PROSECUTING FINANCIAL CRIME Guidelines for Judges and ... · programs. Yugoslavia’s disintegration and break-up into warring states, facilitated the evolution of a symbiotic relationship

P R O S E C U T I N G F I N A N C I A L C R I M E Guidelines for Judges and Prosecutors

Serbia and Montenegro

Judicial Reform/Rule of Law Cluster

This manual would not have been possible without the Canadian Interna-tional Development Agency, which supported the UNDP project Strength-ening the Judicial Resource and Support Functions in the Judicial Training Centre.

PROSECUTING FINANCIAL CRIME

Guidelines for Judges and Prosecutors

United Nations Development Programme Beograd, 2005.

PROSECUTING FINANCIAL CRIME : Guidelines For Judges And Prosecutors2

PROSECUTING FINANCIAL CRIME : Guidelines For Judges And Prosecutors 3

The author and the publisher wish to particularly thank all of the staff of the Judicial Training Centre of the Republic of Serbia who helped in the preparation of this publication.

Prosecuting Financial CrimeGuidelines for Judges and Prosecutors

Author Sarah Greenblatt, UNDP/JTC Financial Crime Consultant

Publisher:United Nations Development Programme (UNDP SCG)Internacionalnih brigada 69, Belgrade, +381 11 2040 400, www.undp.org.yuJudicial Training CentreKara|or|eva 48, Belgrade, +381 11 184 030, www.pcsrbija.org.yu

Editors:Olivera Puric, UNDP Judicial Reform/Rule of Law Cluster, Team LeaderMato Meyer, UNDP Programme Specialist

Core Team:Joanna Brooks Olga Belosavi}Slobodan GeorgijevBiljana LedenicanJelena MacuraSinisa Milatovi} Ivana Ramadanovi}-Vainomaa

Editing:Du{ka Klikovac

Translation:Maša Matijaševi}

Design:Tatjana Kuburovi}

Printing:

Number of copies:

ISBN 86-7728-86-xxxxx

CIP - Katalogizacija u publikacijiNarodna biblioteka Srbije, Beograd

316.344.23(497.11)061.2:316.344.23(497.11)

Vo|enje krivi~nog postupka u oblasti finansijskog kriminala, Vodi~ za sudije i tu`ioce / [Sara Grinblat]. - Beograd : United Nations Development Programme, 2005 (Beograd : Forma B). - 191 str. : ilustr. ; 24 cm

Tira` 1.000. - Re~nik pojmova: str. 171-177. - Napomene i bibliografske reference uz svaki rad.

ISBN 86-7728-013-81. Sara Grinblata) b) Nevladine organizacije - SrbijaCOBISS.SR-ID 125196044

Introduction: The Connection Between Financial Crime (Money Laundering) and Corruption 7

Corruption in Public Procurement and Privatization 9

Background of Corruption and Crime in Serbia 10

Privatization 12

Public Procurement 14

Measures for Anti-Money Laundering and Combating the Financing of Terrorism 16

Due Diligence and Know Your Client (KYC) 21

Reporting Suspicious Financial Transactions 23

The Function of the Financial Intelligence Units (FIUs) 26

Financing of Terrorism 27

The Situation in Serbia 28

Role of Offshore Financial Centres 30

Solicitor/Client Privilege 32

Supervision in the Insurance Industry 33

Supervision in the Securities Industry 34

Cybercrime 36

Anti-Money Laundering (AML) Technology for Banks and Other Financial Institutions 38

Obtaining, Handling and Storing Electronic Evidence 39

Criminal/Civil Burden of Proof 42

International and Extraterritorial Criminal and Judicial Co-operation 44

Conclusion 48

Annex: Case Study on Bank Secrecy and Shell Companies from Working Paper:

Domiciliary Companies as a Logical Instrument of International Corruption,

by Erich Diefenbacher, Transparency International, Berlin 49

Bibliography 51

List Of The Council Of Europe’s Treaties 59

TABLE OF CONTENTS


PROSECUTING FINANCIAL CRIME : Guidelines For Judges And Prosecutors8

PROSECUTING FINANCIAL CRIME : Guidelines For Judges And Prosecutors

INTRODUCTION: The Connection Between Financial Crime (Money Laundering) and Corruption

Although these guidelines deal with the prosecution of financial crimes (money laundering), the stage is usually set by a pre-existing act involving corruption. Financial conversion often results from incidents of corruption committed by public officials or members of the government, who have not properly exercised integrity in their relationship as trustees for civil society. This is especially apparent in cases of bribery and corruption in the award of public procurement contracts and in the privatization of state assets and enterprises. In these instances, there has been an inadmissible blurring of private and public interests on the basis of monetary consideration passing from private to public sector. This illicit financial gain (i.e. the bribe) must be transferred secretly without the knowledge of others, because it is clearly illegal and disclosure would bring sanctions on both giver and receiver and void the agreement. Moreover, the ill-gotten gains cannot be revealed in a public manner, which would raise questions as to how a certain public official was able to enrich himself. Moreover, doubts would arise about the connection between that public individual and the award of a public contract to a certain business or the privatization and sale of a State asset to a particular company. The recovery of a bribe or other financial gain is prima facie evidence of the wrong-doing.

To avoid investigation and sanction, the gain, usually in the form of money, must somehow be trans-ferred outside the country, because it serves as proof that a corrupt act was committed. Ideally, once the money can be given the semblance of a licit provenance, it can be re-routed back to the country of origin or utilized externally by its owner in a legal manner. This process of disguising the illegal source and reintroducing the money into legitimate financial markets is known as money laundering. The latter is not just the product of a predicate criminal offence, but also serves as the handmaiden to corruption. It is estimated that money laundering is the third largest industry in the world and that annually between $500 billion to $1 trillion are laundered globally.

The IMF has stated, that unchecked money laundering can result in the following negative phe-nomena occurring in a domestic economy: inexplicable changes in money demand, increased volatility of international capital flows and exchange rates due to unanticipated cross-border transactions and loss of confidence in the financial system. However, the effects can be more

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insidious and go on to weaken the social fabric, compromise collective ethical standards and values and cripple democratic institutions.

The methodologies and typologies for money laundering have become increasingly sophisticated and elusive, particularly with electronic transfer and internet banking. Money can be transferred from one continent to another in seconds, greatly complicating the task of investigators in tracking the origin and destination of the illicit funds. The task is facilitated by offshore financial havens and bank secrecy laws, which shield the identity of clients. Professional accountants, notaries and lawyers, who promote this illegal passage are now legally obligated to disclose suspicious transactions. Lawyers, however, may claim client confidentiality, which obstructs the investigator or prosecutor from gather-ing evidence and establishing identity. Money laundering requires one or more jurisdictions, lending an international dimension to the operation. This, in turn, necessitates a concerted international response to combat money laundering and international Conventions serve as mutual obligations and practices to be implemented by the signatory parties.1 These guidelines cross-reference these conventions and agreements, which can be used as effective transnational tools for obtaining mutual assistance from signatory States, in addition to supplementing existing domestic legislation.

As stated earlier, money laundering is the product of a criminal act or predicate offence in the first instance. Money laundering is itself illegal, making it a secondary crime to the primary original one, which may be cigarette/alcohol smuggling or trafficking in stolen cars, drugs, arms and human beings. These guidelines deal with the typologies and methodologies of financial crimes, i.e. money laundering, and not with an analysis of the predicate offenses. Moreover certain jurisdictional principles in private international law are activated in the gathering of evidence, because of the transnational nature of money laundering. The evidence, itself, may be on electronic databases and is extremely sensitive to corruption or erasure and the paper focuses on obtaining and preserving electronic files. Despite the differentiation between primary and secondary offences, the threshold for the criminal burden of proof (i.e. beyond a reasonable doubt) may be too high for a conviction in either case. Legal precedence and Conventions have employed civil or administrative law standards of proof and shifted the onus to the defendant to demonstrate that the funds were obtained legitimately. Where civil and administrative judgments have been rendered and sanctions applied, the illegal funds have been confiscated and distributed to victims or law enforcement agencies.

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1 1988 UN Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances, the 2000 UN Convention Against Transnational Crime, the 2003 UN Convention Against Corruption, The Council of Europe Directive of 10 June 1991 (91/309/EEC), the Financial Action Task Force Recommendations and the Basle Committee on Banking Supervision (inter alia)


Corruption in Public Procurement and Privatization

Corruption in public procurement or privatization is harder to detect, because the processes, them-selves, usually involve a number of discretionary procedures in the chain of decision-making. However, it might be worthwhile to run backwards through a procedural checklist of built-in safeguards, which if complied with, would greatly reduce the scope for personal intervention and self-enrichment. Moreover, these guidelines also shed light on the latest cybercrimes, which, although financial in nature, usually strike on an individual basis, while corruption affects the public at large.

Corruption occurs when public power is abused for private profit and financial benefit is knowingly obtained at the expense of the public good. Those who exercise power do so as trustees for the general welfare of society. The chances of detecting fraudulent and corrupt practices are greater, where a high level of accountability and responsibility is attached to the behaviour and decisions of public officials, which are scrutinized by an active and professional media, as well as concerned civic organizations. In fighting corruption, it is necessary to engage dedicated NGOs with professional expertise (such as Transparency International), committed, independent and professional journalists, plus concerned members of civil society. Strengthening democratic values must be supported by solid institutional oversight, sometimes in the form of an independent anti-corruption commission, which combines prosecutors, investigators, accountants and other specialists, linked to the Ministry of the Interior and Tax and Customs Inspectorates. These guidelines review investigatory procedures and offer general suggestions to eliminate opportunities for corruption. As public procurement and privatization can entail a high degree of discretion, strict standards and codes of conduct should be applied in decision-making. Without being able to prove a breach or violation of such procedures, it would be difficult to convict a high-ranking public official.

