In our continuing series on corruption in post-communist societies, we look today at one of the chief methods for concealing the huge profits made in high-level fraud. RFL/RL correspondent Askold Krushelnycky reports on the international criminal practice known as "money-laundering."
Prague, 7 September 2000 (RFE/RL) -- Money-laundering is an attempt to hide the origin of ill-begotten gains and to place the cash somewhere where it is legally accessible.
For many years, money-laundering has been a major problem in the West, where it has been used to hide huge profits from organized crime, particularly from trade in illegal drugs. But the problem has grown even more serious with the globalization of the world's economy, which has lifted many restrictions on the international transfer of money and has greatly speeded up financial transactions through computer technology. That makes money-laundering much easier.
Criminals from the former communist states, with the aid of Western accomplices, quickly mastered the techniques of money-laundering. Russia -- with the biggest scope for corrupt profits -- has conducted the largest known money-laundering operations in the post-communist world. But a French expert on money-laundering techniques, Phillipe Gelin, told RFE/RL it is not just criminals who launder money in Russia:
"The reason it's been happening is that it's clear the Russians have no confidence whatsoever in their financial system, and when they're making money, what they want to do is take it away (from Russia) as soon as possible."
Some of the known cases involving Russians have involved huge sums. U.S. authorities are continuing an investigation after two Russian-born former employees of the Bank of New York admitted they had arranged the laundering of $7 billion of funds from Russia. It is suspected that some of the money came from International Monetary Fund loans to the Russian government.
Former Ukrainian Prime Minister Pavlo Lazarenko is awaiting trial in the United States on charges that he laundered $114 million of Ukrainian state money. Swiss investigators believe that he was involved in laundering more than $800 million in their country.
Some studies estimate that $500 billion is laundered annually around the world. Laundering means changing "dirty" money --that is, illegal funds -- into "clean" or legitimate money. The term derives from laundromats -- premises where customers can wash their laundry in coin-operated washing machines -- that were run by Mafia groups in the United States. The money the Mafia actually made from its illegal businesses was attributed to profits made by the laundromats.
How do you actually launder money?
The first step may involve physically transporting the money across a border. Those utilizing that method can ensure they will not be stopped by customs in the country they are leaving by using VIP status documents that have been furnished by their partners in senior government positions or by bribing the right people.
But the money might also be deposited in domestic banks or other types of formal or informal financial institutions. Then it can be used to buy high-value goods -- artwork, airplanes or precious metals and stones -- that can then be exported.
The second step is known as "layering," that is, carrying out complex layers of financial transactions to disguise where the money came from and to make it difficult for investigators or auditors to track its movement. This phase can involve such transactions as the electronic transfer of cash, the conversion of cash into monetary instruments-- bonds, stocks or travelers' checks -- the resale of high-value goods and monetary instruments, and investment in real estate and other legitimate businesses.
So-called "shell" companies or banks-- often nothing more than an address registered in offshore havens -- are frequently used in this phase of laundering.
All that is needed is a laptop computer, since many internet sites describe how to set up shell companies in one of dozens of financial or offshore havens -- states or parts of states that have special regulations attractive to people who want to avoid paying big tax bills or want their financial dealings to remain secret.
Once you have found your financial haven, you then invent a name or buy an existing company name and register it, by computer. Most havens are in the Caribbean and the South Pacific -- such as the island of Nauru where, according to Russia's central bank, Russians moved $70 billion in 1998.
The resulting company -- let's say it's in Nauru -- is known as a "suitcase bank," or "brass plate bank." That means it does not have any employees or records in Nauru, only a post office box or a brass name plate on a building entrance. It might only exist in the laptop computer or it could be nominally run by trustees who know the name of the person they are working for but use the bank secrecy laws of these havens to hide their client's identity.
You could set up as many of these artificial banks as you like and transfer funds among them simply by using your computer.
Next, you open an account -- this one is called a correspondent account -- with a real bank in a big money center such as New York or London. This enables the money to seem to come from a respectable source.
A "front company" may then take the money and appear to use it to lend the proceeds back to the person who laundered the funds. A front company is one that seems to be legitimate and have nothing to do with the person who laundered the funds -- but, in reality, is completely controlled by him.
Or the freshly laundered money, on deposit in foreign financial institutions, can be used as security for domestic loans. In that case, the money you use in your business dealings again appears to be provided by a legitimate foreign loan.
This kind of complex simulation makes fighting money-laundering a difficult task. What's more, money-launderers employ some of the world's best financial brains to outwit measures aimed at stemming the practice.
The main international body trying to fight money-laundering is the Financial Action Task Force (FATF) set up by the governments of the Group of Seven industrialized nations, or G-7, plus 24 other members of the Organization for Economic Cooperation and Development -- or OECD -- and Hong Kong, Singapore, the Gulf Cooperation Council, and the European Commission.
In July, FATF published a list of 15 states which were identified as places with favorable conditions for money-laundering. It has given these states a year to begin introducing regulations to make money-laundering more difficult and has threatened economic sanctions if they do not act.
But French financier Philippe Gelin, who tracks money-laundering, says the measures are inadequate.
"The list of 15 countries named by the OECD, by the Financial Action Task Force, which is part of the OECD, as havens for money-laundering, is as everybody in the business knows, laughable because it doesn't reflect the reality of what countries are involved in money-laundering."
Gelin said none of the OECD countries was on the blacklist although some, particularly Switzerland, were renowned for their involvement in money-laundering.
Separately, the United States is considering legislation to expand its powers to act against suspicious financial transactions and to make foreign corruption an offence under U.S. money-laundering laws. But the proposals have been criticized by some bankers who say it is difficult to check whether money has come from corrupt sources.
Also, some unscrupulous Western financiers oppose the measures because they know they will be bad for their business.
All this strongly suggests that the practice of money-laundering is not likely to be eradicated in the near future.