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Corruption Watch: July 11, 2002


11 July 2002, Volume 2, Number 26
CYBERLAUNDERING
By Roman Kupchinsky
As part of the post-11 September war on terrorism, the U.S. Treasury Department has issued a number of initiatives meant to combat the laundering of dirty money that could be used to finance terrorist groups. Among other measures, the Treasury has urged the adoption of new regulations for all banks and other financial groups to set up monitoring mechanisms of all correspondent and private-banking accounts opened in the United States by foreign banks or individuals. These are believed to be the main avenues for dirty money entering the U.S. financial system.

However, 11 industry groups -- including the American Bankers Association, the Securities Industry Association, and the New York Clearinghouse -- said in an open letter dated 1 July that such plans would be costly and unworkable. According to the "Financial Times" on 3 July: "They urged the Treasury to support a narrower approach aimed at identifying and scrutinizing a much smaller number of 'high-risk' accounts."

"An approach which does not permit the covered financial institutions to differentiate meaningfully among customers, accounts and transactions will result in less rather than more effective deterrence and prevention," the letter argued.

The concern of financial-industry associations indicates that a great deal of confusion seems to surround the question of how terrorists launder money to pay for their operations. The U.S. effort to seize suspected terrorist assets has identified and frozen $115 million so far since 11 September. An estimated $300 billion is laundered annually, according to U.S. federal agencies. Moreover, according to Treasury officials quoted by the "Financial Times," terrorists have moved their assets out of cash accounts "and into commodities such as gold and diamonds."

All of the regulations proposed by the Treasury Department deal with the movement around the globe of real money or securities. Yet another concern that deserves attention is the question of cyberlaundering of funds through Internet transactions -- in short, e-money. Cyberlaundering was until very recently not seen as a major vehicle for criminals and terrorists to launder money. As late as 1997, the G-10 countries shook it off: "To date, G-10 countries have not seen evidence of this activity [e-money laundering] in connection with electronic money products..." (Canadian Department of Justice, October 1998).

So then, what is e-money and how can it be laundered?

"On Magazine" in its January-February issue published the following account: "Street-smart characters drawn to the edgy side of Miami had heard enough scuttlebutt about Louis Pacheco and Leo Casamayer to view them as big-time drug dealers. But Orlando Puche, vice president of the Gloria Exchange Corp. -- a family-owned Internet wire company licensed to transmit money all over the world via the Web -- made it a practice never to ask questions, especially when patrons flashed fake IDs and bundles of cash. Pacheco and Casamayer typically arrived at Gloria Exchange lugging a stack of cardboard boxes or duffel bags stuffed with small bills that amounted to cash drops of anywhere from $10,000 to $250,000. And Puche and his employees would dutifully wire the money, using the Internet and e-mail, to various overseas accounts. In all, some $2.2 million was e-wired to destinations abroad.

"The case of Gloria Exchange is one of the first major federal prosecutions to document how criminals are using the Internet to launder money. Investigators believe that it's only a matter of time before the practice becomes more common. 'I'm afraid criminals haven't really started to tap its potential,' says Dan Stipano, deputy chief counsel at the U.S. Treasury Department's Office of the Comptroller of the Currency, which makes sure banks are complying with money-laundering rules."

Electronic cash, also known as "digital money," is a replacement for money as we know it by a series of numbers that have an intrinsic value in a currency. According to a paper presented at a seminar at the University of Miami School of Law by Mark Bortner in 1996 titled "Cyber Laundering: Anonymous Digital Cash And Money Laundering": "Using digital cash, actual assets are transferred through digital communications in the form of individually identified representations of bills and coins similar to serial numbers on hard currency." Most digital money making the rounds on the Internet is traceable. There is an exception, however.

DigiCash, according to Bortner, was an Amsterdam-based company (which later moved to California) created by David Chaum, which invented an online product called "ecash." Bortner explained: "Ecash is designed for secure payments from any personal computer to any other workstation, over e-mail or Internet. In providing security and privacy for its customers, DigiCash uses public key digital blind signature techniques. Ecash, unlike even paper cash, is unconditionally untraceable. The 'blinding' carried out by the user's own device makes it impossible for anyone to link payment to payer." On 5 November 1998, DigiCash filed for bankruptcy. According to analysts, it was an apparent victim of consumer preference for credit cards for online purchases.

This, however, did not stop the above-mentioned Florida drug dealers from using the Internet to launder large sums of illegally earned cash.

The 1986 Money Laundering Control Act required that any bank employee having knowledge of attempted money laundering or in the event of a transaction in excess of $10,000 file a currency transaction report (CTR). If a money launderer deposits funds into an ecash account at an Internet bank which is not FDIC-insured (Federal Deposit Insurance Corporation), then this ecash does not enter the marketplace of hard currency. It then is not subject to the filing regulations and compliance with the Money Laundering Act of 1986.

According to a study by the Canadian Department of Justice in 1998, the potential abuse of e-money by money launderers is attractive for two main reasons:

* transactions may become untraceable; and

* transactions are highly mobile.

E-money can come from any corner of the world and be sent anywhere in the world. As the Canadian study states: "E-money systems may offer instantaneous transfer of funds over a network that, in effect, is not subject to any jurisdictional restrictions."

Using e-money the layering, or distancing of illicit funds from their source, can be accomplished through a personal computer -- leaving no audit trail behind. The same is true in the last step of money laundering: the integration of funds, making the wealth appear legitimate. A criminal (or terrorist) can achieve integration by use of a personal computer to pay for investments without the use of an intermediary financial institution that is subject to monitoring regulations.

But e-money comes in different forms and prides itself on maintaining user anonymity.