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Background of Corruption and Crime in Serbia

Bribery and abuses in public procurement and privatization are common themes in Serbia and their occurrence has resulted in much scandal and debate (see reports by the Serbian Anti-Corruption Council). Systemic corruption has been a major impediment to development and has distorted efforts to improve and modernize vital social sectors, such as: education, health, public housing and social programs. Yugoslavia’s disintegration and break-up into warring states, facilitated the evolution of a symbiotic relationship between authority and organized crime. Smuggling cigarettes, alcohol, stolen vehicles, drugs and arms financed wars and was run in co-operation with organized crime and State administrations and security services. Moreover, illegal trafficking financed political parties and labor unions resulting in a crime-permeated society. For this reason, the fighting of crime requires a more holistic approach and a broader effort in addressing poor governance systems, rather than simply strengthening the capacity of law enforcement agencies. This approach would combine anti-corrup-tion policy and the requisite criminal and civil legislation, along with independence and integrity of the judiciary, increased parliamentary oversight, public administration reform, budget, fiscal and audit controls, regulated economic activity and civil society participation.

Serbian laws must provide adequate ethical norms and internal mechanisms for controlling and preventing corruption in State and Local Administrations. There must also be sufficient guarantees for the political independence of civil servants and for neutral, non-partisan recruit-ment practices. Legislation must regulate the acceptance of gifts to civil servants and establish State liability for damages for acts committed by its officials. The most egregious violations of fiduciary responsibility by the Serbian government have been the unlawful abuses of social security funds and individual savings accounts, as well as the misuse of budget resources and tax revenues.

However, as the judiciary resolves all matters of a public and private nature, the battle ultimately rests with its members, to effectively combat corruption. It is primordial to preclude any possibil-ity for corruption of the judicial system, which could undermine anti-corruption efforts throughout government and society. Judges must be independent, objective, qualified and possess impeccable moral and ethical standards. Their remuneration should reflect a salary capable of sustaining a decent

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standard of living, which would obviate the need for bribes. Judicial probity also relies on good court administration, where cases and dockets are effectively managed and monitored to promote expedi-tious handling. Extra budget resources and information technology are required to track the workflow, the assignment of cases and their progress, the collection of fees and the compilation of statistics. In this manner, citizens are assured prompt, impartial and efficient judicial access, supported by a reliable apparatus for enforcing judgments.

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Privatization

There has been evidence of conflicts of interest favouring insiders in the privatization of State enter-prises. Although a separate Agency for Privatization was established, the Government retains discre-tionary power in the privatization process. Moreover, the 2001 Law on Privatization does not elaborate a sole criterion for the selection of a successful bid. Hence, there is room for discretionary action, which invites opportunities for bribery and corruption in the evaluation and sale of key Serbian industries. As a result, the State loses value and revenues in privatization (e.g. Sartid case), while new owners have profited at the expense of the public good.2 This discredits the objectives of the privatization process itself, which may be necessary for future economic development.

Bribes, kickbacks and other illegal payments are evidence of dishonest collusion and have to be disposed of, without drawing attention to their magnitude or source. These funds will, no doubt, enter global money laundering systems and become very difficult to trace. However, the burden for investigators, prosecutors and judges is twofold, because they are also confronted with convicting the perpetrators of the dishonest privatization. This can be extremely difficult, if discretion is built into the system at different procedural stages and there are insufficient guidelines for ensuring probity.

Privatization of State assets has been proceeding throughout transition countries over the past 15 years, which has required a redrawing and reconfiguration of public and private sectors. Moreover, auditors, judges and prosecutors have had to acquire new skills in evaluating complex financial and corporate transactions. The International Organization for Supreme Audit Institutions (INTOSAI), (www.intosai.org), located in Vienna, has developed guidelines and best practices for the audit of privatiza-tions, to assist in providing sound financial management and accountability. In examining the docu-mentation, auditors, prosecutors and judges should consider, whether due diligence was exercised in properly determining the ownership and provenance of the asset. Moreover, was a detailed analysis and complete appraisal carried out for an accurate evaluation, based on current business practices and knowledge of the market place? Pre-sale audits such as these should be conducted by trained experts in the State audit agency or experienced professionals in a disinterested accounting firm. Institutional investment counselors, industry experts, financial advisors, consumer groups and academics are con-cerned third parties, who could provide a comprehensive contribution.3 This evaluation will serve as

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2 The Serbian Anti-Corruption Council (Savet za anti-korupcija), Verica Barac (President) reported on wrong-doing related to the sell off of the Sartid steel works. In August 2002, the Belgrade Commercial Court put Sartid into receivership and estimated its worth at US $1.7 billion. In September 2003, Sartid was sold to US Steel for US $23 million. www.anti-korupcija-savet.sr.gov.yu

3 Bourn, Sir John: Controller and Auditor General of the United Kingdom, Chairman of Working Group on the Audit of Privatization. "On Best Practice for the Audit of Privatizations" International Organization of Supreme Audit Institutions (INTOSAI). www.nao.org/intosai/wgap/best-prac.htm


an important benchmark or reserve price and reflect the baseline of what the ultimate proceeds should be. The financial accounting will also confirm to bidders the quality and condition of the asset being privatized, which could minimize and avoid future allegations and litigation over misrepresentation.4 In order to put the business into a legal and saleable form and to better meet the objectives of privatiza-tion, the site may require presale restructuring or fundamental financial reorganization. It is necessary to consider the particular size, nature and operations of the object to be privatized, to determine the appropriate method of sale, which would void potential loss of value to the vendor. Public auction is usually the simplest and most cost effective for smaller businesses, while larger ones may be better effected through tender or flotation.

It is also important to ascertain, if debts owing to the government and creditors were written off or converted into equity or new debt and whether these steps were necessary to make the asset more saleable.5 A performance audit should be conducted to identify the objectives of the privatization, be they economic, social or environmental and whether they were met. The timetable of the privatization is another factor for examination. Eliminating delays may maximize proceeds, minimize costs and losses and instill healthy competitive tension among bidders, but not at the expense of compromising due diligence and investor confidence in the privatization process.6 To maintain true competition through-out the bidding stage, there should be a minimum of three qualified and credible bidders.

The government’s credibility is severely damaged where it loses value in the privatization and the new owner profits at the public’s expense. It is, therefore, fundamental to build-in adequate accounting safeguards to ensure that public servants receive absolutely no direct or indirect benefit in the transfer of publicly owned assets to the private sector. Where there are allegations of impropriety, the Supreme Audit Institution (SAI) or judges and prosecutors may have to investigate reported lapses in procedures. The following check-list may be helpful: Whether the true value of the asset was concealed, whether the State received all the proceeds, whether certain bidders were granted insider advantages, whether all bidders had equal access to information, whether advertising was sufficiently broadcasted and whether the bids were consistently and uniformly evaluated. 7 Integrity would be further ensured, if all parties to the sale were to know that it was subject to an independent audit by the SAI and that the findings would be made public. On a final note, it is important that the government provide the public with suf-ficient information regarding economic, financial and social rationales behind the privatization process, in order to encourage trust.8

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4 Bourn, Sir John: Ibid.






Public Procurement

The World Bank and International Monetary Fund have conducted considerable research into cor-ruption within government procurement processes, because the latter lends itself to the exercise of discretion at different stages, which can give rise to conflicts of interest from the lowest bureau-cratic/administrative to the highest political levels. The total economic and social effects of corrupt actions transcend the initial cost of the bribes and result in market distortions, waste and misuse of resources, as well as inefficient and unproductive expenditures, which can have negative, long-term consequences on economic development. Such corruption occurs particularly in societies, where powerful private economic interests can influence the government process to their advantage to the detriment of the best candidate. The World Bank refers to this phenomenon as “state capture”, which flourishes in countries where there is insufficient economic liberalization and competition, as well as inadequate transparency and openness to allow civil society and the media to monitor the State’s activities. Unfortunately, this prevalence of bribery, causes people to lose faith in legal alternatives and they become co-opted in committing further acts of corruption, which undermines the judicial system and substitutes legality for criminality.

Judges and prosecutors may have to examine the legality of a procurement award by scrutinizing the tender design and advertisement, the identification of pre-qualified and short-listed bidders, selection of the best candidate and the nature of the contract itself. Corruption is particularly rife in large public works and construction projects and in contracts linked to the defense industry, power and energy sector, telecommunications, civil aviation, healthcare, banking/finance and agribusiness, because of the amounts of money involved, the complexity of the technology and the urgency to acquire required goods and services.9 Judges may wish to examine whether there was appropriate and relevant tender advertisement and whether sufficient time was allotted for the submission of comprehensive and competent bids. The short-listing of pre-qualified candidates should also be scrutinized, to ensure that bribes were not offered or that certain qualifications were not disproportionately weighted for inclu-sion on the short-list. Bribes may also have been paid to the procurement agency to modify or omit certain technical, time and financial criteria, so that an otherwise ineligible candidate could qualify. In evaluating evidence, it would be helpful for judges and prosecutors to be knowledgeable about private market prices, specifications, etc. for like or similar goods and services.

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9 Soreide, Tina, Corruption in Public Procurement Causes, Consequences and Cures. Christian Michelsen Institute, Development Studies and Human Rights. Bergen, Norway. 2002 p. 18 www.cmi.no/ publications/2002%5Crep% 5Cr2002-1.pdf


Where an International Competitive Bidding (ICB) process has not been followed, judges/prosecutors may wish to require justification. Although a previous supplier performed satisfactorily in an earlier instance, the cost may be higher than that obtained through ICB. Moreover, being able to compare prices and technical competencies among competing candidates ensures better cost-efficiency and timely delivery.10 However, derogation from the ICB process may be permitted in cases of natural disas-ter, where urgency overrides other concerns.

