Methods and Stages

The explosion of money laundering

Macroeconomic Consequences

The Risks to Financial Institutions

The Risk to the Financial System

The Euro and Money Laundering

Money Laundering as Tax Evasion

Social and Political Costs

International Conventions

EU Directives on Money Laundering

The Achilles Heel

Bibliography and some useful links

Now an explanation of the new EU directives on money laundering and their relevance in the fight against criminal syndicates. The revised EU directive on money laundering has extended the directives obligations with regard to activities of professions outside the financial services sector, such as auditors, legal professions, real estate agents and casinos. It has also extended the definition of suspicious transactions to include the proceeds of other crimes besides drug trafficking. Apparently, these new directives or extension of existing directives have bought EU laws on money laundering in line with international regulations. The cornerstone of the directive and what is eventually going to stop or at least stagger criminal organisations is the legal requirement of credit and financial institutions (including bureau de change) of identification of all their customers when beginning a business relationship (particularly the opening of an account or offering safe-deposit facilities). Also the reporting of customers, whose single transaction or linked transactions exceeds ECU 15,000 or when they suspect laundering (even where the transaction is below the threshold). Many Member States have gone beyond the strict requirements of the Directive in a number of areas (e.g. lower thresholds and coverage of non-financial professions). Money laundering is now a specific criminal offence throughout the Union, whereas this was the case in only one Member State when the Commission proposed the Directive in March 1990.

In particular, the Commission, in consultation with the Member States, is considering amendments to the Directive in the following areas:

• The need for a wider prohibition of money laundering. The current directive only obliges Member States to combat the laundering of the proceeds of drugs trafficking. In fact nearly all the Member States have already extended their legislation to cover the proceeds of a wider range of serious crimes including terrorism, trafficking in armaments, human beings, antiquities or human organs, prostitution, fraud, illegal gaming, kidnapping, blackmail and robbery.

• The extension of the obligations of the Directive (e.g. customer identification and the reporting of suspicious transactions) to certain vulnerable non-financial activities and professions, where there is a serious risk of laundering. The Commission is looking, for example, at casinos, auditors, real estate agents and the legal professions when carrying out financial transactions on behalf of their clients.

• The need for improved co-operation between the financial intelligence units (FIUs) set up by Member States to receive and process the suspicious transaction reports. Currently, FIUs in Austria, Denmark, Germany, Luxembourg, Ireland and Finland are prevented by their legal status from exchanging information with some of their counterparts in other Member States. Improved cooperation could contribute to increasing the relatively limited numbers of prosecutions; convictions and asset seizures based on suspicious transaction reports.

The reason why these directives have taken this form is because there is no way of looking at a bank or any other financial institutions accounts and working out whether a suspicious transaction is passing through the system for the first time or the 69^th time. Hence the ‘know your customer initiatives’, so that if transactions passing through an account are inconsistent with what the bank would expect from what it knows of a customer, then the bank may be required to report such transactions to supervisory authorities. However, banks and other financial institutions are reluctant to release information about their customers. Public hysteria on privacy laws also hampers the authorities ability to get information from banks; the public do not want personal financial information falling into the hands of the state.

The irony of this debate is that the ability of launderers to move and conceal money once it has already penetrated the financial system is at least as important as the initial role of the banks. Criminals move money between banks, between different financial instruments, and in and out of tangible assets such as businesses or property. They try to change the shape and size of the financial holding by using different currencies and by adding to and subtracting from the amount so that it is more difficult to identify. Criminals also use "shell companies" (entities that have no physical presence or staff and exist purely to create invoices and to receive money for nonexistent services) to launder money. The obsessive focus on banks displays a fundamental lack of understanding of the mechanisms of laundering.

It is definitely a step in the right direction for the EU to bring these directives into being and to try and curb money laundering in the EU, however, the only true way of curbing money laundering is to have global regulations. In the absence of effective international cooperation, there will be no realistic chance of defeating or significantly curbing money laundering. The regulatory regimes operating from country to country are at best piecemeal and often are widely ignored. Lax controls in some countries permit easy access to financial-services systems in more regulated jurisdictions, making a global minimum standard necessary for an effective reduction in laundering. However, we must consider how far those global standards should go in interfering with the domestic policies of sovereign countries.  For further information refer to Europa 2001. 

The Schengen agreement, by removing border controls, allowed the free movement of persons across the EU. This has enabled a motley crew of individuals to move with impunity throughout the Schengen area. This includes, Turkish and Kurdish drug smugglers, traffickers in migrants, the Italian Mafia, and Kosovo Albanian gangs. It is not surprising that Belgium in 1999 opted out of the Schengen agreement owing to the problems that were being experienced with regard to illegal immigrants. The Observatoire Geopolitique des Drogues observed in their Annual Report for 1998/99 that the Schengen area has become the largest drug consumer market on the planet. This means that drug traffickers in the Schengen area are making a lot of money that has to be laundered.

International police and judicial cooperation

The report points out that to be effective, the EU's defences against money laundering must be complemented by efforts at the international level, in view of the global nature of the money laundering problem. All Member States are members of the Financial Action Task Force, the leading world anti-money laundering body, which groups 26 countries plus the European Commission and the Gulf Cooperation Council. The FATF established 40 Recommendations to counter money laundering in 1990, which were updated in 1996. These Recommendations cover measures in the fields of criminal justice and law enforcement, the financial system and its regulation and international cooperation which the FATF members have agreed to implement and which all countries are encouraged to adopt.

The first FATF Recommendation is that each country should ratify and implement fully the United Nations Convention against illicit traffic in narcotic drugs and psychotropic substances (Vienna Convention), which facilitates international cooperation in this area. The report notes all Member States have now ratified and implemented the Vienna Convention.

As for the complementary Council of Europe Convention on laundering, search, seizure and confiscation of the proceeds of crime (Strasbourg Convention), all Member States have signed it and all except Greece, Spain and Luxembourg have ratified and implemented it. Under the terms of the June 1997 Amsterdam European Council's Action Plan to combat organised crime, all Member States are due to ratify and apply the Strasbourg Convention before the end of 1998. For further information refer to Terrorism and Money Laundering Countermeasures.

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