.The report
described in paragraph (1) shall also include recommendations as to whether the Secretary
should promulgate regulations to treat any corporation or business or other grantor trust whose
assets are predominantly securities, bank certificates of deposit, or other securities or investment
instruments (other than such as relate to operating subsidiaries of such corporation or trust) and
that has 5 or fewer common shareholders or holders of beneficial or other equity interest, as a
financial institution within the meaning of that phrase in section 5312(a)(2)(I) and whether to
require such corporations or trusts to disclose their beneficial owners when opening accounts or
initiating funds transfers at any domestic financial institution.
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SEC. 357. SPECIAL REPORT ON ADMINISTRATION OF BANK SECRECY PROVISIONS.

(a) REPORT REQUIRED.Not later than 6 months after the date of enactment of this Act, the
Secretary shall submit a report to the Congress relating to the role of the Internal Revenue
Service in the administration of subchapter II of chapter 53 of title 31, United States Code
(commonly known as the Bank Secrecy Act).
(b) CONTENTS.The report required by subsection (a)
(1) shall specifically address, and contain recommendations concerning
(A) whether it is advisable to shift the processing of information reporting to the Department of
the Treasury under the Bank Secrecy Act provisions to facilities other than those managed by the
Internal Revenue Service; and
(B) whether it remains reasonable and efficient, in light of the objective of both anti-moneylaundering programs and Federal tax administration, for the Internal Revenue Service to retain
authority and responsibility for audit and examination of the compliance of money services
businesses and gaming institutions with those Bank Secrecy Act provisions; and
(2) shall, if the Secretary determines that the information processing responsibility or the audit
and examination responsibility of the Internal Revenue Service, or both, with respect to those
Bank Secrecy Act provisions should be transferred to other agencies, include the specific
recommendations of the Secretary regarding the agency or agencies to which any such function
should be transferred, complete with a budgetary and resources plan for expeditiously
accomplishing the transfer.
SEC. 358. BANK SECRECY PROVISIONS AND ACTIVITIES OF UNITED STATES
INTELLIGENCE AGENCIES TO FIGHT INTERNATIONAL TERRORISM.
(a) AMENDMENT RELATING TO THE PURPOSES OF CHAPTER 53 OF TITLE 31,
UNITED STATES CODE.Section 5311 of title 31, United States Code, is amended by
inserting before the period at the end the following: , or in the conduct of intelligence or
counterintelligence activities, including analysis, to protect against international terrorism.
(b) AMENDMENT RELATING TO REPORTING OF SUSPICIOUS ACTIVITIES.Section
5318(g)(4)(B) of title 31, United States Code, is amended by striking or supervisory agency
and inserting , supervisory agency, or United States intelligence agency for use in the conduct
of intelligence or counterintelligence activities, including analysis, to protect against
international terrorism.
(c) AMENDMENT RELATING TO AVAILABILITY OF REPORTS.Section 5319 of title 31,
United States Code, is amended to read as follows: 5319. Availability of reports The
Secretary of the Treasury shall make information in a report filed under this subchapter available
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to an agency, including any State financial institutions supervisory agency, United States
intelligence agency or self-regulatory organization registered with the Securities and Exchange
Commission or the Commodity Futures Trading Commission, upon request of the head of the
agency or organization. The report shall be available for a purpose that is consistent with this
subchapter. The Secretary may only require reports on the use of such information by any State
financial institutions supervisory agency for other than supervisory purposes or by United States
intelligence agencies. However, a report and records of reports are exempt from disclosure under
section 552 of title 5.
(d) AMENDMENT RELATING TO THE PURPOSES OF THE BANK SECRECY ACT
PROVISIONS.Section 21(a) of the Federal Deposit Insurance Act (12 U.S.C. 1829b(a)) is
amended to read as follows:
(a) CONGRESSIONAL FINDINGS AND DECLARATION OF PURPOSE.
(1) FINDINGS.Congress finds that
(A) adequate records maintained by insured depository institutions have a high degree of
usefulness in criminal, tax, and regulatory investigations or proceedings, and that, given the
threat posed to the security of the Nation on and after the terrorist attacks against the United
States on September 11, 2001, such records may also have a high degree of usefulness in the
conduct of intelligence or counter-intelligence activities, including analysis, to protect against
domestic and international terrorism; and
(B) microfilm or other reproductions and other records made by insured depository institutions
of checks, as well as records kept by such institutions, of the identity of persons maintaining or
authorized to act with respect to accounts therein, have been of particular value in proceedings
described in subparagraph (A).
(2) PURPOSE.It is the purpose of this section to require the maintenance of appropriate
types of records by insured depository institutions in the United States where such records have a
high degree of usefulness in criminal, tax, or regulatory investigations or proceedings, recognizes
that, given the threat posed to the security of the Nation on and after the terrorist attacks against
the United States on September 11, 2001, such records may also have a high degree of usefulness
in the conduct of intelligence or counterintelligence activities, including analysis, to protect
against international terrorism.
(e) AMENDMENT RELATING TO THE PURPOSES OF THE BANK SECRECY ACT.
Section 123(a) of Public Law 91508 (12 U.S.C. 1953(a)) is amended to read as follows:
(a) REGULATIONS.If the Secretary determines that the maintenance of appropriate records
and procedures by any uninsured bank or uninsured institution, or any person engaging in the
business of carrying on in the United States any of the functions referred to in subsection (b), has
a high degree of usefulness in criminal, tax, or regulatory investigations or proceedings, and that,
given the threat posed to the security of the Nation on and after the terrorist attacks against the
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United States on September 11, 2001, such records may also have a high degree of usefulness in
the conduct of intelligence or counterintelligence activities, including analysis, to protect against
international terrorism, he may by regulation require such bank, institution, or person.
(f) AMENDMENTS TO THE RIGHT TO FINANCIAL PRIVACY ACT.The Right to
Financial Privacy Act of 1978 is amended
(1) in section 1112(a) (12 U.S.C. 3412(a)), by inserting , or intelligence or counterintelligence
activity, investigation or analysis related to international terrorism after legitimate law
enforcement inquiry;
(2) in section 1114(a)(1) (12 U.S.C. 3414(a)(1))
(A) in subparagraph (A), by striking or at the end;
(B) in subparagraph (B), by striking the period at the end and inserting ; or; and
(C) by adding at the end the following: (C) a Government authority authorized to conduct
investigations of, or intelligence or counterintelligence analyses related to, international terrorism
for the purpose of conducting such investigations or analyses.; and
(3) in section 1120(a)(2) (12 U.S.C. 3420(a)(2)), by inserting , or for a purpose authorized by
section 1112(a) before the semicolon at the end.
(g) AMENDMENT TO THE FAIR CREDIT REPORTING ACT.
(1) IN GENERAL.The Fair Credit Reporting Act (15 U.S.C. 1681 et seq.) is amended
(A) by redesignating the second of the 2 sections designated as section 624 (15 U.S.C. 1681u)
(relating to disclosure to FBI for counterintelligence purposes) as section 625; and
(B) by adding at the end the following new section: 626. Disclosures to governmental
agencies for counterterrorism purposes (a) DISCLOSURE.Notwithstanding section 604 or
any other provision of this title, a consumer reporting agency shall furnish a consumer report of a
consumer and all other information in a consumers file to a government agency authorized to
conduct investigations of, or intelligence or counterintelligence activities or analysis related to,
international terrorism when presented with a written certification by such government agency
that such information is necessary for the agencys conduct or such investigation, activity or
analysis.
(b) FORM OF CERTIFICATION.The certification described in subsection (a) shall be
signed by a supervisory official designated by the head of a Federal agency or an officer of a
Federal agency whose appointment to office is required to be made by the President, by and with
the advice and consent of the Senate.
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(c) CONFIDENTIALITY.No consumer reporting agency, or officer, employee, or agent of

such consumer reporting agency, shall disclose to any person, or specify in any consumer report,
that a government agency has sought or obtained access to information under subsection (a).
(d) RULE OF CONSTRUCTION.Nothing in section 625 shall be construed to limit the
authority of the Director of the Federal Bureau of Investigation under this section.
(e) SAFE HARBOR.Notwithstanding any other provision of this title, any consumer
reporting agency or agent or employee thereof making disclosure of consumer reports or other
information pursuant to this section in good-faith reliance upon a certification of a governmental
agency pursuant to the provisions of this section shall not be liable to any person for such
disclosure under this subchapter, the constitution of any State, or any law or regulation of any
State or any political subdivision of any State.
(2) CLERICAL AMENDMENTS.The table of sections for the Fair Credit Reporting Act (15
U.S.C. 1681 et seq.) is amended
(A) by redesignating the second of the 2 items designated as section 624 as section 625; and
(B) by inserting after the item relating to section 625 (as so redesignated) the following new
item: 626. Disclosures to governmental agencies for counterterrorism purposes..
(h) APPLICATION OF AMENDMENTS.The amendments made by this section shall apply
with respect to reports filed or records maintained on, before, or after the date of enactment of
this Act.
SEC. 359. REPORTING OF SUSPICIOUS ACTIVITIES BY UNDERGROUND BANKING
SYSTEMS.
(a) DEFINITION FOR SUBCHAPTER.Section 5312(a)(2)(R) of title 31, United States Code,
is amended to read as follows: (R) a licensed sender of money or any other person who engages
as a business in the transmission of funds, including any person who engages as a business in an
informal money transfer system or any network of people who engage as a business in
facilitating the transfer of money domestically or internationally outside of the conventional
financial institutions system;
(b) MONEY TRANSMITTING BUSINESS.Section 5330(d)(1)(A) of title 31, United States
Code, is amended by inserting before the semicolon the following: or any other person who
engages as a business in the transmission of funds, including any person who engages as a
business in an informal money transfer system or any network of people who engage as a
business in facilitating the transfer of money domestically or internationally outside of the
conventional financial institutions system;
(c) APPLICABILITY OF RULES.Section 5318 of title 31, United States Code, as amended by
this title, is amended by adding at the end the following:
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(l) APPLICABILITY OF RULES.Any rules promulgated pursuant to the authority contained

in section 21 of the Federal Deposit Insurance Act (12 U.S.C. 1829b) shall apply, in addition to
any other financial institution to which such rules apply, to any person that engages as a business
in the transmission of funds, including any person who engages as a business in an informal
money transfer system or any network of people who engage as a business in facilitating the
transfer of money domestically or internationally outside of the conventional financial
institutions system.
(d) REPORT.Not later than 1 year after the date of enactment of this Act, the Secretary of the
Treasury shall report to Congress on the need for any additional legislation relating to persons
who engage as a business in an informal money transfer system or any network of people who
engage as a business in facilitating the transfer of money domestically or internationally outside
of the conventional financial institutions system, counter money laundering and regulatory
controls relating to underground money movement and banking systems, including whether the
threshold for the filing of suspicious activity reports under section 5318(g) of title 31, United
States Code should be lowered in the case of such systems.
SEC. 360. USE OF AUTHORITY OF UNITED STATES EXECUTIVE DIRECTORS.
(a) ACTION BY THE PRESIDENT.If the President determines that a particular foreign
country has taken or has committed to take actions that contribute to efforts of the United States
to respond to, deter, or prevent acts of international terrorism, the Secretary may, consistent with
other applicable provisions of law, instruct the United States Executive Director of each
international financial institution to use the voice and vote of the Executive Director to support
any loan or other utilization of the funds of respective institutions for such country, or any public
or private entity within such country.
(b) USE OF VOICE AND VOTE.The Secretary may instruct the United States Executive
Director of each international financial institution to aggressively use the voice and vote of the
Executive Director to require an auditing of disbursements at such institutions to ensure that no
funds are paid to persons who commit, threaten to commit, or support terrorism.
(c) DEFINITION.For purposes of this section, the term international financial institution
means an institution described in section 1701(c)(2) of the International Financial Institutions
Act (22 U.S.C. 262r(c)(2)).
SEC. 361. FINANCIAL CRIMES ENFORCEMENT NETWORK.
(a) IN GENERAL.Subchapter I of chapter 3 of title 31, United States Code, is amended
(1) by redesignating section 310 as section 311; and
(2) by inserting after section 309 the following new section: 310. Financial Crimes
Enforcement Network
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(a) IN GENERAL.The Financial Crimes Enforcement Network established by order of the

Secretary of the Treasury (Treasury Order Numbered 105-08, in this section referred to as
FinCEN) on April 25, 1990, shall be a bureau in the Department of the Treasury.
(b) DIRECTOR.
(1) APPOINTMENT.The head of FinCEN shall be the Director, who shall be appointed by
the Secretary of the Treasury.
(2) DUTIES AND POWERS.The duties and powers of the Director are as follows:
(A) Advise and make recommendations on matters relating to financial intelligence, financial
criminal activities, and other financial activities to the Under Secretary of the Treasury for
Enforcement.
(B) Maintain a government-wide data access service, with access, in accordance with
applicable legal requirements, to the following:
(i) Information collected by the Department of the Treasury, including report information filed
under subchapter II of chapter 53 of this title (such as reports on cash transactions, foreign
financial agency transactions and relationships, foreign currency transactions, exporting and
importing monetary instruments, and suspicious activities), chapter 2 of title I of Public Law 91
508, and section 21 of the Federal Deposit Insurance Act.
(ii) Information regarding national and international currency flows.
(iii) Other records and data maintained by other Federal, State, local, and foreign agencies,
including financial and other records developed in specific cases.
(iv) Other privately and publicly available information.
(C) Analyze and disseminate the available data in accordance with applicable legal
requirements and policies and guidelines established by the Secretary of the Treasury and the
Under Secretary of the Treasury for Enforcement to
(i) identify possible criminal activity to appropriate Federal, State, local, and foreign law
enforcement agencies;
(ii) support ongoing criminal financial investigations and prosecutions and related proceedings,
including civil and criminal tax and forfeiture proceedings;
(iii) identify possible instances of noncompliance with subchapter II of chapter 53 of this title,
chapter 2 of title I of Public Law 91508, and section 21 of the Federal Deposit Insurance Act to
Federal agencies with statutory responsibility for enforcing compliance with such provisions and
other appropriate Federal regulatory agencies;
(iv) evaluate and recommend possible uses of special currency reporting requirements under
section 5326;
(v) determine emerging trends and methods in money laundering and other financial crimes;
(vi) support the conduct of intelligence or counterintelligence activities, including analysis, to
protect against international terrorism; and
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(vii) support government initiatives against money laundering.