Judges should weigh all of the above to determine whether the procurement process was fair, com-petitive, transparent, ethical and accountable. It may well be that deviations arise because of pervasive corruption within the bureaucracy, where numerous discretionary regulations facilitate demands for bribes. In this case, it is necessary to overhaul the bureaucratic framework and reduce and simplify regulatory prerequisites, as well as foster a culture of transparency. Economic and technical evaluation should be performed by separate departments, and the competent personnel should possess adequate technical and financial training. This separation allows for greater objectivity and less collusion in the rating of candidates.11 Confidential information should be shared among officials only on a need-to-know basis, so that fewer can profit through its disclosure. Time delays for deadlines should be kept as short as reasonably possible and strictly observed, so that the potential for bribes is excluded. The entire procurement process should be documented and records kept of decisions and actions, as well as their justification.12 However, in the final analysis, judges should not lose sight, that even with built-in controls, procurement is ultimately about achieving optimal, cost-efficient results and less on formality and process.13

Corruption in public procurement has immediate relevance to Serbia. USAID estimates, that gov-ernment procurement in Serbia in 2002 amounted to $1.45 Billion US or 11.3% of Gross Domestic Product (GDP) of which 15-20% found its way into private hands. This considerable loss could have otherwise been spent on health, education and social welfare for the general population. (Serbian Administration for Public Procurement, Uprava za javne nabavke).

Regardless of whether bribes are paid in privatization and procurement processes or whether violent crimes are committed by organized criminal groups, the problem remains of laundering these illegal proceeds and reintegrating them into the licit economy. The success of converting these illegitimate to legitimate profits in a country, such as Serbia, would depend on the socio-economic environment, the

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10 Soreide, Tina, Ibid. p. 18.

11 Ibid. p. 16.

12 Ibid. p. 32

13 Ibid.


political sphere, the criminal justice system, the independence and integrity of the judiciary and public and private sector governance. While financial crimes may be associated with criminal organizations, they are facilitated by a backdrop of other associated factors, such as ineffective central banks controls, inadequate protection of investor relations, prevalence of tax evasion, and poor performance of law enforcement authorities. Organized crime frequently penetrates public institutions and exerts influence at the highest political levels to shape policy decisions. Interestingly, the degree of organized crime is usually inversely pro-portionate to investment in the criminal justice system. When countries introduce anti-organized crime training, there is a marked reduction in organized crime - unfortunately the converse is also true.14 The independence and integrity of the judiciary as well as the enforcement capability of the criminal justice system are both essential elements in combating organized crime. As long as judges can preserve their independence, they may still be able to sanction organized crime, even though the political system and other areas of the State have been captured.15 An independent, impartial and professional judiciary serves as the institutional guarantor for the rule of law, by ensuring that members of the govern-ment act within the confines of the law. Countries usually experience a high degree of corrup-tion, where selection and promotion within the public administration and judiciary is biased and partisan, rather than based on merit.

The above has illustrated an environment conducive to the fostering of financial crime, but what can be done to effectively eliminate it? Investigation and prosecution have to be supported by research and analysis capability, in order to determine the structure, activities and operations of criminal networks. Specific legislation introduced related measures, such as: wire-tapping, controlled delivery, electronic surveillance and witness protection to strengthen the investigatory and enforcement powers of judicial and police authorities.16 Certain criminal justice systems have formed specialized units or task forces within the police and judiciary to fight organized crime more effectively. This multi-agency approach, combining both law enforcement and judicial entities into a dedicated unit, achieves a superior alloca-tion of resources and expertise in mounting complex prosecutions.17 For judges, who have undergone training and gained competency in the prosecution of financial crimes, remuneration should be com-mensurate, but subject to strict performance-based indicators.

Due to the complexity of these cases, the courts must maintain on-going case management controls, whereby progress is closely monitored regarding the filing of documents, depositions and evidentiary

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14 Buscaglia, Edgardo and van Dijk, Jan. Controlling Organized Crime and Corruption in the Public Sector. "Forum on Crime and Society", Vol 13, Nos 1&2, December 2003. p. 7-8.

15 Ibid. p. 9

16 Ibid. p. 23

17 Ibid.


materials. Objective computerized case-tracking technology can eliminate discretion and deliberate delay and abuse in the assignment of cases and court dates. Cases can be assigned to standard or express tracks, depending on urgency and time deadlines. The introduction of comprehensive, uniform and predictable administration measures in case management and judicial performance, as a means of countering discretion and abuse, will foster public confidence and trust in the criminal justice system. The forfeiture and confiscation of illicit proceeds from convictions for financial crimes, could appropri-ately finance these court and judicial reforms.18

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18 Ibid. p.24-25.


Measures for Anti-Money Laundering and Combating the Financing of Terrorism

INTERPOL defines money laundering as “any act or attempted act to conceal or disguise the identity of illegally obtained proceeds so that they appear to have originated from legitimate sources”. The intentional element of money laundering and financing terrorism can be inferred from objective fac-tual circumstances. Laws should provide for effective, proportionate and dissuasive criminal, civil and administrative sanctions. The latter should include the freezing, seizing and confiscation of property and proceeds, resulting from the commission of the predicate offence and the act of laundering. In most cases, a criminal conviction, requiring a higher burden of proof (beyond a reasonable doubt) than that of civil forfeiture (balance of probabilities) is the prerequisite necessary to trigger the confiscation of illicit property. The fact that criminal convictions are more difficult to prove is one of the reasons for the low success rate of confiscation. In the United States, law enforcement agencies must show “probable cause” in requesting the seizure of property, although the onus of proof shifts to the defendant after seizure.

Money laundering is facilitated through offshore havens or even unwitting bona fide financial institu-tions and is not necessarily restricted to trafficking in drugs, arms, human beings and contraband, but applies equally to political slush funds and bribes. However, whether drug traffickers, fraudsters, embezzlers, smugglers or corrupt politicians, they must all launder the profits of their crimes, because the money itself is evidence of the commission of the offence and can be the target of investigation and seizure. Money laundering can, therefore, be construed as a three-stage process, which requires that the funds be physically disassociated with the commission of the crime (placing), disguising the trail to avoid suspicion (layering) and finally making the money, with its origins sufficiently cam-ouflaged, available to the perpetrator (reintegration). The ultimate goals of any money laundering operation are to convert the illicit cash into another asset, to conceal the true ownership or source of the illegally acquired proceeds and to create the perception of legitimacy of source and owner-ship. However, money-laundering operations involve a paper trail and contacts with the legitimate economy, thereby exposing criminals to being caught. For this reason, organized crime may establish control over persons and institutions from the legitimate economy, which may entail corruption and distort the functioning of banks.

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As stated earlier, the OECD Financial Action Task Force (FATF) estimates that money laundering repre-sents the world’s third largest industry - an estimated $500 billion to $1 trillion annually. In addition to encouraging crime and corruption, money laundering slows economic growth and distorts internation-al trade and capital flows to the detriment of long-term development. Banks, financial institutions and equity markets provide the capital and resources for investment and sustained economic development. Money laundering erodes the integrity of these institutions, but more fundamentally diverts resources for growth into less productive activity and further fuels the cycle of domestic corruption and crime. The proceeds of crime are usually allocated into sterile, non-productive forms of investment, i.e. jewel-lery, luxury cars and yachts, rather than into legitimate growth-oriented capital. Transnational money laundering activity diverts scarce resources from developing economies and undermines confidence in these countries among foreign investors and multilateral aid/donor organizations.19

Organized crime must be excluded definitively from the rest of society and the legitimate economy, because its socially harmful effects impact on the effective allocation of resources, labour and capital. Capital is less optimally invested and invariably moved to countries with poorer economic policies.20 This corruptive influence and erosion of public confidence in financial markets may cause volatility in exchange and interest rates and destabilize a national economy, with further repercussions on the world economic order. Moreover, organized crime makes predatory profits from drugs, arms and human trafficking, which can undermine and corrupt the political and economic structures leading to the decline of rule of law and democratic governance in a given country. Money laundering, as a derivative of the predicate offence, spreads the detrimental consequences of these criminal activities to many parts of society.

Very often, illegal economic activities can supercede legal competitors and remain outside government control and taxation. The profits are so enormous, that even arrest and incarceration do not act as per-sonal deterrents against offenders or as effective measures to stop criminal activities. The incrimination of money laundering, the confiscation of proceeds and the removal of the criminal incentive represent a new strategy in the fight against organized crime.

To counteract this negative phenomenon, legitimate private sector banks and financial institutions must stand squarely beside governments and assume responsibility in eliminating practices, which facilitate crime and ultimately undermine financial systems and their own institutions. The FATF has listed 40 Recommendations, which member financial institutions should apply in scrutinizing clients,

21

19 Bartlett, Brent. The Negative Effects of Money Laundering on Economic Development. Asian Development Bank www.adb.org/Documents/poli-cies/ADB_money_laun-dering_Terrorism/money204.asp?p=policies

20 Ibid.


the provenance of funds and the pattern of financial activity. These 40 Recommendations are non-bind-ing soft laws, in order to avoid time-consuming and elaborate ratification procedures. However, they allow sufficient flexibility to set up a world-wide, anti-money laundering network.

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Due Diligence and Know Your Customer (KYC)

There has been little mention of private sector governance within which banks operate. In this regard, is the banking system sufficiently transparent and supervised and are anti-money laundering legisla-tion and regulations sufficiently effective to curb illegal practices? Are private businesses and financial institutions subject to sufficiently high accounting and disclosure standards?