On the Internet site of Cybacom, a virtual credit card company, it states: "In order to use some features of this Web site as well as Cybacom's products and services, a user must first complete an Application form. During application, a user is required to give their contact information (such as name, and email address). This information is used to contact the user about the services on our Web site. We do not collect demographic information (such as income level and gender), and we do not collect unique identifiers (such as full social security numbers and driver's license numbers). Also during the application process, we request information from the user (such as credit card information) for billing purposes as required for our product and service." However, the company does inform the potential user that it will: "not disclose information to third parties about your account or about you without your permission. However, we may disclose information: (a) to Cybacom; (b) when it is necessary to complete transfers or transactions; (c) to our accountants; (d) to bank regulators; (e) to exchange, in the regular course of business, credit information with other banks, financial institutions, or commercial enterprises, directly or through credit reporting agencies; (f) to our affiliates to the extent permitted under the Fair Credit Reporting Act; (g) to advise third parties of accounts closed for misuse; (h) to furnish information to the appropriate law enforcement authorities when we reasonably believe we have been the victim of a crime; to comply with government agency or court orders, or to furnish any information required by statute."

As a one-time vehicle for transferring cash, the use of such a company potentially meets the security needs of a small terrorist cell anywhere in the world.

The September 2001 attack on the United States did not cost Al-Qaeda a large amount of money. According to the Federal Bureau of Investigation, "accounts were opened with cash/cash equivalents in the average amount of $3,000 to $5,000." It also seems that the largest infusion of cash into relevant accounts in the United States came from the United Arab Emirates in the sum of about $100,000. These types of transaction are common, everyday transfers of cash and are virtually impossible to trace. If executed over the Internet, as the Miami example demonstrates, the Financial Review Group (FRG) formed by U.S. law enforcement to monitor and prevent terrorist funds from reaching their destination will be faced with a new and even more daunting task.

END NOTE
BRIBERY AND RUSSIAN EDUCATION

By Maria Danilova

According to a report in the Russian daily "Izvestiya" on 27 June, one in three students in the summer of 2002 will pay bribes when entering university. Reliable figures on such activities are virtually impossible to calculate, of course. But even the perception of rampant corruption can take a heavy toll, fostering a loss of faith in the system and perpetuating the problem.

Tatyana K. was a bright high-school junior in Moscow, scoring in the top 10 percent of her class, speaking two foreign languages, and dreaming of a successful academic career. In Russia, where education is still a public service and where admission policies are officially based on merit rather than financial status, one might expect such a promising student to enroll in one of the top Russian universities for free. However, in her quest for a good education, Tatyana's family laid out more than $4,000 in either direct or veiled bribes.

At the beginning of her senior year in high school, Tatyana made up her mind to study psychology and pedagogy and set out to enroll in one of Russia's prestigious pedagogical universities based in Moscow. After consulting some of the university's staff as well as her friends and relatives who had experience in applying to universities, Tatyana says she concluded that "there was no way on earth I would be admitted to that school for free."

"I was told awful stories about students' tests and essays being purposefully blemished by the admission board staff in order to fail those kids and thus secure the seats for selected students," Tatyana recounts. She did not want to spend a year rigorously studying for her admission exams and then have some 'invisible hand' put a few extra commas in her essay, tipping the balance from a passing to a failing grade. "The bottom line was that if I wanted to get in, I would have to pay," Tatyana insists.

One path to securing her admission might have been paying a direct, several-thousand-dollar bribe to one of an admission-board member. But she says she dismissed that approach as "too cynical."

Still, however, she believed a payment of some kind was unavoidable. So she hired tutors from the university of her choice who, she knew, would comprise the admission board. "I knew that it also was a way of bribing them, but at least this way I would gain additional knowledge," she says.

Tatyana hired three tutors to train her for three challenging university admission exams in biology, a literary essay, and a foreign language (in her case, English). In all, a year of tutoring cost Tatyana's family over $4,000.

In the summer following her high-school graduation, Tatyana successfully passed her university admission exams and enrolled in one of Moscow's top pedagogical institutes. "I knew that I did well on the tests, but I also knew that if I had made some mistakes, they would have been corrected," she says.

Such is the state -- real and perceived -- of a Russian educational system that once prided itself on free access to a quality, comprehensive education on the basis of merit. In today's Russia, where corruption thrives in so many spheres of life -- from parking a car to setting up a firm -- bribery appears to be no less common in the educational system than elsewhere.

Moreover, corruption need not disappear once the admission process is over. Although evidence of such cases is indeed rare, in some Russian universities students believe they can ensure a passing grade by paying for it. Oleg N., a senior at one of Moscow's top institutes of international relations, insists that some of his peers are buying their grades. "They won't show up in class for the whole semester and then I see them getting [top marks]. How could that happen?" he asks.

The proposed government reform of the educational system that is currently being debated envisages containing corruption by adopting unified, state-wide graduation exams in secondary schools, similar to the Scholastic Aptitude Tests (SAT) in the United States. The exam scores would then be used by universities' admission boards to determine the best candidates.

Critics charge that as a result of such a reform, an entire infrastructure of corruption will successfully make its way down to the high-school level, with teachers prone to 'helping' their students do well on the tests. Others argue that universal exams discriminate against students whose secondary-schools are less conducive to learning.

Marina Fedorova, a researcher in the field of education, stresses that corruption in the educational sphere is harmful to Russian society not only because it denies citizens access to quality education, but because often times "students have money, but no knowledge." As a result, Fedorova says, the economy is run by poorly trained specialists.

Without a doubt, some outstanding students will make their way into the country's top schools without paying money. But the perception, at least, is that a good education in Russia is no longer free and requires bribes one way or the other.

(Maria Danilova is a recent graduate of Moscow State University.)

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