(D) Establish and maintain a financial crimes communications center to furnish law
enforcement authorities with intelligence information related to emerging or ongoing
investigations and undercover operations.
(E) Furnish research, analytical, and informational services to financial institutions, appropriate
Federal regulatory agencies with regard to financial institutions, and appropriate Federal, State,
local, and foreign law enforcement authorities, in accordance with policies and guidelines
established by the Secretary of the Treasury or the Under Secretary of the Treasury for
Enforcement, in the interest of detection, prevention, and prosecution of terrorism, organized
crime, money laundering, and other financial crimes.
(F) Assist Federal, State, local, and foreign law enforcement and regulatory authorities in
combatting the use of informal, nonbank networks and payment and barter system mechanisms
that permit the transfer of funds or the equivalent of funds without records and without
compliance with criminal and tax laws.
(G) Provide computer and data support and data analysis to the Secretary of the Treasury for
tracking and controlling foreign assets.
(H) Coordinate with financial intelligence units in other countries on anti-terrorism and antimoney laundering initiatives, and similar efforts.
(I) Administer the requirements of subchapter II of chapter 53 of this title, chapter 2 of title I of
Public Law 91508, and section 21 of the Federal Deposit Insurance Act, to the extent delegated
such authority by the Secretary of the Treasury.
(J) Such other duties and powers as the Secretary of the Treasury may delegate or prescribe.
(c) REQUIREMENTS RELATING TO MAINTENANCE AND USE OF DATA BANKS.
The Secretary of the Treasury shall establish and maintain operating procedures with respect to
the government-wide data access service and the financial crimes communications center
maintained by FinCEN which provide
(1) for the coordinated and efficient transmittal of information to, entry of information into, and
withdrawal of information from, the data maintenance system maintained by the Network,
including
(A) the submission of reports through the Internet or other secure network, whenever possible;
(B) the cataloguing of information in a manner that facilitates rapid retrieval by law
enforcement personnel of meaningful data; and

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(C) a procedure that provides for a prompt initial review of suspicious activity reports and other
reports, or such other means as the Secretary may provide, to identify information that warrants
immediate action; and
(2) in accordance with section 552a of title 5 and the Right to Financial Privacy Act of 1978,
appropriate standards and guidelines for determining
(A) who is to be given access to the information maintained by the Network;
(B) what limits are to be imposed on the use of such information; and
(C) how information about activities or relationships which involve or are closely associated
with the exercise of constitutional rights is to be screened out of the data maintenance system.
(d) AUTHORIZATION OF APPROPRIATIONS.There are authorized to be appropriated for
FinCEN such sums as may be necessary for fiscal years 2002, 2003, 2004, and 2005.
(b) COMPLIANCE WITH REPORTING REQUIRE- MENTS.The Secretary of the Treasury
shall study methods for improving compliance with the reporting requirements established in
section 5314 of title 31, United States Code, and shall submit a report on such study to the
Congress by the end of the 6-month period beginning on the date of enactment of this Act and
each 1-year period thereafter. The initial report shall include historical data on compliance with
such reporting requirements.
(c) CLERICAL AMENDMENT.The table of sections for subchapter I of chapter 3 of title 31,
United States Code, is amended
(1) by redesignating the item relating to section 310 as section 311; and
(2) by inserting after the item relating to section 309 the following new item: 310. Financial
Crimes Enforcement Network.
SEC. 362. ESTABLISHMENT OF HIGHLY SECURE NETWORK.
(a) IN GENERAL.The Secretary shall establish a highly secure network in the Financial
Crimes Enforcement Network that
(1) allows financial institutions to file reports required under subchapter II or III of chapter 53 of
title 31, United States Code, chapter 2 of Public Law 91508, or section 21 of the Federal
Deposit Insurance Act through the secure network; and
(2) provides financial institutions with alerts and other information regarding suspicious
activities that warrant immediate and enhanced scrutiny.

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(b) EXPEDITED DEVELOPMENT.The Secretary shall take such action as may be necessary
to ensure that the secure network required under subsection (a) is fully operational before the end
of the 9-month period beginning on the date of enactment of this Act.
SEC. 363. INCREASE IN CIVIL AND CRIMINAL PENALTIES FOR MONEY
LAUNDERING.
(a) CIVIL PENALTIES.Section 5321(a) of title 31, United States Code, is amended by adding
at the end the following:
(7) PENALTIES FOR INTERNATIONAL COUNTER MONEY LAUNDERING
VIOLATIONS.The Secretary may impose a civil money penalty in an amount equal to not less
than 2 times the amount of the transaction, but not more than $1,000,000, on any financial
institution or agency that violates any provision of subsection (i) or (j) of section 5318 or any
special measures imposed under section 5318A.
(b) CRIMINAL PENALTIES.Section 5322 of title 31, United States Code, is amended by
adding at the end the following:
(d) A financial institution or agency that violates any provision of subsection (i) or (j) of section
5318, or any special measures imposed under section 5318A, or any regulation prescribed under
subsection (i) or (j) of section 5318 or section 5318A, shall be fined in an amount equal to not
less than 2 times the amount of the transaction, but not more than $1,000,000.
SEC. 364. UNIFORM PROTECTION AUTHORITY FOR FEDERAL RESERVE FACILITIES.
Section 11 of the Federal Reserve Act (12 U.S.C. 248) is amended by adding at the end the
following:
(q) UNIFORM PROTECTION AUTHORITY FOR FEDERAL RESERVE FACILITIES.
(1) Notwithstanding any other provision of law, to authorize personnel to act as law
enforcement officers to protect and safeguard the premises, grounds, property, personnel,
including members of the Board, of the Board, or any Federal reserve bank, and operations
conducted by or on behalf of the Board or a reserve bank.
(2) The Board may, subject to the regulations prescribed under paragraph (5), delegate authority
to a Federal reserve bank to authorize personnel to act as law enforcement officers to protect and
safeguard the banks premises, grounds, property, personnel, and operations conducted by or on
behalf of the bank.
(3) Law enforcement officers designated or authorized by the Board or a reserve bank under
paragraph (1) or (2) are authorized while on duty to carry firearms and make arrests without
warrants for any offense against the United States committed in their presence, or for any felony
cognizable under the laws of the United States committed or being committed within the
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buildings and grounds of the Board or a reserve bank if they have reasonable grounds to believe
that the person to be arrested has committed or is committing such a felony. Such officers shall
have access to law enforcement information that may be necessary for the protection of the
property or personnel of the Board or a reserve bank.
(4) For purposes of this subsection, the term law enforcement officers means personnel who
have successfully completed law enforcement training and are authorized to carry firearms and
make arrests pursuant to this subsection.
(5) The law enforcement authorities provided for in this subsection may be exercised only
pursuant to regulations prescribed by the Board and approved by the Attorney General.
SEC. 365. REPORTS RELATING TO COINS AND CURRENCY RECEIVED IN
NONFINANCIAL TRADE OR BUSINESS.
(a) REPORTS REQUIRED.Subchapter II of chapter 53 of title 31, United States Code, is
amended by adding at the end the following new section: 5331. Reports relating to coins and
currency received in nonfinancial trade or business (a) COIN AND CURRENCY RECEIPTS
OF MORE THAN $10,000.Any person
(1) who is engaged in a trade or business; and
(2) who, in the course of such trade or business, receives more than $10,000 in coins or
currency in 1 transaction (or 2 or more related transactions), shall file a report described in
subsection (b) with respect to such transaction (or related transactions) with the Financial Crimes
Enforcement Network at such time and in such manner as the Secretary may, by regulation,
prescribe.
(b) FORM AND MANNER OF REPORTS.A report is described in this subsection if such
report
(1) is in such form as the Secretary may prescribe;
(2) contains
(A) the name and address, and such other identification information as the Secretary may
require, of the person from whom the coins or currency was received;
(B) the amount of coins or currency received;
(C) the date and nature of the transaction; and
(D) such other information, including the identification of the person filing the report, as the
Secretary may prescribe.
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(c) EXCEPTIONS.
(1) AMOUNTS RECEIVED BY FINANCIAL INSTITUTIONS.Subsection (a) shall not
apply to amounts received in a transaction reported under section 5313 and regulations
prescribed under such section.
(2) TRANSACTIONS OCCURRING OUTSIDE THE UNITED STATES.Except to the
extent provided in regulations prescribed by the Secretary, subsection (a) shall not apply to any
transaction if the entire transaction occurs outside the United States.
(d) CURRENCY INCLUDES FOREIGN CURRENCY AND CERTAIN MONETARY
INSTRUMENTS.
(1) IN GENERAL.For purposes of this section, the term currency includes
(A) foreign currency; and
(B) to the extent provided in regulations prescribed by the Secretary, any monetary instrument
(whether or not in bearer form) with a face amount of not more than $10,000.
(2) SCOPE OF APPLICATION.Paragraph (1)(B) shall not apply to any check drawn on the
account of the writer in a financial institution referred to in subparagraph (A), (B), (C), (D), (E),
(F), (G), (J), (K), (R), or (S) of section 5312(a)(2).
(b) PROHIBITION ON STRUCTURING TRANSACTIONS.
(1) IN GENERAL.Section 5324 of title 31, United States Code, is amended
(A) by redesignating subsections (b) and (c) as subsections (c) and (d), respectively; and (B) by
inserting after subsection (a) the following new subsection:
(b) DOMESTIC COIN AND CURRENCY TRANSACTIONS INVOLVING
NONFINANCIAL TRADES OR BUSINESSES.No person shall, for the purpose of evading
the report requirements of section 5333 or any regulation prescribed under such section
(1) cause or attempt to cause a nonfinancial trade or business to fail to file a report required
under section 5333 or any regulation prescribed under such section;
(2) cause or attempt to cause a nonfinancial trade or business to file a report required under
section 5333 or any regulation prescribed under such section that contains a material omission or
misstatement of fact; or
(3) structure or assist in structuring, or attempt to structure or assist in structuring, any
transaction with 1 or more nonfinancial trades or businesses.
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(2) TECHNICAL AND CONFORMING AMENDMENTS.