Banks need to conduct due diligence in the opening of client accounts to identify politically exposed persons (PEPs), such as high level officials, legislators, government members, high ranking military and to ascertain, that they have acquired the funds legitimately. (Recommendation 6) They must be able to determine the true beneficial owners behind corporate entities or anonymous accounts. The decision to establish banking relationships with PEPs should be made by senior management and should be refused if the bank knows or must assume that the funds were derived from corruption or misuse of public assets. The Wolfsberg Group, which was established in 2000 and represents an association of twelve global banks, has developed a set of industry principles for Knowing Your Customer, as well as anti-money laundering and counter-terrorism policies. (Wolfsberg Principle 1.2 on Client Identification and Acceptance) www.wolfsberg-principles.com

The FATF recommends that financial institutions (including banking, insurance and securities sectors) should be prohibited from keeping anonymous accounts or ones with fictitious names. (Recommendation 8) Numbered accounts should only be permitted, if the financial institution has properly identified the customer in accordance with specific criteria. Upon opening accounts, establishing relations or conducting transactions for amounts above a certain threshold, customers (physical persons) or those acting on their behalf must provide official or other identifying documents (Recommendation 5). If the customer is a legal entity, the financial institution must obtain informa-tion regarding the name, legal form, configuration, address, directors, principal owners, beneficiaries and those persons authorized to act on behalf of the corporation. Where the customer is a trust, banks should obtain information about the trustees, settlors/grantors and beneficiaries. In situations where customers are presented by business “introducers” or professional intermediaries, the latter must have conducted the same standard of due diligence with regard to verification of identity. (Recommendation 9) Banks should further examine non-resident customers and ascertain their rea-

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sons for opening accounts in foreign countries and exercise caution, should they believe that another bank has refused service to the same customer. No business relationship should be established until the customer’s identity is satisfactorily verified and decisions regarding involvement with higher risk cus-tomers should be made at the financial institution’s senior management level. Should the information or the lack thereof raise doubts, financial institutions are advised not to open the account, but consider filing a suspicious transaction report. (Recommendations 13 and 14) It might also be wise for banks to conduct due diligence for existing customers, if doubts arise. Financial institutions should also adopt risk management procedures, which limit a customer’s ability to fully utilize its services, (i.e restrictions on the number types and/or amounts of transactions performed), prior to verification.21

As wire transfers have been used to finance terrorism, financial institutions should afford enhanced scrutiny of those with incomplete originator and beneficiary information. In order to facilitate detec-tion, without impeding the freedom of capital movements, the FATF recommends, that countries could consider the feasibility of subjecting all cross-border transfers, above a given threshold, to verification, monitoring and record-keeping. (Recommendation 19).

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21 For more detailed comments and inter-pretation, consult the Financial Action Task Force web-site: www1.oecd.org/fatf/40Recs_en.htm#scope and that of the Wolfsberg Principles: www.wolfsberg-prin-ciples.com/privat-bank-ing.html


Reporting Suspicious Financial Transactions

The financial institution should monitor unusual patterns of activity or suspicious transactions, which do not reflect normal business practices. FATF members have introduced anti-money laundering legislation in their respective countries, whereby financial institutions report large cash payments (above an established threshold) and other suspicious transactions to their competent government authorities, usually termed Financial Intelligence Units (FIUs). FATF Recommendations impose a duty to keep records of transactions and provide them to domestic competent authorities in the context of relevant criminal prosecutions and investigations. (Recommendations 10, 11, 15 and 28) Reporting transactions on the basis of an objective threshold, rather than on suspiciousness is less cost efficient. Complex and unusual large transactions without apparent economic or visible lawful purpose are more relevant reporting criteria. (Recommendation 11 and Wolfsberg Principle 4) It is more difficult for financial institutions to detect money laundering operations involving economic, fiscal or white collar crime than those linked to drug trafficking and organized crime. In order for the banks to conduct real-time, risk-based analysis, the following criteria: i.e. geographic location, nature of transaction and client and business types, should be utilized in screening and monitoring activity. Moreover, employing uniform standards in evaluating levels of “unusualness” or “suspiciousness” would better assess the relevance of this information and render the exercise more effective. Financial institutions should examine complex, large and unusual transactions, lacking apparent economic purpose and involving jurisdictions without adequate systems to deter money laundering or the financing of terrorism (Recommendations 11and 18). Particular attention should be focused on practices with a high usage of cash or equivalents and a prevalence of vulnerable financial products, such as single premium life insurance policies. Findings should be reported electronically to competent (FIUs) and/or law enforcement authorities and records retained for at least five years. (Recommendation 10) The latter should contain sufficient information (i.e. name address of customer and beneficiary, nature and date of operation, type, account number and amount of currency involved) to reconstruct the transaction and to serve as evidence in a criminal prosecution. The FIU should also be able to impose sanctions in the form of monetary penalties, fines and license suspensions on the financial sector for failure to properly report this information.

25


If financial institutions suspect that assets are linked to criminal activity or the financing of terrorism, they are required to have clear procedures and policies in place to promptly file suspicious transaction reports with their FIU. The latter, in turn, should establish guidelines, which describe fighting money laundering and terrorism techniques and methods, relevant legislation and how to comply with such laws and regulations. More importantly, financial institutions should maintain ongoing employee train-ing programs, which provide updated information on current trends in anti-money laundering and fighting terrorism methods to conduct identification and due diligence prior to customer acceptance. (Recommendation 15, Wolfsberg Principles 8). Prospective employees, managers and directors should be subject to rigorous screening procedures prior to engagement to ensure that they have no criminal background. Persons with a criminal record should be prohibited from acquiring or hold a significant investment function or management function in a financial institution. (Recommendation 23). Foreign branches should be encouraged to adopt the same high standards of integrity in “knowing their cus-tomers”, as those practiced in the home jurisdiction.

In 1988, the Basel Committee on Banking Supervision issued its “Principles for the Prevention of Criminal Use of the Banking System for the Purpose of Money-Laundering”. The purpose of these prin-ciples are to further reinforce best practices among banks through vigilance in customer identification, reporting of transactions, which they have good reason to believe are linked to money-laundering and to co-operate with law enforcement authorities in closing and/or freezing customer accounts, associ-ated with criminal activities.22

In addition to auditing their customers’ identities, banks are tasked with verifying the activities of customers’ correspondent and respondent banks. Banks should refuse to maintain a correspondent relationship with a bank, which, although incorporated, has no physical presence (meaningful mind and management) in a particular jurisdiction and is unaffiliated with a regulated financial group (i.e. shell banks). Reputable financial institutions could do much to curtail the dubious activities of shell banks and pierce their secrecy practices by simply refusing to deal with them.

The intensity of electronic transactions occurring within financial institutions can enable huge amounts of money to be transferred quickly from one jurisdiction to another without arousing suspicion. Bank secrecy laws further impede efforts to trace proceeds and their origin. Electronic transfers and the lib-eralization of exchange controls contribute to an increased volume of international transactions, which provide greater cover to disguise illegal funds. The collapse of communism led to new financial sectors

26

22 Bank of International Settlements (Basel Committee on Banking Supervision) "Prevention of Criminal Use of the Banking System for the Purpose of Money-Laundering (December 1988) www.bis.org/publ/bcbsc137.pdf and Sharing of Financial Records Between Jurisdictions in Connection with the Fight Against Terrorist Financing". (April 2002) www.bis.org/publ/bcbs89.pdf


in formerly communist states, which were attractive to money laundering, because of inexperienced and ill-equipped regulatory systems. Law enforcement agencies viewed the conversion from domestic currencies to the EURO in February 2002 with apprehension, because of the potentially massive influx of old “dirty” money and its consequent transformation into new “clean” currency. It is difficult to estimate the volume of money successfully laundered during this one-time conversion, however, large denomination EURO notes continue to pose a risk, because they can be moved anonymously around a broad territory. It should be borne in mind, that banks and financial institutions have a fiduciary duty and high standard of care vis-à-vis their clients and might be reluctant to share confidential information with FIUs, unless the latter can evidence that the content will be protected from government misuse. Supervisory and competent authorities should safeguard the information obtained from individual accounts through co-operative arrangements and ensure that it is used exclusively for the purposes lawfully intended. Financial institutions also want to receive assurances, that their disclosure of suspicious transactions will not be used for different purposes in a foreign jurisdiction.

Moreover, the directors, officers and employees of financial institutions should be protected from liability for reporting suspicious transactions made in good faith. On the other hand, the same person-nel should be prohibited from warning (“tipping off”) their customers when information relating to their transactions is reported. (Recommendation 14) The customers' awareness of a possible suspicious transaction report could compromise the investigation of a suspected money laundering or terror-ist financing operation. If a financial institution reasonably believes that performing a due diligence process could tip-off a customer, it may choose not to do so, but file a suspicious transaction report instead.

27


The Function of the Financial Intelligence Unit (FIUs)

Banks may be reluctant to report suspicious transactions to the police, but rather to the FIU, which can guarantee that the information will be handled with deference to privacy, confidentiality and for the purpose intended (Specialty Principle). The FIUs should occupy an independent position and act as a buffer between the financial sector and law enforcement/judicial and prosecuting authorities. Centralizing the functions of receiving, assessing and processing bank reports into one single office, i.e. the FIU, achieves greater efficiency. The supervisory or competent authority should be able to make on-site inspections of customer files and random samplings of accounts to ensure that there is ade-quate compliance by home country banks and their foreign subsidiaries/branches. For this reason, FIUs must receive adequate funding, resources, training and staff to carry out these functions. International co-operation among FIUs occurs via requests, spontaneously or periodically and is more administrative than judicial.23 (Recommendations 31, 36, 40. UN Convention Against Transnational Organized Crime 2000 Article 7. UN Convention Against Corruption 2003 Articles 14, 37, 38, 39). However, there remains some divergence among FIUs as to what constitutes a suspicious transaction. The authority of the FIUs to lift bank secrecy has increasingly brought this function into the administrative rather than judicial remit. The Egmont Group of National FIUs, of which Serbia is a member, have concluded Memoranda of Understanding (MOUs) between national government competent authorities, i.e. the FIUs themselves, rather than between national governments per se.24

Financial institutions regret, that they receive no feedback concerning the outcome of their suspicious transaction reports, which, if it were forthcoming, could lead to more efficient and effective use of the information and procedures. It is important that trust and co-operation form the basis of the relation-ship between financial institutions and their respective FIUs, so that the latter receive relevant and factual information and the former is satisfied that the data will be used only for the purpose expressly intended (Specialty Principle).

28

23 Stessens, Guy. Money Laundering: A New International Law Enforcement Model. Cambridge University Press, Cambridge, 2000. p. 258

24 The Egmont Group of Financial Intelligence Units (FIUs) www.egmontgroup.org of which the Serbian FIU is a Member. Uprava za Sprecavanje Pranja Novca


Financing of Terrorism

Money laundering has assumed a broader and more urgent agenda, because of its links with the fund-ing of terrorist activities. The latter may be financed by criminal acts, i.e. drug and arms trafficking, but also by legitimate sources, i.e. donations and gifts from unwitting donors to front organizations/charities operating in third countries. Some of the bank programs employed for filtering information concerning suspicious transactions, as well as the criteria for determining customer identity in money laundering have been further enhanced to track the funding of terrorism. The difference is that, in the case of the former, one is detecting the movement of large amounts of illicit cash, while in the latter, one is tracking the movement of relatively small amounts of often “clean” money. In combating the financing of terrorism, it is necessary to shut down the pipelines through which money is raised and transferred and freeze or seize assets, so that terrorist organizations have fewer options and are obliged to use ever more costly, less reliable channels. The FATF 40 Recommendations have been enlarged with Eight Specific Recommendations to include the financing of terrorism, which, while employing certain money laundering typologies, rely on informal, alternate remittance systems i.e. Hawala, wire transfers, non-profit organizations and fraudulent invoicing in foreign trade transac-tions. In general, the FATF has introduced a number of additional miscellaneous monitoring controls, which apply to an increase or decrease in the use of cash transactions, credit or debit cards, smaller size denominations in bank notes, as well as cross border transportation of cash (FATF Recommendation 19).

29


The Situation in Serbia

In Serbia, the FIU is known as the Administration for the Prevention of Money Laundering (Uprava za Sprecavanje Pranja Novca). As a new member of the Council of Europe (CoE), Serbia became a full and active member of the CoE’s Select Committee of Experts on the Evaluation of Money Laundering Measures (Moneyval) and underwent a first-round evaluation in October 2003. As mentioned earlier, Serbia also belongs to the Egmont Group, which seeks to expand exchanges among FIUs of financial intelligence and improve expertise and technological capability. International conventions (United Nations) and agreements for international police co-operation (INTERPOL, EUROPOL) also simplify pro-cedures for disclosing and sharing financial and criminal records among signatory countries. EUROPOL has a mandate to conclude co-operation agreements in combating organized crime with countries in the Western Balkans, which have already given rise to exploratory talks and exchanges of information in the lead-up to negotiations. Since July 2002 (the inception of the Anti-Money Laundering Law), the Serb Administration for the Prevention of Money Laundering has received over 16,000 reports of cash transactions above the 600,000 Dinar threshold and suspicious transaction reports representing 40 million EURO.

A new draft money laundering law, implementing all international standards to include attorneys and accountants, in order to harmonize legislation with EU Directives, was held up by parliamentary elec-tions in late December 2003 and by the formation of a new government. Serbia has no law against the financing of terrorism, consistent with international conventions, although its Criminal Code provides for the revoking of business licenses and the banning of activities, where legal or natural persons are found guilty of criminal activities, including drug trafficking or terrorism financing. Although Serbian law has no explicit provisions for the seizure or forfeiture of criminal assets, the latter may be executed upon obtaining a court order. Moreover, on October 9, 2003, Serbia ratified the Council of Europe’s Convention on Laundering Search, Seizure and Confiscation of the Proceeds of Crime, which came into effect on February 1, 2004. Serbia has also ratified the Protocol for the Suppression of the Financing of Terrorism to the UN Convention Against Transnational Organized Crime, although the domestic imple-mentation procedures do not yet provide the framework for complete application. Serbia, therefore, needs to expand its anti-money laundering legislation to include asset seizure and forfeiture

30


regimes, as well as introducing a legal framework, based on international standards, for combat-ing the financing of terrorism.25

Serbia’s co-operation with governments in combating narcotics trafficking and terrorist financing is based on its participation in INTERPOL and bilateral agreements for collaboration and international legal assistance. In April 2003, Serbia joined the South Eastern Europe Co-operation Process in adopting the “Belgrade Declaration” calling for joint intensification in the fight against terrorism and organized crime. In this regard, Serbia has collaborated with INTERPOL to establish an office in Belgrade, as a con-tribution to the fight against transnational crime and terrorism. It would be most beneficial for Serbia to participate in international fora, which offer training and technical assistance to police, customs and judicial officials in combating money laundering and terrorist financing. Currently, there are no laws governing the sharing of confiscated assets with other countries.26

The Serbian Administration for Prevention of Money Laundering has provided banks with a list of indicators of suspicious transactions. These advisories concern large sums of cash used for frequent purchases and exchanges of travelers’ cheques, and requests for loans, letters of credit and other bank-ing instruments with offshore banks, cash deposits (under the reporting limit of 10,000 EURO) into two or more accounts, which are subsequently consolidated into one and for transfer abroad. On the list of indicators are also money transfers to countries with which the business or individual has no connection and which are known or suspected of allowing money laundering. Banks should also be wary, as well, if frequent transfers between business and personal accounts over a short period of time do not reflect bona fide business practices, particularly if the amounts involved exceed the business’s capacity or the individual’s means.

31

25 International Narcotics Control Strategy Report. March 2004, appearing on the US Embassy (Belgrade) web-site: http://belgrade.usembassy.gov.cur-rent040302.html

26 Ibid.


Role of Offshore Financial Centres

Mention has been made of “offshore” financial centres and bank secrecy jurisdictions, which serve as instruments to launder the illegitimate proceeds of drug trafficking and other predicate offences, as well as illicit funds from political corruption such as election campaign financing and kick-backs. The financial world is in constant and rapid flux, where a complex balance must be maintained between competitiveness and high ethical business standards. Despite the tightening of regulations, criminals continue to successfully launder illicit proceeds by exploiting a seamless system of anonymous elec-tronic transfers and protective offshore financial havens. The latter, be they in the form of corporations, foundations or trusts represent a “black hole” in the international legal and fiscal system.

Illicit criminal proceeds are transferred physically, electronically, etc. abroad from their original jurisdic-tion. The destination is usually a country, which facilitates the establishment of “non-resident” corpora-tions, which are only licensed to conduct business outside the country of incorporation, operate free of domestic tax and regulation and are protected by corporate secrecy laws. Once the corporation is set up in the offshore jurisdiction, a bank deposit in the new company’s name is made in the particu-lar haven country, which protects the owner’s identity through corporate secrecy laws. Between the law enforcement authorities and the launderer, there may be three levels of secrecy: bank, corporate and solicitor-client, which shield the investor/launderer from prosecution in the home country. These secrecy laws have prevented law enforcement officials from obtaining evidence for conviction and recovery of illegal proceeds. Money laundering schemes may involve an offshore trust, which, in addi-tion to secrecy laws, may offer the additional insulation of a “flee clause”, which permits the trustee to shift the trust’s domicile, if the latter is under threat.

While confidentiality in financial matters is the essential pillar of offshore financial centres, it poses significant risks to legitimate onshore banks. Onshore states have become increasingly aggressive in confronting offshore confidentiality and disclosure, which facilitate tax evasion and money launder-ing. One outstanding example was the incident, involving the Bank for Credit and Commerce (BCCI), where over $12 billion were seized in 1991, which precipitated its ultimate collapse. This event obliged countries to introduce stricter regulations to prevent financial markets from being exploited for money laundering purposes. With increasing globalization, the proceeds of crime, deposited in an offshore

32


financial centre, can penetrate into the legitimate financial system of other countries. To deal effectively with these offshore jurisdictions, sanctions could be imposed, whereby their existence and financial operations are denied legal recognition and/or punitive withholding taxes are imposed on capital flows emanating from these countries. Offshore financial centres contribute little to the surrounding economy, because they are not functionally integrated into indigenous growth and development structures. They do not interact by stimulating demand for local goods, services and personnel from the “real” economy, nor do they represent taxable objectives. Ultimately, offshore financial centres lead to severe macroeconomic instability, as small local economies are unable to cope with spikes in their monetary supply and exchange rate fluctuations.27 Co-ordinated intervention by concerned States, combined with measures by private sector financial institutions, could render off-shore financial centres less attractive. Off-shore countries, whose regulations and practices fail to meet minimum FATF require-ments, could be excluded from international programmes of economic assistance.28 (For a detailed case study of the operation of offshore financial centres, consult Annex 1, p. 22)

33

27 Bartlett, Brent. Op Cit.

28 Bernasconi, Paulo. Working Paper: Off-shore Domiciliary Companies as Instruments of Corruption and Money Laundering, Transparency International, Berlin. www.transparency.org/working_papers/ber-nasconi/appendix.html