(A) The heading for subsection (a) of section 5324 of title 31, United States Code, is amended by
inserting INVOLVING FINANCIAL INSTITUTIONS after TRANSACTIONS.
(B) Section 5317(c) of title 31, United States Code, is amended by striking 5324(b) and
inserting 5324(c).
(c) DEFINITION OF NONFINANCIAL TRADE OR BUSINESS.
(1) IN GENERAL.Section 5312(a) of title 31, United States Code, is amended
(A) by redesignating paragraphs (4) and (5) as paragraphs (5) and (6), respectively; and (B) by
inserting after paragraph (3) the following new paragraph:
(4) NONFINANCIAL TRADE OR BUSINESS. The term nonfinancial trade or business
means any trade or business other than a financial institution that is subject to the reporting
requirements of section 5313 and regulations prescribed under such section.
(2) TECHNICAL AND CONFORMING AMENDMENTS.
(A) Section 5312(a)(3)(C) of title 31, United States Code, is amended by striking section
5316, and inserting sections 5333 and 5316,
(B) Subsections (a) through (f) of section 5318 of title 31, United States Code, and sections
5321, 5326, and 5328 of such title are each amended
(i) by inserting or nonfinancial trade or business after financial institution each place such
term appears; and
(ii) by inserting or nonfinancial trades or businesses after financial institutions each place
such term appears.
(c) CLERICAL AMENDMENT.The table of sections for chapter 53 of title 31, United States
Code, is amended by inserting after the item relating to section 5332 (as added by section 112 of
this title) the following new item: 5331. Reports relating to coins and currency received in
nonfinancial trade or business.
(f) REGULATIONS.Regulations which the Secretary determines are necessary to implement
this section shall be published in final form before the end of the 6-month period beginning on
the date of enactment of this Act.
SEC. 366. EFFICIENT USE OF CURRENCY TRANSACTION REPORT SYSTEM.
(a) FINDINGS.The Congress finds the following:

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(1) The Congress established the currency transaction reporting requirements in 1970 because
the Congress found then that such reports have a high degree of usefulness in criminal, tax, and
regulatory investigations and proceedings and the usefulness of such reports has only increased
in the years since the requirements were established.
(2) In 1994, in response to reports and testimony that excess amounts of currency transaction
reports were interfering with effective law enforcement, the Congress reformed the currency
transaction report exemption requirements to provide
(A) mandatory exemptions for certain reports that had little usefulness for law enforcement, such
as cash transfers between depository institutions and cash deposits from government agencies;
and
(B) discretionary authority for the Secretary of the Treasury to provide exemptions, subject to
criteria and guidelines established by the Secretary, for financial institutions with regard to
regular business customers that maintain accounts at an institution into which frequent cash
deposits are made.
(3) Today there is evidence that some financial institutions are not utilizing the exemption
system, or are filing reports even if there is an exemption in effect, with the result that the
volume of currency transaction reports is once again interfering with effective law enforcement.
(b) STUDY AND REPORT.
(1) STUDY REQUIRED.The Secretary shall conduct a study of
(A) the possible expansion of the statutory exemption system in effect under section 5313 of title
31, United States Code; and
(B) methods for improving financial institution utilization of the statutory exemption provisions
as a way of reducing the submission of currency transaction reports that have little or no value
for law enforcement purposes, including improvements in the systems in effect at financial
institutions for regular review of the exemption procedures used at the institution and the training
of personnel in its effective use.
(2) REPORT REQUIRED.The Secretary of the Treasury shall submit a report to the Congress
before the end of the 1-year period beginning on the date of enactment of this Act containing the
findings and conclusions of the Secretary with regard to the study required under subsection (a),
and such recommendations for legislative or administrative action as the Secretary determines to
be appropriate.
Subtitle CCurrency Crimes and Protection
SEC. 371. BULK CASH SMUGGLING INTO OR OUT OF THE UNITED STATES.
(a) FINDINGS.The Congress finds the following:
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(1) Effective enforcement of the currency reporting requirements of subchapter II of chapter 53

of title 31, United States Code, and the regulations prescribed under such subchapter, has forced
drug dealers and other criminals engaged in cash-based businesses to avoid using traditional
financial institutions.
(2) In their effort to avoid using traditional financial institutions, drug dealers and other criminals
are forced to move large quantities of currency in bulk form to and through the airports, border
crossings, and other ports of entry where the currency can be smuggled out of the United States
and placed in a foreign financial institution or sold on the black market.
(3) The transportation and smuggling of cash in bulk form may now be the most common form
of money laundering, and the movement of large sums of cash is one of the most reliable
warning signs of drug trafficking, terrorism, money laundering, racketeering, tax evasion and
similar crimes.
(4) The intentional transportation into or out of the United States of large amounts of currency or
monetary instruments, in a manner designed to circumvent the mandatory reporting provisions of
subchapter II of chapter 53 of title 31, United States Code,, is the equivalent of, and creates the
same harm as, the smuggling of goods.
(5) The arrest and prosecution of bulk cash smugglers are important parts of law enforcements
effort to stop the laundering of criminal proceeds, but the couriers who attempt to smuggle the
cash out of the United States are typically low-level employees of large criminal organizations,
and thus are easily replaced. Accordingly, only the confiscation of the smuggled bulk cash can
effectively break the cycle of criminal activity of which the laundering of the bulk cash is a
critical part.
(6) The current penalties for violations of the currency reporting requirements are insufficient to
provide a deterrent to the laundering of criminal proceeds. In particular, in cases where the only
criminal violation under current law is a reporting offense, the law does not adequately provide
for the confiscation of smuggled currency. In contrast, if the smuggling of bulk cash were itself
an offense, the cash could be confiscated as the corpus delicti of the smuggling offense.
(b) PURPOSES.The purposes of this section are
(1) to make the act of smuggling bulk cash itself a criminal offense;
(2) to authorize forfeiture of any cash or instruments of the smuggling offense; and
(3) to emphasize the seriousness of the act of bulk cash smuggling.
(c) ENACTMENT OF BULK CASH SMUGGLING OFFENSE.Subchapter II of chapter 53
of title 31, United States Code, is amended by adding at the end the following: 5332. Bulk
cash smuggling into or out of the United States
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(a) CRIMINAL OFFENSE.

(1) IN GENERAL.Whoever, with the intent to evade a currency reporting requirement under
section 5316, knowingly conceals more than $10,000 in currency or other monetary instruments
on the person of such individual or in any conveyance, article of luggage, merchandise, or other
container, and transports or transfers or attempts to transport or transfer such currency or
monetary instruments from a place within the United States to a place outside of the United
States, or from a place outside the United States to a place within the United States, shall be
guilty of a currency smuggling offense and subject to punishment pursuant to subsection (b).
(2) CONCEALMENT ON PERSON.For purposes of this section, the concealment of
currency on the person of any individual includes concealment in any article of clothing worn by
the individual or in any luggage, backpack, or other container worn or carried by such individual.
(b) PENALTY.
(1) TERM OF IMPRISONMENT.A person convicted of a currency smuggling offense under
subsection (a), or a conspiracy to commit such offense, shall be imprisoned for not more than 5
years.
(2) FORFEITURE.In addition, the court, in imposing sentence under paragraph (1), shall
order that the defendant forfeit to the United States, any property, real or personal, involved in
the offense, and any property traceable to such property, subject to subsection (d) of this section.
(3) PROCEDURE.The seizure, restraint, and forfeiture of property under this section shall be
governed by section 413 of the Controlled Substances Act.
(4) PERSONAL MONEY JUDGMENT.If the property subject to forfeiture under paragraph
(2) is unavailable, and the defendant has insufficient substitute property that may be forfeited
pursuant to section 413(p) of the Controlled Substances Act, the court shall enter a personal
money judgment against the defendant for the amount that would be subject to forfeiture.
(c) CIVIL FORFEITURE.
(1) IN GENERAL.Any property involved in a violation of subsection (a), or a conspiracy to
commit such violation, and any property traceable to such violation or conspiracy, may be seized
and, subject to subsection (d) of this section, forfeited to the United States.
(2) PROCEDURE.The seizure and forfeiture shall be governed by the procedures governing
civil forfeitures in money laundering cases pursuant to section 981(a)(1)(A) of title 18, United
States Code.
(3) TREATMENT OF CERTAIN PROPERTY AS INVOLVED IN THE OFFENSE.For
purposes of this subsection and subsection (b), any currency or other monetary instrument that is
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concealed or intended to be concealed in violation of subsection (a) or a conspiracy to commit

such violation, any article, container, or conveyance used, or intended to be used, to conceal or
transport the currency or other monetary instrument, and any other property used, or intended to
be used, to facilitate the offense, shall be considered property involved in the offense.
(c) CLERICAL AMENDMENT.The table of sections for subchapter II of chapter 53 of title
31, United States Code, is amended by inserting after the item relating to section 5331, as added
by this Act, the following new item: 5332. Bulk cash smuggling into or out of the United
States.
SEC. 372. FORFEITURE IN CURRENCY REPORTING CASES.
(a) IN GENERAL.Subsection (c) of section 5317 of title 31, United States Code, is amended
to read as follows:
(c) FORFEITURE.
(1) CRIMINAL FORFEITURE.
(A) IN GENERAL.The court in imposing sentence for any violation of section 5313, 5316,
or 5324 of this title, or any conspiracy to commit such violation, shall order the defendant to
forfeit all property, real or personal, involved in the offense and any property traceable thereto.
(B) PROCEDURE.Forfeitures under this paragraph shall be governed by the procedures
established in section 413 of the Controlled Substances Act.
(2) CIVIL FORFEITURE.Any property involved in a violation of section 5313, 5316, or
5324 of this title, or any conspiracy to commit any such violation, and any property traceable to
any such violation or conspiracy, may be seized and forfeited to the United States in accordance
with the procedures governing civil forfeitures in money laundering cases pursuant to section
981(a)(1)(A) of title 18, United States Code.
(b) CONFORMING AMENDMENTS.
(1) Section 981(a)(1)(A) of title 18, United States Code, is amended
(A) by striking of section 5313(a) or 5324(a) of title 31, or; and
(B) by striking However and all that follows through the end of the subparagraph.
(2) Section 982(a)(1) of title 18, United States Code, is amended
(A) by striking of section 5313(a), 5316, or 5324 of title 31, or; and
(B) by striking However and all that follows through the end of the paragraph.
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SEC. 373. ILLEGAL MONEY TRANSMITTING BUSINESSES.

(a) SCIENTER REQUIREMENT FOR SECTION 1960 VIOLATION.Section 1960 of title 18,
United States Code, is amended to read as follows: 1960. Prohibition of unlicensed money
transmitting businesses
(a) Whoever knowingly conducts, controls, manages, supervises, directs, or owns all or part of
an unlicensed money transmitting business, shall be fined in accordance with this title or
imprisoned not more than 5 years, or both.
(b) As used in this section
(1) the term unlicensed money transmitting business means a money transmitting business
which affects interstate or foreign commerce in any manner or degree and
(A) is operated without an appropriate money transmitting license in a State where such
operation is punishable as a misdemeanor or a felony under State law, whether or not the
defendant knew that the operation was required to be licensed or that the operation was so
punishable;
(B) fails to comply with the money transmitting business registration requirements under
section 5330 of title 31, United States Code, or regulations prescribed under such section; or
(C) otherwise involves the transportation or transmission of funds that are known to the
defendant to have been derived from a criminal offense or are intended to be used to be used to
promote or support unlawful activity;
(2) the term money transmitting includes transferring funds on behalf of the public by any and
all means including but not limited to transfers within this country or to locations abroad by wire,
check, draft, facsimile, or courier; and
(3) the term State means any State of the United States, the District of Columbia, the Northern
Mariana Islands, and any commonwealth, territory, or possession of the United States.
(b) SEIZURE OF ILLEGALLY TRANSMITTED FUNDS.Section 981(a)(1)(A) of title 18,
United States Code, is amended by striking or 1957 and inserting , 1957 or 1960.
(c) CLERICAL AMENDMENT.The table of sections for chapter 95 of title 18, United States
Code, is amended in the item relating to section 1960 by striking illegal and inserting
unlicensed.
SEC. 374. COUNTERFEITING DOMESTIC CURRENCY AND OBLIGATIONS.