Solicitor/Client Privilege

Once law enforcement agencies master the intricacies of certain money laundering typologies, ever-inventive criminals discover new forms to camouflage the origins of illegitimate proceeds. The rule in successful money laundering is to approximate the form of legal transactions and legitimate busi-ness practices.29 One has to study money trails to understand how criminals exploit vulnerabilities in financial systems and take advantage of regulatory weaknesses. The FATF has extended obligations to report suspicious and unusual transactions to insurance companies, brokerage and investment firms, real estate brokers, dealers in diamonds and precious metals (cash transactions above USD/EURO 15,000) currency exchanges, sellers of luxury cars and yachts and casinos (Recommendation 24) for cash transactions above USD/EURO 3,000, accountants and lawyers, who can facilitate the laundering and integration of large sums of cash from the illegitimate into the legitimate economy. (Recommendations 5, 12, 16)

Lawyers have resisted the requirement to report suspicious activity or transactions, where such infor-mation is subject to solicitor-client privilege. The FATF recommends that legal professional confidenti-ality should be applied strictly to instances where information is disclosed in the course of ascertaining a client’s legal position, in representing or defending the client or in judicial, administrative, arbitration or mediation proceedings. (Recommendation 16) The legal profession has a duty of confidence, where information comes to them through privileged circumstances in the course of representing or defend-ing their client in legal proceedings. This privilege extends to real estate transactions, handling money, assets, securities, opening or managing bank accounts, the creation of trusts and the execution of financial transactions. However, solicitor-client privilege is abused by financial criminals, who rely on professional confidentiality to prevent investigation and confiscation of illicit profits. The domestic law of several off-shore countries encourages the exploitation of professional confidentiality by granting such professions the right to refuse to give evidence, even when facts may have come to their knowl-edge outside the context of their specific professional activity.30


29 World Bank Institute. Anti-Money Laundering Literature Search. p. 63 www.worldbank.org.wbi/governance

30 Bernasconi, Paolo. Op Cit.


Supervision in the Insurance Industry

The International Association of Insurance Supervisors (IAIS) has adopted Core Principles of Insurance Supervision (Insurance Core Principles), which have done much to tighten-up internal control systems for combating money laundering and the financing of terrorism. The insurance entity must be able to verify the identity of each applicant for an insurance policy, which, in the case of group life and pen-sions, may be limited to principal company shareholders and directors. The true nature of the relation-ship between principals and policy holders must be investigated, particularly where claims, commis-sions and other monies are paid to persons (including partnerships, companies, etc.) other than the policy holder. An insurance entity should be alert to the implications of significant and unexplained changes in financial flows and transaction patterns of existing policy holders, such as: early surrenders and redemptions, payment of high claims or commissions and involvement of persons, companies or entities in jurisdictions with weak measures to counter money laundering and the financing of ter-rorism. The insurance company and supervisory body should be vigilant with respect to the buying and selling of second hand endowment policies, as well ensuring that the monies in retrocession or reinsurance transactions are commensurate to the risks underwritten and are actually paid to bona fide re-insurance entities. Insurance entities and their representatives must maintain records, documenting the entire application process, including the client’s needs analysis, details of payment and benefits, as well the terms of the contract and maturity dates.31

The Serbian Administration for the Prevention of Money Laundering sets certain indicators for suspi-cious transaction within the insurance industry, pursuant to Articles 2, 5, 6 of the Money Laundering Act of July 1, 2002. Insurance companies should be wary of transactions, where insurance policies are purchased and cancelled soon thereafter, or endorsed to unrelated third party beneficiaries or non-existent companies, or are inconsistent with the purchaser’s business or are subject to false claims. The Administration also draws attention to situations where policy holders purchase a number of high-value premiums over short periods of time, pay with large amounts of cash or cheques, ostensi-bly exceeding their income or assets, and subsequently cancel these policies, with demands that the proceeds be rendered in cash or cheque. The Administration also recommends noting the following practices: life insurance policies for terms of under three years, sudden changes from monthly install-ments to payment in full, fees paid from foreign bank accounts or policies and certificates sent to an address other than that of the holder.

35

31 Bank for International Settlements (BIS). Initiatives by the Basel Committee on Banking Supervision, International Organization of Insurance Supervisors (IAIS) and International Organization of Securities Commissions (IOSCO) to Combat Money Laundering and the Financing of Terrorism. Joint Forum, June 2003. www.bis.org/publ/joint05.htm


Supervision in the Securities Industry

In 1998 and 2002, the International Organization of Securities Commissions (IOSCO) established com-pliance procedures, set out in the “Objectives and Principles of Regulations”, which contribute to the fight against money laundering and the financing of terrorism. Brokers and intermediaries must obtain information about their customers’ circumstances and investment objectives, relevant to the services provided. (IOSCO Core Principles, Section 12.5) Policies and procedures are to be established, which ensure the integrity, security, availability and reliability of all information, including documentation and electronically stored data relevant to operations on customers’ behalf. (IOSCO Core Principles, Section 12.5) The management of the market intermediary accepts primary responsibility for compli-ance with internal controls.

However, it is the purview of regulatory bodies to set overall licensing procedures and standards for professional competency and conduct within the securities sector. (IOSCO Core Principles, section 12.3) The supervisor or competent authority should be invested with comprehensive investigative and enforcement powers to obtain data, statements and records relevant to an enquiry, undertake appropriate action to ensure compliance, impose administrative sanctions, seek court orders and initiate criminal prosecution. (IOSCO Core Principles, Section 8.3) Laws should provide the supervisor with adequate powers to take effective action in cases of cross-border malfeasance. For this, co-opera-tive mechanisms, such as Memoranda of Understanding, should be concluded to share public and non-public information with foreign counterparts, which would exert a deterrent effect against trans-national misconduct. Exchanges of information could include the release of confidential documents and the provision of assistance could facilitate court orders and injunctions. (IOSCO Core Principles, Sections 9.3 and 9.4)32

The Serbian Administration for the Prevention of Money Laundering compiled a list of suspicious trans-actions to draw the attention of Serb brokers to dubious practices. Dealers should be wary of clients who buy large amounts of securities in cash without expert analysis or advice, who have no previous background in the securities market, have no particular business purpose and have no interest in the outcome of the investment and appear indifferent to risk. Brokers should be wary in cases where it is difficult to conduct a background check, the client already has a past reputation of illegal activities, is

36

32 The IOSCO Principles and IOSCO Public Documents and Resolutions are available on IOSCO's website: http://www.iosco.org/iosco.html


secretive about his own business and financial standing and purchases in the names of third parties. Brokers should also be on notice, if clients pay for large trades using transfers from two or more unrelat-ed accounts and for multiple amounts just under the 600,000 Dinar/10,000 USD reporting threshold.

37


Cybercrime

The emerging medium of cyberlaundering, whereby electronic banking systems, smart cards and cyberwallets are used to launder illegitimate funds, has greatly complicated the task of law enforce-ment authorities. There are already calls that such cards should have limits and that transactions be logged in a central record repository. Electronic commerce has become an ideal medium for money-laundering, because of its speed, access, anonymity and global attributes. Today’s legal and techno-logical standards, establishing protocols, record keeping and audit trails may already be obsolete, given increasingly more complex security technology and encryption, which can deny access to law enforcement authorities.

Electronic money is exchanged digitally and anonymously by means of a smart card from one party to another without an intermediary. E-money can buy foreign currency and high value goods for resale, which means that it can perform the initial step of “placing” the dirty money. The latter is then “layered” through a complex series of transactions (such as the transfer to an offshore company or to a solicitor’s account), in order to separate it from its illegal origins. It may also be possible to open Internet bank accounts in other jurisdictions under false names, which prevent tracing. Moreover, on-line banking handles a higher volume of transactions, making the monitoring of suspicious transac-tions and geographic origins more difficult. However, some on-line banks have installed control sys-tems to identify unusual or suspicious activity, which monitor repetitious anomalies in timing, volume and value. Money may be transferred through multiple jurisdictions, which raises the questions of where the laundering took place, in the location of the server or where the money is held. Present jurisprudence has ruled in favour of where the money is held.

The purchase of goods and services over the internet has facilitated money laundering through the issuing of false invoices, because internet shopping is geographically unlimited, disguises the origin of the transaction and has lower overheads, than need be accounted for. There are also concerns that unregulated internet gambling can serve as a vehicle for money laundering, whereby money is moved through the gambling web-site from a credit card to a bank account located offshore.

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Cyberlaundering is a supranational problem, which requires quick international co-operation and reaction before the audit trail becomes cold. However, law enforcement authorities are walking a fine line in that they are also responsible for protecting the privacy and safeguarding the content of all the legitimate business and data transferred via the internet. Internet service providers (ISPs) should main-tain and retain reliable subscriber registries and appropriate identification information for at least six to twelve months. The contents could be made available to criminal investigations, provided the latter do not constitute an invasion of privacy and are deemed necessary for crime prevention.33

39

33 The excerpt on Cybercrime is derived from a paper entitled: Electronic Money Laundering, An Environmental Scan. Department of Justice Canada and Solicitor General of Canada. October 1998. Appearing on the web-site of Public Safety and Emergency Preparedness Canada. www.psepc-sppcc.gc.ca/publications/rim-jus/money-laundering-e.asp


Anti-Money Laundering (AML) Technology for Banks and Other Financial Institutions

Compliance with national laws and international conventions have required financial institutions to install computer software systems capable of detecting, monitoring and verifying currency exchanges, the opening of new accounts, the granting of loans and letters of credit, the cashing of cashier’s cheques and wire transfers in above-designated ranges. These computer programs can scan files at the rate of 200,000 per minute, by using sophisticated algorithms and statistical and analytical techniques to recognize suspicious activity patterns and aberrant behaviour and compare with customer account history. The system takes into account patterns specific to money laundering and will signal an alert, where there are deviations from normal client practices without plausible explanation. Such aberra-tions might be inconsistencies in customer’s business and account activities, as well as relationships with high-risk countries. “High risk countries” are those that permit offshore financial havens, shell companies and strict bank secrecy. Sudden large cash withdrawals from previously dormant accounts or from accounts, into which substantial amounts of money have been transferred from countries asso-ciated with drugs, will also trigger a warning. The opening of a number of accounts within branches of the same or different banks and the repeated transfer of large sums among these accounts or abroad will also be flagged.