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(a) COUNTERFEIT ACTS COMMITTED OUTSIDE THE UNITED STATES.Section 470 of

title 18, United States Code, is amended
(1) in paragraph (2), by inserting analog, digital, or electronic image, after plate, stone,; and
(2) by striking shall be fined under this title, imprisoned not more than 20 years, or both and
inserting shall be punished as is provided for the like offense within the United States.
(b) OBLIGATIONS OR SECURITIES OF THE UNITED STATES.Section 471 of title 18,
United States Code, is amended by striking fifteen years and inserting 20 years.
(c) UTTERING COUNTERFEIT OBLIGATIONS OR SECURITIES.Section 472 of title 18,
United States Code, is amended by striking fifteen years and inserting 20 years.
(d) DEALING IN COUNTERFEIT OBLIGATIONS OR SECURITIES.Section 473 of title
18, United States Code, is amended by striking ten years and inserting 20 years.
(e) PLATES, STONES, OR ANALOG, DIGITAL, OR ELECTRONIC IMAGES FOR
COUNTERFEITING OBLIGATIONS OR SECURITIES.
(1) IN GENERAL.Section 474(a) of title 18, United States Code, is amended by inserting after
the second paragraph the following new paragraph: Whoever, with intent to defraud, makes,
executes, acquires, scans, captures, records, receives, transmits, reproduces, sells, or has in such
persons control, custody, or possession, an analog, digital, or electronic image of any obligation
or other security of the United States; or.
(2) AMENDMENT TO DEFINITION.Section 474(b) of title 18, United States Code, is
amended by striking the first sentence and inserting the following new sentence: For purposes
of this section, the term analog, digital, or electronic image includes any analog, digital, or
electronic method used for the making, execution, acquisition, scanning, capturing, recording,
retrieval, transmission, or reproduction of any obligation or security, unless such use is
authorized by the Secretary of the Treasury.
(3) TECHNICAL AND CONFORMING AMENDMENT.The heading for section 474 of title
18, United States Code, is amended by striking or stones and inserting , stones, or analog,
digital, or electronic images.
(4) CLERICAL AMENDMENT.The table of sections for chapter 25 of title 18, United States
Code, is amended in the item relating to section 474 by striking or stones and inserting ,
stones, or analog, digital, or electronic images.
(f) TAKING IMPRESSIONS OF TOOLS USED FOR OBLIGATIONS OR SECURITIES.
Section 476 of title 18, United States Code, is amended
(1) by inserting analog, digital, or electronic image, after impression, stamp,; and (2) by
striking ten years and inserting 25 years.
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(g) POSSESSING OR SELLING IMPRESSIONS OF TOOLS USED FOR OBLIGATIONS OR

SECURITIES.Section 477 of title 18, United States Code, is amended
(1) in the first paragraph, by inserting analog, digital, or electronic image, after imprint,
stamp,;
(2) in the second paragraph, by inserting analog, digital, or electronic image, after imprint,
stamp,; and
(3) in the third paragraph, by striking ten years and inserting 25 years.
(h) CONNECTING PARTS OF DIFFERENT NOTES. Section 484 of title 18, United States
Code, is amended by striking five years and inserting 10 years.
(i) BONDS AND OBLIGATIONS OF CERTAIN LENDING AGENCIES.The first and second
paragraphs of section 493 of title 18, United States Code, are each amended by striking five
years and inserting 10 years.
SEC. 375. COUNTERFEITING FOREIGN CURRENCY AND OBLIGATIONS.
(a) FOREIGN OBLIGATIONS OR SECURITIES.Section 478 of title 18, United States Code,
is amended by striking five years and inserting 20 years.
(b) UTTERING COUNTERFEIT FOREIGN OBLIGATIONS OR SECURITIES.Section 479
of title 18, United States Code, is amended by striking three years and inserting 20 years.
(c) POSSESSING COUNTERFEIT FOREIGN OBLIGATIONS OR SECURITIES.Section
480 of title 18, United States Code, is amended by striking one year and inserting 20 years.
(d) PLATES, STONES, OR ANALOG, DIGITAL, OR ELECTRONIC IMAGES FOR
COUNTERFEITING FOREIGN OBLIGATIONS OR SECURITIES.
(1) IN GENERAL.Section 481 of title 18, United States Code, is amended by inserting after
the second paragraph the following new paragraph: Whoever, with intent to defraud, makes,
executes, acquires, scans, captures, records, receives, transmits, reproduces, sells, or has in such
persons control, custody, or possession, an analog, digital, or electronic image of any bond,
certificate, obligation, or other security of any foreign government, or of any treasury note, bill,
or promise to pay, lawfully issued by such foreign government and intended to circulate as
money; or.
(2) INCREASED SENTENCE.The last paragraph of section 481 of title 18, United States
Code, is amended by striking five years and inserting 25 years.

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(3) TECHNICAL AND CONFORMING AMENDMENT.The heading for section 481 of title
18, United States Code, is amended by striking or stones and inserting , stones, or analog,
digital, or electronic images.
(4) CLERICAL AMENDMENT.The table of sections for chapter 25 of title 18, United States
Code, is amended in the item relating to section 481 by striking or stones and inserting ,
stones, or analog, digital, or electronic images.
(e) FOREIGN BANK NOTES.Section 482 of title 18, United States Code, is amended by
striking two years and inserting 20 years.
(f) UTTERING COUNTERFEIT FOREIGN BANK NOTES.Section 483 of title 18, United
States Code, is amended by striking one year and inserting 20 years.
SEC. 376. LAUNDERING THE PROCEEDS OF TERRORISM.
Section 1956(c)(7)(D) of title 18, United States Code, is amended by inserting or 2339B after
2339A.
SEC. 377. EXTRATERRITORIAL JURISDICTION.
Section 1029 of title 18, United States Code, is amended by adding at the end the following: (h)
Any person who, outside the jurisdiction of the United States, engages in any act that, if
committed within the jurisdiction of the United States, would constitute an offense under
subsection (a) or (b) of this section, shall be subject to the fines, penalties, imprisonment, and
forfeiture provided in this title if
(1) the offense involves an access device issued, owned, managed, or controlled by a financial
institution, account issuer, credit card system member, or other entity within the jurisdiction of
the United States; and
(2) the person transports, delivers, conveys, transfers to or through, or otherwise stores, secrets,
or holds within the jurisdiction of the United States, any article used to assist in the commission
of the offense or the proceeds of such offense or property derived therefrom.
CHAPTER 9 COMPLIANCE: INTRODUCTION, RECORD-KEEPING & REPORTING
I. Learning Objectives:
1. understand the compliance requirements in the Bank Secrecy Act and the Patriot Act.
2. understand the requirements for Suspicious Activity Reports (SARs).
3. understand the role of the Office of Foreign Assets Control (OFAC) of the U.S. Treasury
Department.
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4. understand compliance programs, due diligence, enhanced due diligence, know your customer
programs and customer identification programs.
5. understand the role of the compliance officer in an institutions compliance obligations.
6. understand the role of a training manual in the compliance program.
7. understand the record-keeping and reporting requirements under the BSA and Patriot Act.
II. Introduction*
Obviously, the term compliance, as utilized in the context of anti-money laundering regimes,
expresses the requirement of certain institutions and businesses to actually follow the laws. In
the United States, the Bank Secrecy Act requires financial institutions to follow certain
procedures to ensure their fulfillment of the law. The BSA of 1970 has three primary
components: (1) it requires all domestic banks to keep certain records of customer transactions
and to obtain an identification number (typically, a social security number) from anyone opening
an account; (2) Title II of the BSA gives the Secretary of the Treasury the power to specify
reporting duties; and (3) it requires banks to set up internal departments and compliance officers
for the BSA.632
Prior to the enactment of the PATRIOT Act (the Act), the Secretary of the Treasury had
implemented only three reporting requirements under the BSA: (1) banks had to file a Currency
Transaction Report, or CTR,633 every time they carry out a transaction above $10,000.00; (2)
every person who physically transports, mails or ships currency or other monetary instruments in
excess of $10,000.00 to a place outside the United States, or into the United States from
anywhere outside, is required to file a Currency and Monetary Instruments Report (CMIR) with
the US Customs Services; and (3) all persons subject to American jurisdiction and with a
financial interest in, or with signatory or other authority over, bank accounts, securities, or other
financial accounts in foreign jurisdiction with an aggregate value greater than $10,000.00 are
required to file an annual report with the Department of Treasury.634
Initially, the BSA was not followed by banks until the 1980s, when the IRS and the Treasury
Department began fining banks for failing to comply with the requirements of the BSA. This is
despite the fact that the BSA carried with it criminal and civil penalties for any institution which
knowingly did not comply with these duties.635 The various reports required by the BSA were
filed by financial institutions with FinCEN, the agency within the Treasury Department
responsible for collecting and processing CTRs and CMIRs. Part of the problem that led to
* Samuel Frankel, Attorney at Law.
632 Megan Roberts, Big Brother Isn't Just Watching You, He's Also Wasting Your Tax Payer Dollars: An Analysis of
the Anti-Money Laundering Provisions of the USA Patriot Act, 56 RUTGERS L. REV. 573 (2004).
633 31 U.S.C. 5313.
634 See supra note 1, at 566.
635 31 U.S.C. 5318.

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various amendments636 of the BSA was that the FinCEN was not capable of processing the
millions of reports that began to flow into it each year as banks began to take the reporting
requirements seriously.637 Banks are required to keep these reports on file for no less than five
years, and they must produce a copy at the request of FinCEN.
Since the passage of the PATRIOT Act and the resulting amendments to the BSA, banks are now
required to file Suspicious Activity Reports (SARs). Suspicious activity means that there is a
transaction of at least $5,000.00 and the bank has reason to suspect that its derivation is illegal
and/or the purpose of the transaction is to evade reporting. Furthermore, banks are prohibited
from telling their customers if such a report has been filed on them, and the financial institution
has immunity from civil litigation by its customers.638
With Title III of the PATRIOT Act, known as the International Money Laundering Abatement
and Anti-Terrorist Financing Act of 2001 came increased reporting and compliance requirements
to the BSA. Subtitle A of the Act deals with international anti-money laundering measures.639
Subtitle B of the Act addresses the amendments to the BSA. First, the amendments clarify that
financial institutions will not be liable for disclosures of information made under regulations of
the government. Further, financial institutions and their employees are not permitted to notify
the customer of any report. Additionally, the Act added changes to the BSA involving brokers
and commodities traders, requiring them to submit suspicious activity reports.640 The Act also
changed the definition of a financial institution, essentially making any business that engages
in the transmission of funds fall within the definition of financial institution. 641 Once again, the
Act provides that FinCEN will be responsible for creating a database of all of these records,
which will (supposedly) be accessible by other government agencies, with civil and criminal
penalties for violations of the Act by financial institutions. As far as non-financial businesses are
concerned, any trade or business (i.e., a retail store) that receives more than $10,000 in currency
for a transaction has to report that transaction and the name and address of the individual to
FinCEN.642
As part of the overall compliance requirements, financial institutions must designate a special
compliance officer, train employees to detect money laundering, commission independent audits,
and establish policies and procedures to identify risks and minimize opportunities for abuse. 643
These programs must be in writing and be approved by the senior management of the financial
institution, and audited annually by an impartial third party or outside auditing firm.
Additionally, financial institutions must comply with the know your customer requirements,
perform the necessary due diligence when dealing with accounts of non-U.S. persons or
636 See The Comprehensive Crime Control Act of 1984; The Money Laundering Control Act of 1986; and The
Anti-Drug Abuse Act of 1988.
637 See supra note 1, at 577.
638 See supra note 1, at 578.
639 Id. at 586.
640 Id.
641 This includes credit card operators, mutual funds, and money-transfer firms.
642 Id.
643 Yochi J. Dreazen, Legislation Aimed at Stopping Terrorism Could Have a Devastating Impact on an Innocent
Bystander: PayPal, WALL ST. J., Oct. 21, 2002, at R9.

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institutions, continually screen the government lists of nations and persons whose accounts must
be seized or frozen.644
Through the implementation of the PATRIOT Act, the compliance requirements of the BSA have
been strengthened, and the paper tiger of compliance finally has gotten teeth to enforce these
requirements.
Our primary focus is to fully understand the various recordkeeping and reporting requirements
placed upon the financial institutions and other Money Services Businesses (MSBs) by the Bank
Secrecy Act of 1970 (BSA), as strengthen by the U.S. PATRIOT Act of 2001.1
Recordkeeping and reporting requirements are best demonstrated by reference to the Financial
Crimes Enforcement Network (FinCEN) of the U.S. Department of the Treasury 2 wherein Title
III of the Act elevated FinCENs to bureau status and thereby granting it new authorities and
opportunities to augment its primary mission. 3 Once in 1994 and with the passing of the USA
PATRIOT Act in 2001, FinCens operation both broadened and it was elevated to bureau status.
Defining FinCEN
The Financial Crimes Enforcement Network (FinCEN) is a network. FinCEN was established
via a statutory the authority outlined in Treasury Order Number 105-08, in April 1990. Its
overarching charter is to provide a government-wide, multi-source intelligence and analytical
network.4
Once in 1994 and with the passing of the USA PATRIOT Act in 2001, FinCens operation both
broadened and it was elevated to bureau status respectfully. Currently one of its aims is bringing
people and information together to fight the complex problem of money laundering. Since its
creation in 1990, FinCEN has worked to maximize information sharing among law enforcement
agencies and its other partners in the regulatory and financial communities. Through cooperation
and partnerships, FinCEN's network approach encourages cost-effective and efficient measures
to combat money laundering domestically and internationally.
The primary mission of FinCEN as outlined
http://www.fincen.gov/af_mission.html, is the following:

on

the

WEB

site

at

is to support law enforcement investigative efforts and foster interagency and global
cooperation against domestic and international financial crimes; and to provide U.S. policy
makers with strategic analyses of domestic and worldwide money laundering developments,
644 Money Laundering: A Bankers Guide to Avoiding Problems, Office of the Comptroller of the Currency, Dec.
2002. Available at: http://www.occ.treas.gov/moneylaundering2002.pdf.
1 U.S. PATRIOT Act, http://www.fincen.gov/hr3162.pdf, (Oct. 2001).
2 Overview, http://www.fincen.gov/af_overview.html, (June 2002).
3 FinCEN Strategic Plan for the fiscal years 2003-2008, http://www.fincen.gov/strategicplan2003_2008.pdf, (Sept.
2003).
4 Id. at 1.

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trends and patterns. FinCEN works toward those ends through information collection, analysis
and sharing, as well as technological assistance and innovative, cost-effective implementation of
the Bank Secrecy Act and other Treasury authorities.
Section 314(a) of the USA PATRIOT Act of 2001
Section 314(a) of the USA PATRIOT Act of 2001 gave the Secretary of the Treasury the
authority to adopt regulations to encourage regulatory authorities and law enforcement
authorities to engage in the sharing of information with financial institutions regarding
individuals, entities, and organizations engaged in or reasonably suspected, based on good
evidence, or engaging in terrorist acts or money laundering services. FinCEN exercised its
rulemaking authority by issuing a proposed rule on March 5, 2002 and the final rule on
September 26, 2002 whose focus was to implement this authority.5
The Act promulgates new requirements for both financial institutions and non-financial
institutions. Under the Act, a financial institution, whether domestic or foreign, is defined very
broadly.
The act is therefore applicable to the following financial and non-financial institutions:
an insured bank; a commercial bank or a trust company; private bankers; an
agency or branch of a foreign bank in the United States; any credit union; a thrift
institution; a broker or dealer registered with the SEC under the Securities
Exchange Act of 1934; a broker or dealer in securities or commodities (whether
registered with the SEC or not); an investment banker or investment company; a
currency exchange; an issuer, redeemer, or cashier of traveler's checks, checks,
money orders, or similar instruments; an operator of a credit card system; an
insurance company; a dealer in precious metals, stones, or jewels; a pawnbroker;
a loan or finance company; a travel agency; a licensed sender of money or any
other person who engages as a business in the transmission of funds, formally or
informally; a telegraph company; a business engaged in vehicle sales, including
automobile, airplane and boat sales; persons involved in real state closings and
settlements; the United States Postal Service; an agency of the federal or any state
or local government carrying out a duty or power of a business described in the
definition of a financial institution a state-licensed or Indian casino with annual
gaming revenue of more than $1,000,000; and certain other businesses designated
by Treasury (collectively Financial Institutions"). A non-financial institution is
simply any institution that does not fall under the Financial Institution category
(Non-Financial Institution).6
Statutory Reporting Requirements
5 67 Fed. Reg. 60,579 and 31 CFR, Part 103.100, 314(a).
6 U.S. Government Civil Remedies over Money Laundering,
http://news.findlaw.com/hdocs/gao/mnylndragsec1001.pdf,

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Currency Transactions Reports. The Act requires Non-Financial Institutions to report certain
cash and currency transactions (CTRs) to the Financial Crimes Enforcement Network
(FinCEN), a part of the Department of Treasury. However, it does not repeal a similar
provision under the Internal Revenue Code (26 U.S.C. 6050I). CTRs require entities or
persons who receive $10,000 or more in coins or currency (which includes monetary instruments
typically in bearer form, such as travelers' checks, bearer negotiable instruments, etc.) to report
the transaction. It is a crime to "structure" payment of coins or currency to avoid the $10,000
reporting requirement. Non-Financial Institutions previously were required to report to I.R.S.
They are now required to report to FinCEN as well. Treasurys proposed regulation and interim
rule implementing the Currency Transactions Reports provision are similar to the current cash
reporting requirements already applicable to trades and businesses under the Internal Revenue
Code, 26 U.S.C. 6050I, and its corresponding regulation, 26 C.F.R. 1.6050I-1 (i.e.,
Form 8300). Annual statements will continue to be required under the Internal Revenue Code,
but are not required under the FinCEN rule. Under FinCEN's rule, the filing of a Form 8300 will
satisfy both I.R.S. and FinCEN.
Suspicious Activity Reports for Brokers, Dealers and Commodities Merchants. After
consultation with the SEC and the Federal Reserve, Treasury published proposed regulations,
which went in to effect on July 1, 2002. This regulation now requires Suspicious Activity
Reports (SARs) by securities broker/dealers.
Money Services Businesses (MSB) that conduct the business of selling money orders or
travelers checks are required to record cash purchases involving $3,000-$10,000, inclusive. The
statute mandates that multiple cash purchases of monetary instruments totaling $3,000.00 or
more be treated as one purchase if the following criteria is evident:
They are made at the same time, or
The MSB has knowledge that such purchases occurred during one business day.
Mandatory Recording of Specific Information of Money Transfer of $3,000.00 or more. MSBs
that provide money transfer services are required to obtain and record specific information for
each money transfer of $3,000.00 or more. This requirement does not consider the method of
payment to mitigate this requirement.
Sharing of Information on Terrorism and Money Laundering. The Act requires Treasury to
improve sharing of law enforcement and regulatory information to assist Financial Institutions to
identify and report suspicions of terrorism and money laundering. Financial Institutions are
required to designate someone to receive the information and monitor accounts of persons or
entities identified by the government. If prior notice is given to Treasury, two or more
Financial Institutions (or an association of Financial Institutions) may share information with
each other about money laundering or suspected terrorist activities.7
Conclusion

7 Recordkeeping Requirements, http://www.fincen.gov/pub_main.html, (2004).

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Financial Institutions are required to adopt anti-money laundering programs. The programs must
include the development of internal policies, procedures and controls, designation of a
compliance officer, ongoing training, and an independent audit system. Regulations have been
announced which cover mutual funds, operators of credit card systems and money services
businesses (such as money transfer companies and check cashers). Banks, savings associations,
credit unions, registered brokers and dealers in securities, futures commission merchants and
casinos can comply by establishing anti-money laundering programs in compliance with existing
FinCEN regulations or with those of their respective regulating agencies. All engaged in the
business of generating, issuing or servicing CTRs, MTs, cash purchases in statutory specified
amounts are required to comply with the statutory recordkeeping requirements under 31 CFR
part 103 and other relevant statutes.
Record-Keeping and Reporting
U.S. Reporting Forms
There are many reporting forms available for compliance with the Bank Secrecacy Act. The
Financial Crimes Enforcement Network provides many of these forms in as fill-in Acrobat
documents.645 The following list is the most used forms:
Money Services Businesses Registration Form646 - The form asks for the identity of the MSB
owner, the locations where services are offered and other information. MSBs include money
transmitters, currency exchangers, check cashers, issuers of travelers checks or money orders,
and sellers or redeemers of travelers checks or money orders. Money Services Businesses in the
U.S. have until December 31 to register.
Currency Transaction Report (FinCEN Form 104647, formerly IRS Form 4789648) - All U.S.
financial institutions, including banks, money transmitters, check cashers and currency exchange
houses must use this form to report to the U.S. government cash transactions involving more
than $10,000. The form was updated in August 2003. Older forms will not be accepted after
August 31, 2004.
Designation of Exempt Person Form649 (Treasury Department Form TD F90-22.53) - U.S. banks
that exempt customers from currency transaction reporting duties must use the form to report the
exemption to the U.S. government. The form was updated in January 1999.

645 Regulatory/BSA Forms and Filings available at http://www.fincen.gov/reg_bsaforms.html.

Alert Global Media Resources available at http://www.moneylaundering.com/freeresources/default.aspx. The text
in this entire section is a direct quote from the website; the hyperlinks are the authors.
646 Registration of Money Services Business available at http://www.fincen.gov/msbregform11082001.pdf.
(Requires Acrobat Reader.)
647 Currency Transaction Report available at http://www.fincen.gov/fin104_ctr.pdf. (Requires Acrobat Reader.)
648 Currency Transaction Report available at http://www.fincen.gov/f4789-1.pdf. (Requires Acrobat Reader.)
649 Designation of Exempt Person available at http://www.fincen.gov/f9022-53-1.pdf. (Requires Acrobat Reader.)

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Currency Transaction Report for Casinos 650 (FinCEN Form 103, former IRS Form 8362) - U.S.
casinos that operate outside of Nevada must use this form to report to the U.S. government cash
transactions involving more than $10,000. The form was updated in March 2003. Older forms
will not be accepted after September 30, 2003.
Currency Transaction Report by Casinos Nevada651 (Internal Revenue Service Form 8852) - U.S.
casinos that operate in Nevada must use this form to report to the U.S. government cash
transactions involving more than $10,000. The form was updated in May 1997.
Suspicious Activity Report Form652 - U.S. banks and other "depository institutions" must use this
form to report a wide range of "suspicious activity." The form was updated in July 2003. Older
forms will not be accepted after December 31, 2003.
Suspicious Activity Report for Securities and Futures Industries 653 (FinCEN Form 101) Securities and futures industries must report suspicious activity using this SAR-SF form. The
form was issued in January 2003.
Suspicious Activity Report for Casinos and Card Clubs654 (FinCEN Form 102) - Every reporting
casino and card club must file this form for any suspicious transaction relevant to a possible
violation of law or regulation. The form was updated in April 2003 and replaced Treasury
Department Form TD F 90-22.49. Older forms will not be accepted after December 31, 2003.
Suspicious Activity Report for Money Services Businesses655 (TD F 90-22.56) - MSBs that are
money transmitters or issuers, sellers or redeemers of money orders or traveler's checks are
required to report suspicious activity by filing the SAR-MSB Form. October 2002.
The Report of Cash Payments Received in a Trade or Business656 (Internal Revenue Service
Form 8300) - U.S. trades and businesses, including car dealers, jewelers, attorneys and others,
must use this form to report cash transactions of more than $10,000. The form was updated in
August 1994.

650 Currency Transaction Report for Casinos available at http://www.fincen.gov/fin103_ctrc.pdf. (Requires

Acrobat Reader.)
651 Currency Transaction Report for Casinos Nevada available ahttp://www.fincen.gov/fin103n_ctrcn.pdf.
(Requires Acrobat Reader.)
652 Suspicious Activity Report available ahttp://www.fincen.gov/f9022-47-1a.pdf. (Requires Acrobat Reader.)
653 SAR for Securities and Futures Industries available at http://www.fincen.gov/fin101_form_only.pdf. (Requires
Acrobat Reader.)
654 SAR for Casinos and Card Clubs available at http://www.fincen.gov/fin102_form_only.pdf. (Requires Acrobat
Reader.)
655 SAR for Money Services Businesses available at http://www.fincen.gov/f902256.pdf. (Requires Acrobat
Reader.)
656 Report of Cash Payments Over $10,000 Received in a Trade or Business available at
http://www.fincen.gov/form8300dec2001.pdf. (Requires Acrobat Reader.)

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Report of Foreign Bank and Financial Accounts657 (Treasury Department Form TD F90-22.1) U.S. persons must use this form, which is commonly known as the FBAR, to report a U.S.
person's financial interest in or signature or other authority over one or more bank account,
securities account, or other financial account in foreign countries with a value of $10,000 or
more. The form was updated in July 2000.
Report of International Transportation of Currency or Monetary Instruments 658 (FinCEN Form
105, former Customs Form 4790) - Anyone transporting more than $10,000 in cash or
unrestricted monetary instruments into or out of the U.S. must use this form to report the
transportation to the U.S. government.
Discussion Questions:
1. Discuss the compliance requirements of the Bank Secrecy Act and the Patriot Act.
2. When are Suspicious Activity Reports (SARs) required?
3. Discuss the AML annual audit compliance requirements.
4. Discuss the role of OFAC.
5. Discuss compliance programs, due diligence, enhanced due diligence, know your customer
programs and customer identification programs.
6. Discuss compliance programs, due diligence, know your customer programs and customer
identification programs.
7. Discuss the role of the compliance officer in an institutions compliance obligations.
8. Discuss the role of a training manual in the compliance program.
9. Discuss the Office of Foreign Assets Controls Specially Designated Nationals and Blocked
Persons list and the compliance obligations of financial institutions with respect to it.
10. Discuss the minimum elements of an employee compliance training program.
11. Discuss how compliance obligations vary depending on an institutions size, location or
volume of business.
12. Discuss the civil and criminal penalties for non-compliance.
13. Discuss the record-keeping and reporting requirements under the BSA and Patriot Act.
CHAPTER 10: ADVANCED TOPICS IN COMPLIANCE
I. Learning Objectives
1. To understand Customer Identification Programs.
2. To understand an internal compliance program to monitor for the Office of Foreign Assets
Control.
3. To understand the annual audit of an AML compliance program.