The software filters through all wire transfer data in search of suspicious activities, beneficiaries, originators and out-of-profile transactions. Through algorithms, the program can discover disguised or bogus names and match them to tracked beneficiaries or account owners. The system can establish an evidentiary audit trail by extracting data on suspicious transaction patterns and placing it on hold until more information becomes available. Multiple function systems can scan and analyze multiple banks, accounts and transactions, plus countries of origin and destination to determine suspicious trends. Similar systems are available for securities firms, which track the indiscriminate buying and selling of securities, trading inconsistent with the customer’s net worth or background and the sudden sale of securities at a loss without apparent reason.34

40

34 For information regard-ing computer software programs used in anti-money laundering consult the web-site of Mantas, Inc. www.mantas.com/Company/Index.htm


Obtaining, Handling and Storing Electronic Evidence

Law enforcement agencies are responsible for physically entering suspect premises with warrants and conducting searches and seizures for evidence, as part of the criminal investigation and prosecution. Legal authorization is required to search and seize suspected evidence and improperly obtained access to electronically stored data may violate provisions of privacy laws. There are specific procedures to be followed in protecting an electronic crime scene and in obtaining, handling and storing electronic evidence, which is information of investigative value stored or transmitted by an electronic device. Such electronic data is easily compromised, erasable and time sensitive and requires particularly care-ful attention.35

First, the “electronic” crime scene should be secured and documented (photographs, sketches, notes) and handled with the same protective equipment (gloves) as conventional ones.36 Many electronic devices contain memory, requiring continuous power to maintain information. It is, therefore, neces-sary to determine the mode of power (cables and/or adaptors) and not to turn anything on or off, because data can be lost or modified.37 In the instance that, there is insufficient evidence to go to trial or the case is dismissed or there is an acquittal, law enforcement authorities could be held liable for lost data or damage done to the computer system. The condition of any electronic device should not be altered: if it is on, leave it on/ if it is off, leave it off.38 The power status and whether the computer is still warm should also be noted. All telephone jacks and lines attached to modems and all wires attached to key boards, computers and mice should be identified and properly labeled.39 No fingerprinting chemi-cals should be applied to the computer, mouse, key board or floppy discs, until all information has been collected, as such chemicals can damage both equipment and data.40 It is important to denote the physical location of the computer system through detailed photographs and record the make, model and serial number. All evidence should be documented, labeled and inventoried, especially where it is collected from multiple computer systems.41 All persons present at the scene should be questioned for their passwords, user names, access to internet service provider and encrypted codes.42

Computers are sensitive to temperature, humidity, physical shock, static electric and magnetic sources and must be handled carefully to preserve their integrity and evidentiary value. Caution must be observed in the packaging, transporting and storing to avoid loss, damage or destruction. Because

41

35 US. Department of Justice, Office of Justice Programs, National Institute of Justice. Electronic Crime Scene Investigation: A Guide for First Responders. July 2001. P.19

36 Ibid. P.20

37 Ibid. P. 2238 United States Secret

Service. Best Practices for Seizing Electronic Evidence. www.secretservice.gov/electronic_evidence.shtml

39 Ibid.40 US Dept. of Justice,

Office of Justice Programs, National Institute of Justice. Electronic Crime Scene Investigation: A Guide for First Responders. July 2001. p.42

41 Ibid.

42 Ibid.


computer evidence must be protected from static electricity, magnets, radio transmitters, speakers and even heated car seats,43 it should be handled with gloves and packed in anti-static bags, such as: bubble wrap or paper. Computer evidence should not be driven or left in vehicles for long periods, because of the risks posed by extreme temperatures and humidity, vibrations and shocks. Care must taken not to fold, bend or scratch diskettes, CD Roms and tapes. Batteries should be removed from laptops, because their limited life and expiration could result in lost data. Floppy discs should be removed from A drives and packaged separately, although CDs should not be handled and be left in the drive. Tape should be placed over drive slots and power connections. The evidence should be stored in facilities, which also protect from temperature extremes, moisture, dust, contaminates and electronic or magnetic sources.44 Moreover, a chain of custody should be established for all those responsible in the handling and safe-keeping of the evidence.

Important evidence can be stored in address books, audio/video files, calendars, databases, docs/text files, e-mail, images, bookmarks and spreadsheets. Files may be encrypted, password protected, hid-den, compressed or misnamed. In recovering files for evidentiary purposes, it is important to note the date and time of creation, any modifications or deletions, access, user name and identification and file attributes.45 Moreover, data may be stored in computer created files, in the memory (circuit boards are evidence in cases of counterfeiting and theft), in the central processing unit (microprocessors, circuit boards which perform algorithmic and logical functions) and in hard drives.46 Printers contain memory and receive and store multiple documents, which are logged-in according to usage, time and date. The printer components such as the ink cartridge and hard drive, may also reveal additional information.47 Floppy discs, CDs, DVDs, and tape cartridges, using either magnetic or digital recording, also represent electronic storage devices. Scanners convert printed documents into electronic files, which can be transmitted via computer and the Internet.48

There is also a new range of access control devices, which authenticate identity and allow access. Smart Cards contain a microprocessor capable of storing monetary value, as well as an encryption key and password for information authentication. Dongles are devices, which plug into a computer port and contain information similar to that on a smart card. Biometric scanners recognize physical characteris-tics of individuals (finger-prints, voice or retina) before granting access to secure computer programs.49 Memory cards or sticks are used in the storing of information, which do not lose data, if removed from the power source. Modems facilitate electronic communication and allow computers to access other computer networks via telephone lines, wireless and other communication mediums.50 Local Area

42

43 Ibid.

44 Ibid. p. 47

45 Ibid. p. 22

46 Ibid. p. 25

47 Ibid. p. 31

48 Ibid. p. 32.

49 Ibid. p. 25.

50 Ibid. p. 27


Network (LAN) cards or Network Interface Card (NIC) connect computers and allow for the exchange of information and resource sharing.51 Servers provide service to connected computers via a network in the most common form of Internet and e-mail. 52

Answering machines also use magnetic tapes or an electronic digital recording system, which can provide information on caller names, messages, phone numbers, even where the latter have been deleted.53 Similarly digital and video cameras also use a digital recording device for transfers of images to a computer and serve as a valuable audio/video information source.54 The same is true for handheld digital devices, such as: telephone/faxes and pagers, which can contain telephone numbers, voice mail, e-mail and numeric or alphanumeric messages. 55 Digital watches may also contain an address book, calendars, e-mails, notes and phone numbers. Land based telephones frequently store names, phone numbers, caller identification and fax machines produce reports on transmitted and received docu-ments with dates, times and phone numbers of senders and recipients.56 Moreover, the film cartridge may be able to reproduce images sent. Last, but not least, photocopiers can also log-in users, dates and times.57

43

51 Ibid. p. 2952 Ibid. p. 30

53 Ibid. p. 26

54 Ibid.

55 Ibid. p. 27

56 Ibid. p. 34-35

57 Ibid. p. 34


Criminal/Civil Burden of Proof

Criminal procedure allows courts to consider circumstantial or indirect evidence concerning the illegal origin of assets. While the criminal onus of proof is “beyond a reasonable doubt”, there is discus-sion about reversing the burden of proof (reverse onus). In this way, the defendant must prove that the funds were acquired legitimately “beyond a reasonable doubt”,58 (Article 31(8) of the 2003 UN Convention Against Corruption) otherwise the proceeds are forfeit for confiscation. There is also a difference in how investigations are conducted; in Civil Law systems it may be an accusatorial form of inquiry, in contrast to an adversarial procedure under Common Law, where the defense conducts its own investigation, parallel or in opposition to those of the prosecution

Civil liability is equated with a money-related remedy. In criminal justice, the emphasis is deterrence, re-socialization and restoration, so that felonies are penalized by incarceration and misdemeanors are sanctioned by fines. In some cases, the line between civil and criminal prosecution i.e. actus rea vs. mens rea has become blurred. Moreover, regulatory crimes do not require intent, but impose strict lia-bility for knowingly, willfully or recklessly causing something to happen, because one must knowingly have engaged in an unlawful and fraudulent activity. Although linked to a predicate offence, the crime of money laundering per se requires proof of intent and knowledge (mens rea). Article 28 of the 2003 UN Convention Against Corruption allows this to be inferred from factual circumstances. The situation, however, becomes more complicated, where the defendant is a legal person, for how does one infer mental state to a corporate entity? This instance is dealt with under FATF Recommendation 33, Article 26 of the 2003 UN Convention Against Corruption and Article 10 of the 2000 UN Convention Against Transnational Organized Crime, which prescribe, that the liability of legal persons may be criminal, civil or administrative. Legal persons may also be subject to effective, proportional and dissuasive criminal or non-criminal (including monetary) sanctions.59

Some countries allow for in rem forfeiture of illicit assets, whereas others cannot, because there is a requirement of a prior conviction for the offence, which generated the original proceeds.60 Although civil matters require a lower burden of proof (balance of probabilities), they do not enjoy the same mechanism of international legal co-operation as criminal investigations.61 Moreover, there is an implicit choice between criminal and civil procedures: By opting for the latter, one may recover assets,

44

58 2003 UN Convention Against Corruption www.unodc.org/pdf/crime/conven-tion_corruption/signing/Convention_e.pdf