657 Report of Foreign Bank Accounts available at http://www.fincen.gov/reg_bsaforms.html#901. (Requires

Acrobat Reader.)
658 Report of International Transportation of Currency or Monetary Instruments available at
http://www.fincen.gov/fin105_cmir.pdf. (Requires Acrobat Reader.)

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4. To understand the Patriot Act and special compliance issues for non-traditional and highrisk businesses.
5. To understand section 312 of the Patriot Act and money laundering and terrorism in
correspondent banking relationships and money laundering and terrorism in private banking
relationships.
6. To understand enhanced due diligence and monitoring for high-risk clients including
international and foreign political figures.
7. To understand account transaction monitoring and suspicious activity investigations for
foreign banks with offices in the United States.
8. To understand global anti-money laundering industry standards: what are the new best
practices in the field and how do you implement them?
A. Customer Identification Program (CIP) and Regulations under Section 326 of the Patriot Act *
The Financial Crimes Enforcement Network (FinCEN), a part of the U.S. Treasury, drafted
and approved rules implementing the reporting requirements of section 326 of the USA
PATRIOT Act (the Act). The purpose was to provide a tool to protect the U.S. financial system
from money laundering, terrorist financing, identity theft and other forms of fraud. The rules
apply to the following types of financial institutions:659
Banks and trust companies
Savings associations
Credit unions
Securities brokers and dealers
Mutual funds
Futures commission merchants and futures introducing brokers
The Act required financial institutions to develop a Customer Identification Program (CIP or
Know Your Customer rules) that implement reasonable procedures to:
Collect identifying information about customers660 opening an account;
Verify that the customers are who they say they are;
Maintain records of the information used to verify their identity; and
Determine whether the customer appears on any list of suspected terrorists or terrorist
organizations.

* Samuel Frankel, Attorney at Law.

659 Department of the Treasury, Office of Public Affairs, Fact Sheet of April 30, 2003, available at:
http://www.ustreas.gov/press/releases/reports/js7432.doc
660 Customers mean those who open a new account, including all joint account holders, whether in a fiduciary
capacity and for entities which are legal persons. See USA PATRIOT Act, Section 326 Customer Identification
Program, Compliance Systems, Inc., May 2003, available at:
http://www.compliancesystems.com/USAPATRIOTACT5_2003.pdf

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As part of this CIP, financial institutions are required to develop procedures to collect relevant
identifying information including a customers name, address, date of birth, and a taxpayer
identification number (or social security number). 661 Part of the identification process requires
financial institutions to verify the identity of customers opening accounts, such as using
documentation as a drivers license or passport. However, the final rules implementing section
326 allow financial institutions the flexibility to use methods of identifying and verifying the
identity of their customers appropriate to their individual circumstances (internet banking), but
places the onus of responsibility on the institution, requiring them to assess risks associated with
that document and take whatever reasonable steps may be required to minimize that risk.662
Additionally, financial institutions must maintain records on file to leave a paper trail of their
efforts at compliance at CIP, regularly check terrorist lists when such lists are identified by
Treasury663 Financial institutions may rely on the information gathered from each other as
part of the CIP process, in order to avoid multiple redundant verification processes, but must
keep a record of any discrepancies that arise during the CIP process. All records must be kept for
five years.664
B. Suspicious Activity Reports (SARS)
The Act requires financial institutions and business owners to file Suspicious Activity Reports
(SARS) for certain transactions. Previously, under the Currency and Financial Reporting Act,
anyone who transported more than $10,000.00 into or out of the United States was required to
report that fact to the Treasury Department. Banks, credit unions and certain other institutions
were required to report cash transactions in excess of $10,000.00 to the Treasury Department.
Businesses and non-financial institutions were required to report transactions exceeding
$10,000.00 to the IRS. The Act now requires financial institutions to file SARs with FinCEN for
any transaction involving more than $5,000.00 which they suspect may be derived from criminal
activity.665
Businesses are also now required to file SARs for transactions exceeding $10,000.00. In
addition, businesses dealing with the transfer of money, traveler's checks, or money orders are
under a similar obligation for suspicious activities involving more than $2,000.00. An interesting
feature of this new reporting requirement is that the individual entity or institution that makes the
661 See supra note 1.
662 Department of the Treasury, Office of Public Affairs, Fact Sheet of September 18, 2003, available at:
http://www.ustreas.gov/press/releases/reports/js7432.doc
663 See supra note 1.
664 USA PATRIOT Act, Section 326 Customer Identification Summary of Final Rule, Compliance Systems, Inc.,
May 1, 2003, available at: http://www.compliancesystems.com/USAPatriotAct_summary.pdf
665 A suspicious transaction means any transaction that a financial institution believes may involve funds derived
from illegal activity, intended or conducted in order to hide or disguise funds or assets derived from illegal activity,
designed to evade the requirements of the Bank Secrecy Act, whether through structuring or other means, or serves
no business or apparent lawful purpose, and the reporting business knows of no reasonable explanation for the
transaction after examining all available facts. See Rubin Sanchez, Guidance on when to File a SAR, available at:
http://www.rubensanchez.com/RFS%20Project/Articles%20Folder/Article%20When%202%20file%20an
%20SAR.htm

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report is not permitted to notify the participant that he or she is being reported. The Act grants
immunity to the business or institution and its officers and employees in connection with filing a
SAR.666 Failure to file a SAR will result in a federal investigation and possibly a fine.
Essentially, failure to file a SAR in one year will automatically result in an investigation, as the
government will assume the particular financial institution has failed in its anti-money
laundering compliance.667
C. Internal Compliance Program to Monitor for the Office of Foreign Assets Control
According to the Mission Statement of the Department of the Treasury, the Office of Foreign
Assets Control (OFAC) administers and enforces economic and trade sanctions based on US
foreign policy and national security goals against targeted foreign countries, terrorists,
international narcotics traffickers, and those engaged in activities related to the proliferation of
weapons of mass destruction. OFAC acts under Presidential wartime and national emergency
powers, as well as authority granted by specific legislation, to impose controls on transactions
and freeze foreign assets under US jurisdiction. Many of the sanctions are based on United
Nations and other international mandates, are multilateral in scope, and involve close
cooperation with allied governments.668
All U.S. citizens, corporations, and legal residents fall under the authority of OFAC, and can be
held responsible for sanction violations. As a result, most banks have software that automatically
block transactions over a certain amount, and contain filters with every name on the OFACs
master list of Specially Designated Nations and Blocked Persons (SDNlist), which also
contain geographical names for embargoed countries and cities. Transactions are blocked as a
matter of law if they involve the interests of any of the names on the SDNlist.669
The act of freezing transactions under OFAC is different the anti-money laundering procedures
under the Bank Secrecy Act or the PATRIOT Act. Whereas the latter attempt to seize assets
involved or somehow connected to certain money-laundering/terrorism crimes, illegal activity, or
predicate crimes, OFAC compliance achieves certain foreign policy goals by freezing assets, and
are typically protective in nature (freezing Kuwaiti assets following Iraqs invasion). 670 These
procedures help put pressure on certain countries, or preserve a pool of resources for lawsuits.
The building of a criminal profile, such as is typically the case in the Know Your Customer
requirements of the PATRIOT Act, do not play a role: the compliance for OFAC is very simple
and automatic. Once a transaction has been blocked, a blocked account for the blocked party is
established in an interest-bearing account, and the OFAC is notified within ten days.671
666 Jim Ricca, Fighting Terrorism at Home: Compliance with the USA PATRIOT Act, The Counselor, vol.
XXXVIV, Winter 2004, available at: http://fcsmcc.com/newsletter/
667 Tammy McInturff, Tackling Terrorism, LOMA, November 2002, available at: http://www.loma.org/../res-1102-terrorism.asp
668 Mission Statement, Office of Foreign Assets Control, Department of the Treasury, available at:
http://www.ustreas.gov/offices/enforcement/ofac/
669 Specially Designate Who?: A Primer on OFAC Compliance, ABA Bank Compliance, March/April 1996, p. 31,
available at: http://www.ustreas.gov/offices/enforcement/ofac/articles/abamag.pdf
670 Id. at 32.
671 Id. at 34.

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D. Annual Audit of an AML Compliance Program

Financial institutions must perform an independent self-audit of their anti-money laundering
program under the PATRIOT Act, with direct reporting to the Directorate or Audit Committee. It
is strongly recommended that an annual review be conducted by a financial institutions Chief
Compliance Officer to ensure period review of the entire compliance system.672
The scope of the audit or independent review must be sufficient to assess anti-money laundering
risks of all major business lines, products, and locations, including branches and overseas offices.
It also must verify compliance with the bank's anti-money laundering policies and procedures,
and the scope of the review must be adequate and addresses the following items for applicable
functions of the financial institution: BSA reporting requirements, CTRs, SARs, customer
identification program, identifying and reporting suspicious activities, recordkeeping
requirements, funds transfer operations, on-going training, OFAC compliance, customer due
diligence, and compliance with information sharing requirements, among others.673
E. The Patriot Act: Special Compliance Issues for Non-Traditional and High-Risk
Businesses*
Part of the USA PATRIOT Acts (the Act) novelty involved the new relationships developed
between the government and other non-traditional and high-risk businesses. It makes it easier
for federal investigators to obtain certain forms of wire communication evidence. It allows
investigators pursuing any criminal offense will be able to obtain the content of both voicemail
and e-mail by obtaining a search warrant, which must be supported by probable cause but is not
subject to the more elaborate requirements of a wiretap application. Previously, voicemail was
protected through stare decisis and Title III of the 1968 Omnibus Crime Control and Safe Streets
Act (originally applied to wiretap/voice communications).674
The Act also increases the amount of information obtainable for ISPs (Internet Service
Providers) to include records of session times and durations, temporarily assigned network
address[es], and means and source of payment for services including any credit card or bank
account number.675 This is in additional to the previously allowed information to be produced
from ISPs via an administrative or grand jury subpoena, including the name, address, local and
672 Frank C. Razzano, American Money Laundering Statutes: The Case for a Worldwide System of Banking
Compliance Programs, 3 D.C.L.J. INTL L. & PRAC. 277, 297 (1994).
673 Anti-Money Laundering/Bank Secrecy Act Basic Procedures, Financial Institution Letters, FDIC, October 17,
2003, available at: http://www.fdic.gov/news/news/financial/2003/FIL0379b.html
* Samuel Frankel, Attorney at Law.
674 R.J. Cinquegrana and Richard M. Harper II, Department: Legal Analysis: The
USA PATRIOT Act: Affects on American Employers and Businesses, 46 B.B.J. 10
(2002).
675 The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct
Terrorism Act of 2001, 210, PUB. L. NO. 107-56, 115 Stat. 272 (codified in scattered sections of 5, 8, 10, 12, 15,
16, 18, 21, 22, 28, 31, 42, 47, 49 and 50 U.S.C.).

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long distance telephone toll billing records, telephone number or other subscriber identity, ...
length of service, [and] the types of service ... utilized.676
In addition to requiring the maintenance and reporting of certain electronic information from
telephone companies and ISPs, the Act also broadened the definition of financial institution
from federally insured depository institutions, credit unions, securities brokers and futures and
commission merchants to include dealers in precious metals, stones or jewels, pawnbrokers,
loan or finance companies, private bankers, insurance companies, travel agencies, telegraph
companies, sellers of vehiclesand persons engaged in real estate closings and settlements.677
The same requirements for traditional financial institutions are now applicable for the institutions
encompassed within the new, expanded definition of financial institutions. These include the
development of internal policies, procedures, and controls; the designation of a compliance
officer; an ongoing employee training program; and an independent audit function to test
programs.678 Again, these include know your customer regulations and the development and
implementation of anti-money laundering programs. Such standards include implementing
policies and procedures to detect and deter money laundering, designating a compliance officer,
conducting ongoing employee training, and completing independent audits of the compliance
program to ensure its effectiveness.679
Section 312 of the Patriot Act:
a. Money Laundering and Terrorism in Correspondent Banking Relationships
Section 312 of the USA PATRIOT Act680 generally requires a U.S. financial institution that
maintains a correspondent account681 or private banking account for a non-U.S. person to
establish appropriate and, if necessary, enhanced due diligence procedures to detect and report
instances of money laundering.682 In the case of certain correspondent accounts, the additional
standards required by subsection 5318(i)(2) require a U.S. financial institution to, at a minimum,
do three things: (1) Ascertain the identity, and the nature and extent of the ownership interests, of
the owners of any foreign bank correspondent whose shares are not publicly traded. (2) Conduct
enhanced scrutiny of the correspondent account to guard against money laundering and satisfy its
obligation to report suspicious transactions under the terms of 31 U.S.C. 5318(g). (3) Ascertain
whether any foreign bank correspondent in turn provides correspondent accounts to third party
foreign banks; if so the U.S. financial institution must ascertain the identity of those third party
676 Electronic Communications Privacy Act, 18 U.S.C. 2703.
677 Rebecca Gregory, Article: The Lawyers Role: Will Uncle Sam Want You in the Fight Against Money
Laundering and Terrorism?, 72 UMKC L. REV. 23, 48 (2003).
678 See supra note 17, 352.
679 See supra note 19, at 48.
680 Codified at 31 U.S.C. 5318(i).
681 A correspondent account is defined in the new section 5318A, added to the Bank Secrecy Act by section 311
of Title III.
682 Richard Spillenkothen, Division of Banking Supervision and Regulation, Board of Governors of the Federal
Reserve System, Section 312 of the USA Patriot Act -- Due Diligence for Correspondent and Private Banking
Accounts, 2002.

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foreign banks and related due diligence information required under the general rules of
paragraph 5318(i)(1).683
b. Money Laundering and Terrorism in Private Banking Relationships
In the case of private banking accounts, a U.S. financial institution must comply at a minimum,
with the following requirements of subsection 5318(i)(3): (1) The U.S. financial institution must
take reasonable steps to ascertain the identity of the nominal and beneficial owners of the
account and the source of funds deposited into the account, as needed to guard against money
laundering and report any suspicious transactions under the terms of 31 U.S.C. 5318(g). (2) The
U.S. financial institution must take reasonable steps to conduct enhanced scrutiny, that is
reasonably designed to detect and report transactions that may involve the proceeds of foreign
corruption, for any private banking account that is requested or maintained by, or on behalf of, a
senior foreign political figure (or any immediate family member or close associate of such a
political figure).
A private banking account for this purpose is any account or combination of accounts that
requires a minimum aggregate deposit of at least $1 million, is established on behalf of
one or more individuals who have either a direct or beneficial ownership interest in the
account, and that is assigned to, or administered or managed by, in whole or in part, an
officer, employee or agent of a financial institution who serves as liaison between the
institution and the account's direct or beneficial owner or owners.684

683 Section-by-section summary of Title III of the USA PATRIOT Act, available at:
http://www.gabankers.com/issuesfederal.patriot.section-by-section.htm.
684 See id.

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F. Enhanced Due Diligence and Monitoring for High-Risk Clients including International
and Foreign Political Figures
In addition to the minimum required due diligence procedures for correspondent accounts
for financial institutions, three additional requirements are necessary for high-risk foreign
banks. These are: (1) Enhanced scrutiny to guard against money laundering and to ensure
detection and reporting of illegal activity, which includes obtaining and reviewing details
of the foreign bank's anti-money laundering program, monitoring of transactions and
screen the person who has authority to direct transaction through the correspondent
account; (2) Know your correspondent bank's correspondent banks; identity of foreign
bank's correspondent banks, assess and minimize risks associated with the bank's
correspondent banks; and (3) Unless bank is publicly traded, obtain identification and
share of each owner of the foreign bank.685
In addition to the private banking requirements outlined above, financial institutions must
exercise reasonable diligence in seeking to determine whether an individual is a senior
foreign political figure, and may rely on the customer's statement that he is not. If a
financial institution is dealing with a senior foreign political figure, the minimum
requirements need to be enhanced by procedures and policies to detect and report
transactions that may involve the proceeds of foreign corruption. 686 The inability to
perform the enhanced due diligence requirements must be met with a plan addressing
when to refuse, suspend, file a SAR, or close the account.
G. Account Transaction Monitoring and Suspicious Activity Investigations for Foreign
Banks with Offices in the US
Section 319 of the Act requires U.S. correspondent banks to maintain certain records
concerning foreign banks that have a U.S. correspondent account. This section also
provides authority for the Secretary of the Treasury and the Attorney General to subpoena
the foreign bank's offshore records concerning the account, and authorizes forfeiture of
deposits in the foreign bank. The purpose is to enhance the powers of U.S. law
enforcement authorities to monitor correspondent accounts and seize funds that might
otherwise be outside of U.S. jurisdiction.687
Section 313 of the Act prohibits "covered financial institutions" from maintaining a U.S.
correspondent account for a foreign bank that does not have a physical presence in any
country (a "foreign shell bank"). In addition, a covered financial institution is required to
take "reasonable steps" to ensure that a correspondent account for any foreign bank is not
being used by that foreign bank to provide banking services indirectly to a foreign shell
bank. The Act requires the Secretary to promulgate regulations that delineate the
685 Summary of the Proposal for 312 USA PATRIOT Act, available at:
http://www.worldcompliance.com/Resource/312_summary.aspx.
686 Foreign corruption means assets or property that are acquired by, through, or on behalf of a senior
foreign political figure through misappropriation, theft of embezzlement of public funds, or the unlawful
conversion of property of a foreign government, or through acts of bribery or extortion. Id.
687 David R. Sahr & Daniel Morales, U.S. Anti-Money Laundering Legislation, 8 NAFTA L. & BUS.
REV. AM. 583, 586 (2002).

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reasonable steps necessary to comply with this requirement. The Act does not prohibit a
covered financial institution from providing a correspondent account to a foreign shell
bank that (i) is an affiliate of a depository institution, credit union, or foreign bank that
maintains a physical presence in the United States or a foreign country, and (ii) is subject
to supervision by the regulator of the affiliated financial institution. The foreign shell
bank exception is "intended to be narrowly construed to protect the U.S. financial system
from shell banks to the greatest extent possible."688
Additional due diligence policies must ensure that the domestic financial institutions take
"reasonable steps" (i) to ascertain, for any such foreign bank the shares of which are not
publicly traded, the identity of each of the owners of the foreign bank, and the nature and
extent of the ownership interest of each owner; (ii) to conduct "enhanced scrutiny" of the
account and report any suspicious transactions; and (iii) to ascertain whether any such
foreign bank itself provides correspondent accounts to other foreign banks, and, if so,
identify those banks and gather related due diligence information.689
H. Global Anti-Money Laundering Industry Standards: What are the New Best Practices
in the Field and How do You Implement Them?
The Anti-Money Laundering practices have developed from various national and
international efforts to control money laundering and terrorist financing. In the US, this
has been accomplished through legislation like The Bank Secrecy Act of 1970, The
Money Laundering Control Act of 1986, The Anti-Drug Abuse Act of 1988, Section 2532
of the Crime Control Act of 1990, Section 206 of the FDIC Improvement Act of 1991,
The Annunzio-Wylie Anti-Money Laundering Act of 1992, The Money Laundering
Suppression Act of 1994, The Money Laundering and Financial Crimes Strategy Act of
1998, and the USA PATRIOT Act of 2001.690
On the international front, the FATF helps promote anti-money laundering policies by
spreading an anti-money laundering message, monitoring the 40 Recommendations (and
Special Recommendations on Terrorist Financing), and publishing typologies exercises.
The fundamental controls for anti-money laundering regimes are effective BSA
compliance, and customer due diligence programs, compliance with OFAC guidelines,
suspicious activities monitoring and reporting programs, and risk-based anti-money
laundering programs. All of this includes appropriate training and outside monitoring by
third parties, verifying customer identification, paying special attention to foreign
correspondence banks, and regularly checking the lists of suspicious countries and
persons.691
Other Compliance Issues including those Required by the USA Patriot Act.
688 See supra note 29, at 589.
689 Id. at 590.
690 Office of the Comptroller of the Currency, Money Laundering: A Bankers Guide to Avoiding
Problems, 4 (2002), available at http://www.occ.treas.gov/moneylaundering2002.pdf.
691 Id.

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To satisfy the Act, financial institutions are required to define a solution to spot patterns
of behavior likely to reveal money laundering. Nearly all have pursued technology as
part of the answer - namely, exception-based money laundering detection software that
can be implemented relatively quickly on a business unit-by-business-unit basis.692
However, simple compliance with all of the requirements of the PATRIOT Act and other
international anti-money laundering regimes presents a dilemma that goes beyond a
simple computer program to correct. Given the vast changes that occurred with the postSeptember 11 merging of the anti-money laundering and terrorist financing regimes, it
was clear that problems would arise. U.S. and international law enforcement agencies
have experienced difficulties refocusing their efforts, keeping track of rapid and
significant amendments to laws and new regulations, new partnerships and bureaucracies,
as well as different perspectives in the international community. Governments,
organizations, and institutions have been wary of moving too quickly with the new
regime for fear of alienating allies, violating fundamental rights to due process and
privacy, and incurring burdensome costs.693 Additionally, in the United States, the
Treasury Department, pursuant to the USA PATRIOT Act, has issued hundreds of pages
of complex regulations that force banks and financial institutions, their counsel, and
many other professionals to participate in law enforcement activities and regulatory
processes.694
III. Introduction to Compliance
A. . Customer Identification Program (CIP) and Regulations under Section 326 of the
Patriot Act. Know Your Customer.
Ted
Dreyer,
How
to
Get
From
KYC
to
CIP
available
http://www.complianceheadquarters.com/AML/AML_Articles/kyc_to_cip.html#1

at

Many institutions have wondered about the differences between their existing customer
identification or Know Your Customer policies and the new CIP requirements.
Specifically, institutions have questioned whether their existing KYC policies satisfy the
new CIP requirements. To answer that question some background information on KYC is
helpful.
B. KYC Background

692

Laurie Rose and Mark Moorman, The USA PATRIOT Act: A Long-Term Financial Services Strategy,
Bank Systems & Technology Online, February 14, 2003, available at:
http://www.banktech.com/story/BNK20030214S0004.
693 Bruce Zagaris, International Money Laundering: From Latin America To Asia, Who Pays?: The
Merging Of The Anti-Money Laundering And Counter-Terrorism Financial Enforcement Regimes After
September 11, 2001, 22 BERKELEY J. INT'L L. 123, 145 (2004).
694 Id. at 146.

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On December 7, 1998, the OCC, the Federal Reserve Board, the Federal Deposit
Insurance Corporation, and the Office of Thrift Supervision each published "Know Your
Customer" proposals. The proposed rules would have required each bank and savings
association to develop a comprehensive program designed to determine the identity of its
customers; determine its customers' sources of funds; determine the normal and expected
transactions of its customers; monitor account activity for transactions that are
inconsistent with those normal and expected transactions; and report any transactions of
its customers that were determined to be suspicious in accordance with the OCC's
existing suspicious activity reporting regulations. In response to its Know Your Customer
proposal, the OCC alone received over 16,000 comments during the comment period.
Virtually all of those submitting comments opposed adoption of the proposed rule. In
light of those comments, the regulators withdrew the proposal. In doing so, however, the
regulators stated its belief that banks should adopt their own policies and procedures to
determine the identities of their customers, and should have systems and controls that will
allow them to identify suspected illegal conduct.
Because the KYC proposal was withdrawn, institutions have created their existing
customer identification policies without specific regulatory requirements or guidelines.
Obviously these existing policies vary from institution to institution. Many institutions
have relied heavily on credit reports and reports of bad checks or accounts closed. They
are good sources for discovering the financial problems associated with a named party.
However, they focus on financial misbehavior of a party and are not probably not very
effective to help determine whether someone is truly who they say they are.
The new CIP regulation establishes a host of specific requirements for the collection,
documentation, verification and retention of customer information. Therefore, it is highly
likely that existing policies will have to be adjusted. However, the existing policies
should serve as a useful building block towards developing a CIP that complies with
Section 326. The following questions address many of the requirements of the CIP
regulation.
Answer the following questions about your existing policy, and make the necessary
adjustments to meet the CIP requirements. All references to the regulation mean the CIP
regulation, 31 CFR 103.121.
C. CIP Coverage
Does your existing policy apply to all types of accounts?
The regulation provides that an account covered by CIP includes a wide range of formal
banking relationships including loans, deposit accounts, safe deposit leases, cash
management, custodian and trust services.
Does your existing policy distinguish a formal business entity for an informal
relationship? Does it treat the business entity as the customer to be identified if its a legal

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entity, and treat the individual opening the account as the customer for an entity that is
not a legal person?
The regulation provides that an individual who opens an account for an entity that is not a
legal person (such as a book club or bowling team) is the customer for CIP purposes. If
the entity is a legal person (such as a corporation or trust), then the entity is the customer.
This affects not only which party must be verified, but also which information to collect.
Does your existing policy treat the custodian of an account opened for a minor as the
customer?
The regulation provides that an individual who opens an account for an individual that
lacks legal capacity (such as a minor) is the customer for CIP purposes, not the
beneficiary. This also affects which party must be verified and which information to
collect.
Does your existing policy cover your subsidiaries?
As noted in the preamble to the regulation, the CIP must be a part of your BSA
compliance program. Therefore, it will apply throughout your U.S. operations (including
subsidiaries) in the same way as the BSA compliance program requirement.
D. Identification Procedures
Does your existing policy include risk-based procedures for verifying the identity of each
customer?
The regulation provides that a CIP must contain procedures for verifying the identity of
each customer and that they must be risk-based. This ties into the next question regarding
the minimum requirements for this risk assessment.
Are these procedures based on your assessment of the relevant risks, including the
various types of accounts you maintain, the various methods of opening accounts you
provide, the various types of identifying information available, and your size, location,
and customer base?
The regulation provides that you should take these factors into account in doing your risk
assessment. These are just the minimum. You should, of course, consider other factors, if
appropriate.
Does your existing policy specify the identifying information that will be obtained from
each customer?
The regulation requires that this information include name, street address, ID number
and, in the case of individuals, date of birth. Other information, such as telephone

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numbers may be specified and other information may be needed for businesses or foreign
citizens.
Does your existing policy address situations where, based on your risk assessment of a
new account opened by a customer that is not an individual, you will obtain information
about individuals with authority or control over such account, including signatories, in
order to verify the customers identity?
The regulation only requires this in cases where you cannot verify a non-individual
customer. This is an exception to the general rule that signers on an account do not need
to be verified.
E. Identity Verification
Does your existing policy contain procedures for verifying the identity of the customer,
within a reasonable time after the account is opened? Does it describe when you will use
documents, non-documentary methods, or a combination of both methods?
The regulation contains this requirement. What a reasonable time is might depend on
what type of account is being opened a loan that will be funded the same day would
require quicker verification than a real estate loan that might not close for weeks. The use
of a combination of documents and non-documentary methods is encouraged in the
preamble because identification documents may be obtained illegally and may be
fraudulent, and in light of the recent increase in identity theft.
Does your existing policy contain procedures that set forth the documents that you will
use?
The regulation requires the documents to be specified. Obviously, the documents will
vary depending on whether the customer is an individual, corporation, partnership, trust,
sole proprietor, or other entity, as well as on whether the customer is from the U.S. or
another country.
Does your existing policy contain procedures that describe the non-documentary methods
the financial institution will use?
The regulation requires the CIP to describe what methods other than documents will be
used to verify identity and when these methods will be used. This may be done by an
automated verification solution or it may be done manually. At a minimum, the
procedures must address each of the situations stated in the next question.
Does your existing policy describe non-documentary procedures to address situations
where:
An individual is unable to present an unexpired government-issued identification
document that bears a photograph or similar safeguard;
You are not familiar with the documents presented;

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The account is opened without obtaining documents;

The customer opens the account without appearing in person; and
Where you are otherwise presented with circumstances that increase the risk that you will
be unable to verify the true identity of a customer through documents?
The regulation provides that all of these situations should be covered in your CIP. In
connection with the last situation, you should try to anticipate what the circumstances
might be that would increase the risk of not being able to identify the customer through
documents at your institution.
Does your existing policy include procedures for responding to circumstances in which
you cannot form a reasonable belief that you know the true identity of a customer? These
procedures should describe:
When you should not open an account;
The terms under which a customer may use an account while you attempt to verify the
customers identity;
When you should close an account, after attempts to verify a customers identity have
failed; and
When you should file a Suspicious Activity Report
The regulation does not require that you close or refuse to open an account in any
particular circumstances, only that you specify when you will do so in your CIP. Keep in
mind that the rule does not give protection from liability for errors and does not eliminate
the need for adverse action notices where required. Procedures for filing Suspicious
Activity Reports should be consistent with the instructions on the Suspicious Activity
Report form.
F. Record Retention
Does your existing policy include procedures for making and maintaining a record of
information that includes:
All required identifying information about a customer
A description of any document that was relied on, noting the type of document, any
identification number contained in the document, the place of issuance and, if any, the
date of issuance and expiration date;
A description of the methods and the results of any non-documentary measures
undertaken to verify the identity of the customer and
A description of the resolution of any substantive discrepancy discovered when verifying
the identifying information obtained?
The regulation requires that all of these four elements be included in your CIP record
keeping.

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Does your existing policy include retention of the required identifying information for
five years after the date the account is closed or, in the case of credit card accounts, five
years after the account is closed or becomes dormant?
The regulation specifies a two-tiered retention period. The required identifying
information (name, address, ID number and date of birth) must be kept for five years
after the account is closed.
Does your existing policy include retention of the document description, nondocumentary methods and results, and resolution of discrepancies for five years after the
record is made?
The regulation specifies that the records other than the required identifying information
must be kept for five years after the record is made.
G. Government List Review
Does your existing policy include procedures for determining whether the
customer appears on any list of known or suspected terrorists or terrorist
organizations issued by any Federal government agency and designated as such
by Treasury in consultation with the Federal functional regulators? The
procedures must require the financial institution to make such a determination
within a reasonable period of time after the account is opened, or earlier, if
required by another Federal law or regulation or Federal directive issued in
connection with the applicable list. The procedures must also require the financial
institution to follow all Federal directives issued in connection with such lists.
The regulation contains this requirement. Although no lists have been designated, when
such guidance is issued this will have a significant effect on your work flow for account
opening. In the meantime, your policy should indicate that you will check any such list(s)
and follow any directives when they are available.
H. Adequate Notice
Does your existing policy include procedures for providing your customers with adequate
notice that you are requesting information to verify their identities?
The regulation requires that your give adequate notice to your customers that you are
requesting information to verify their identities. This notice must be given in any manner
reasonably designed to ensure that a customer is able to view the notice, or is otherwise
given notice, before opening an account. Although lobby posters or other signs are
acceptable for customers that come into your institution, your CIP should specify how
customers that do not open accounts face-to-face will be handled. This can happen when
accounts are opened by mail, phone or Internet, when one spouse comes in to your

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institution but the other one doesnt, and when accounts are opened by third parties such
as dealers or agents.
I. Conclusion
The bottom line is that KYC compliance is not CIP compliance. Although CIP does build
on KYC principles, the compliance requirements set out in section 326 are extensive and
much more detailed than what was expected under KYC guidance. The questions and
answers discussed above highlight each explicit requirement of section 326. Although
formal examination procedures have not yet been released, it seems reasonable that
regulatory examiners will expect your CIP to address each of these areas in some fashion.
On October 1, 2003, your CIP must be board approved and fully implemented. Now is
the time insure that your CIP meets all the regulatory expectations.
2. Suspicious Activity Reports (SARs)Suspicious Activity Report available at
http://encyclopedia.thefreedictionary.com/Suspicious%20activity%20report.
A Suspicious Activity Report (or SAR) is a report regarding suspicious or potentially
suspicious financial activity, filed with the Financial Crimes Enforcement Network
(FINCEN), an arm of the United States Department of the Treasury.
SARs are filed primarily by financial institutions such as banks, credit unions and check
cashing establishments. Casinos are required to file a separate report called a SAR-C.
FINCEN requires a SAR report to be filed by a financial institution when the financial
institution experiences a potential loss (also known as risk or exposure) of $25,000 or
more, a potential loss of $10,000 or more when a suspect can be identified, for any
potential loss when an employee is involved (such as embezzlement or misuse of
position) or any transaction or set of transactions that may be deemed suspicious (such as
structuring to avoid a CTR). A similar, though less detailed report called a "Currency
transaction report" (CTR) is required under the Bank Secrecy Act for any cash transaction
or transactions greater than $10,000.
SAR reports include detailed information about transactions that are or appear to be
fraudulent, and the individuals conducting such transactions. While many institutions file
thousands of SARs a year, very few people will have a SAR filed with thier name
included. The goal of SAR filings is to help the Federal government identify individuals,
groups and organizations involved in fraud, terrorist financing and money laundering. At
the same time, neither the financial institution, nor the Federal government is required to
notify an individual or organization that a SAR has been filed that includes their name.
Financial institutions usually undergo an investigations process prior to filing a SAR to
assure that the information reported is appropriate and accurate. This process will often
include review by financial investigators, management and attorneys prior to filing.
An institution can file these reports as a paper form, electronically on tape or floppy disk,
or through a special secure internet connection.

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Financial institutions face very heavy penalties for failing to properly file Suspicious
Activity Reports, including large fines and regulatory restrictions. This regulatory
compliance has become increasingly important for financial institutions in recent years,
with entire departments and executive positions springing up to ensure regulatory
compliance, in SARs as well as the Bank Secrecy Act and the Sarbanes-Oxley Act.
3. Internal Compliance Program to Monitor for the Office of Foreign Assets Control
The Treasurys Office of Foreign Assets Control (OFAC) administers laws that
impose economic sanctions against, including the restriction of transactions with, certain
foreign countries, their nationals, or specifically designated nationals. The
Workprogram includes examination procedures to determine whether institutions are
complying with the OFAC requirements.695
Regulation H, Section 208.14, requires that financial institutions establish and maintain
adequate internal procedures to assure and monitor compliance with the BSA (Refer to
BSA ManualRegulation H).696
The sophistication and comprehensiveness of the institutions internal compliance
program should be gauged by the type of activities engaged in by the institution and the
quantity of transactions subject to the BSA and related rules and regulations. As an
example, a wholesale institution that conducts no cash transactions needs only to have
an internal compliance program that ensures that should a covered transaction be
presented to the institution, the institutions employees will have sufficient education to
understand that the transaction may be subject to Bank Secrecy Act requirements and the
employee has the means to obtain additional instructions from manuals or employees at
other branches of the institution. As an alternative, an institution that conducts a retail
operation needs to have specific and comprehensive internal compliance procedures. It is
your responsibility to determine the appropriateness of the internal compliance program
based on the institutions activities. Keep in mind that all institutions, throughout the
organization, should maintain a program to detect, and where necessary, report unusual or
suspicious activities possibly related to money laundering.697
4. Annual Audit of an AML Compliance Program
While the Work program is designed to maximize the efficiency of the review process
(by using a sampling or by requiring the institution to perform an analysis), it is not
designed to be all inclusive; therefore, specific situations or problems identified while
conducting examinations may require additional procedures that would not otherwise be
required.698
695 Bank Secrecy Act Examination Manual, 1 available at
http://www.federalreserve.gov/boarddocs/supmanual/bsa/bsa_p1.pdf. (Requires Acrobat Reader.)
696 Id. at 4.
697 Id.
698 Id. at 1.

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Regulation H, Section 208.14, requires that financial institutions provide for

independent testing for BSA compliance to be conducted by bank personnel or an outside
party (Refer to BSA ManualRegulation H).699
Evidence of violations of, or noncompliance with, specific provisions of the BSA may
beindicative of a systemic failure of the internalaudit program. As you complete the
following examination procedures, you must determine whether apparent violations were
caused by misinterpretations, oversight, or technical matters rather than by an inadequate
compliance program. If you feel the institutions compliance program is inadequate, you
may want to enhance your BSA examination (i.e., use a larger sampling of
transactions).700
Regulation H, Section 208.14 requires that financial institutions provide BSA training
for appropriate personnel, including, but not limited to, tellers, customer service
representatives, lending officers, private and personal banking officers and all other
customer contact personnel (Refer to BSA ManualRegulation H).701
The sample size of CTRs you should review will depend upon several factors such as
the size and location of the institution, the detail and accuracy of reports, and your
comfort level with the institutions internal control procedures.702

699 Id. at 9.
700 Id. at 10.
701 Id.
702 Id. at 21.
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Discussion Questions:
1. Discuss Customer Identification Programs.
2. Discuss an internal compliance program to monitor for the Office of Foreign
Assets Control.
3. Discuss the annual audit of an AML compliance program.
4. Discuss the Patriot Act and special compliance issues for non-traditional and
high-risk businesses.
5. Discuss section 312 of the Patriot Act and money laundering and terrorism in
correspondent banking relationships and money laundering and terrorism in
private banking relationships.
6. Discuss enhanced due diligence and monitoring for high-risk clients including
international and foreign political figures.
7. Discuss account transaction monitoring and suspicious activity investigations for
foreign banks with offices in the United States.
8. Discuss global anti-money laundering industry standards: what are the new best
practices in the field and how do you implement them?

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