59 Financial Action Task Force 40 Recommendations: www1.oecd.org/fatf/40Recs-en.htm 1988 UN Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances: www.unodc.org/pdf/convention_1988_en.pdf 2001 UN Convention Against Transnational Organized Crime: www.unodc.org/pdf/crime/a_res_55/res5525e.pdf 2003 UN Convention Against Corruption www.unodc.org/pdf/crime/conven-tion_corruption/signing/Convention_e.pdf

60 United Nations Office on Drugs and Crime (UNODC). Anti-Corruption Tool Kit. Chapter IX. P. 3 www.unodc.org/pdf/crime/corruption/AC_Toolkit_chapter9.pdf

61 Ibid.


but not obtain justice and sanction against the perpetrators.62 In cases of “grand” corruption, where there has been fraud or embezzlement of State assets, civil recovery has been linked to property and tort law. The State claims rightful ownership in the property and brings an action in tort for harm caused through corruption and maladministration, which provides for compensation.63 The advantage relating to civil recovery is the choice of jurisdiction and the fact that the suit can be prosecuted in more than one jurisdiction simultaneously, if the perpetrator has concealed assets in sev-eral places.64 However, the major drawback is, that greater financial resources are required in conduct-ing civil proceedings. The cost of a criminal prosecution falls on the country in which the proceedings take place.65

45

62 Ibid.

63 Ibid.

64 Ibid. p. 12

65 Ibid.


International and Extraterritorial Criminal and Judicial Co-operation

The element of extraterritoriality complicates the task of law enforcement and judicial authorities in the jurisdiction prosecuting the predicate and secondary (i.e. money laundering) offences in obtaining relevant evidence and testimony. Law enforcement authorities have co-operated jointly in investiga-tions and intelligence gathering, as well as undercover techniques using surveillance and controlled delivery in dealing with funds known or suspected to be the proceeds of crime.66 This international sharing of information among law enforcement and prosecuting authorities is a potent weapon against money laundering, which flourishes where there is a lack of understanding of its complex forms and methodologies.

Banking secrecy and access to information already present major obstacles for investigating and prosecuting money laundering cases, but the situation is further complicated when the evidence is located in another jurisdiction. Even with relief from multilateral Conventions and Recommendations, the process can be slow and cumbersome due, in part, to differences between common and civil law regarding evidence gathering and the lifting of bank secrecy. Under the French Criminal Code, for example, bank secrecy is equated with professional secrecy, breach of which constitutes a criminal offence. Under Common Law, bank secrecy is a contractual matter and is, therefore, not considered legally privileged. Swiss bank secrecy is not professional, but statutory, and is enshrined in Article 47 of the Swiss Bank Act of 1934, which makes disclosure a criminal offence.67

Extraterritorial disclosure requests, which may be used in a criminal proceeding pose a number of dilemmas under international law. In the first place, no state is entitled to require the commission of an illegal or criminal offence in the territory of another. This has an impact on the financial institutions against which these extraterritorial disclosure orders are made, as they are not direct, but rather third parties to the prosecution.68 Moreover, as stated above, the enforcing state cannot order the foreign branch of a bank to make disclosure, if this would amount to an illegal or criminal offence under the lex situs, because no state can require the commission of an illegal act in another state.69 However, the enforcing state has prescriptive jurisdiction over its nationals with respect to acts committed abroad. Therefore, in cases of money laundering, the enforcing state can order disclosure of documents abroad, provided it has prescriptive jurisdiction over the person under investigation.70 The privilege against

46

66 Provisions for interna-tional co-operation in Special Investigative Techniques are contained in FATF Recommendation 27, the 1988 UN Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances (Article 1), the 2000 UN Convention Against Transnational Organized Crime (Article 20) and the 2003 UN Convention Against Corruption (Article 50).

67 Stessens, Guy. Op Cit. (Money Laundering: A New International Enforcement Model. Cambridge University Press. 2000.) p. 323-324.

68 Ibid. p. 322

69 Ibid. p. 324

70 Ibid. p.326


self-incrimination can also interfere with extraterritorial disclosure, in that a defendant can refuse to give evidence, if such testimony could be used against them by a foreign authority.71 For this reason the legal maxim of locus regit actum continues to apply in an international proceeding and bestows the same rights against self-incrimination, as under a domestic one, to the defense and third parties.72

There are three legal conditions of international co-operation, which, although material for the lifting of bank secrecy, can circumscribe its purview. There is a general prohibition of conducting “fishing expedi-tions”, which disallows the requesting states from engaging in pre-trial discovery of documents.73 The requesting state must also possess a reasonable suspicion that the acts committed amount to a criminal offence. It is incumbent on the requesting state to guarantee that the right to privacy under its domestic law is not violated and, if so, that evidence so gathered may be excluded post facto. Noncompliance with domestic right to privacy laws might serve as another ground of refusal by the requested state to the requesting state.74 The globalization and internationalization of crime requires mechanisms for international co-operation, which must be appropriately balanced with the protection of human rights. In this case, the competent authority initiating the request should always make it clear for what purpose the request is made. (Recommendation 40). The information sought may pertain only to offences for which bank secrecy is lifted and not to other criminal and fiscal delicts. The Specialty Principle has been adopted in the law of mutual assistance in criminal matters and limits the use of information or evidence to the offence, for which the assistance was requested.75 Governments and financial institutions are closely enmeshed in a symbiotic relation-ship: On the one hand, governments need to sustain the co-operation of banks in reporting suspicious transactions; on the other hand, the primary concern of financial institutions is to resist corruption and infiltration from organized crime. If the Specialty Principle is applied restrictively, is it, therefore, realistic to expect financial institutions to report transactions associated with fiscal offences or tax evasion or to respond to such a request? The Specialty Principle operates in rem with respect to the informa-tion transmitted, but not in personam with respect to the extradition of a person, which is more the acknowledgement of the requested state’s sovereignty, rather than the protection of human rights.76 Issues of human rights and presumption of innocence could be raised in instances of “tipping off”, where, despite international prohibitions, a financial institution reveals to its client that an investigation is underway. This warning might come more from the bank’s desire to protect its customer, rather than the latter’s human rights.77

47

71 Ibid. p.328

72 Ibid. p. 329

73 Ibid. p. 330.

74 Ibid. p.340

75 Ibid. p.343

76 Ibid. p. 346

77 Ibid. p.348-349


It is hoped that the intermediate measure of seizure and forfeiture of illegal proceeds will lead to the ultimate goal of reducing crime. Deterring money laundering serves the repressive goal of crime reduc-tion and the preventive policy of protecting the legitimate economy from criminal influence.78 This requires the criminalization of money laundering and the confiscation of the proceeds of crime, which may provide reparation to victims. There are moves to except the illegal proceeds from the general rules of criminal law and procedure by reversing the burden of proof and using the civil standard of proof, in the absence of victims.79 Where the secondary offence is victimless, FATF Recommendation 38 envisages that countries consider establishing an asset forfeiture fund, where the confiscated property could be deposited for law enforcement, health, education or other appropriate pur-poses.

Money laundering methodologies are extremely dynamic and rapidly shift to other economic sectors and geographic regions, which pose challenges to the international harmonization of anti-money laundering legislation. The crack-down on predicate offences and money laundering practices result in new, ever evolving criminal variants, which require broad-based legislation to include this widening purview. Countries, themselves, must have the technical, logistic and legal capacity to co-operate in combating money laundering.80 Some states are externally sovereign, but internally cannot combat criminality or exert control over persons living in their territory. Countries, sponsoring offshore havens and unwilling to co-operate against money laundering, should be subject to sanctions, exclusions and peer pressure.81

National authorities have attempted to prevent dissipation of assets located outside the national terri-tory. Common law authorities have resorted to extraterritorial injunctive in personam relief in civil fraud cases. The injunction is directed against the defendant, which may include third party banks, where noncompliance or failure to take appropriate action in preventing the loss of assets is equivalent to contempt of court. These so-called “Mareva” injunctions (Mareva Compania Naviera SA v. International Bulk Carriers SA ¬1980³ 1 All ER 213 CA), apply to cases where there is a real risk that the assets will be removed from the jurisdiction, rather than simply being disposed of within the jurisdiction. This form of injunction relates to private litigation, but may be used in criminal investigations, although they can pose difficulties in enforcement among countries with different legal systems.82

Third parties, notably banks, may be caught in a conflicting situation, where one national authority issues extraterritorial confiscation orders, which are not recognized or enforceable in other countries.

48

78 Ibid. p. 420.

79 Ibid. p.422-423

80 Ibid. p. 429

81 Ibid. p. 430

82 Ibid. p. 354.


There is the Babanaft proviso, which contends that a third party (eg. bank) should never be required to do something illegal according to the lex situs of the assets.83 The Babanaft proviso emerged from the case of Babanaft International Co. SA v. Bassatne ¬1989³ 1 All ER 433 of the British Court of Appeal. The decision is that courts in the United Kingdom do not assume exorbitant jurisdiction over the actions of third parties in relation to property outside the jurisdiction. More explicitly, a freezing injunction, issued by a British court, has no effect on a third party outside the court’s jurisdiction, until enforced by a court in the relevant country. To require a bank to act in breach of its civil obligations in a foreign jurisdiction would assume an exorbitant jurisdiction and be inconsistent with the interests of comity. The onus rests on the party obtaining the freezing order to have it enforced in the local courts.

Under private international law, property rights are determined by the lex situs of the property. There is some debate as to the correct situs of bank accounts. As the latter are considered as debts owed by the bank to the customer, they are governed by the law of the place where they are held, i.e the for-eign bank.84 Lord Denning ruled that branches of international banks are only subject to court orders emanating from the country where they are located.85 The enforcement of foreign judicial decisions are limited to civil and commercial matters and, for reasons of national sovereignty, courts of one country will not enforce, although they will recognize the public laws (i.e. criminal) of another state.86

International co-operation mechanisms based on explicit treaty arrangements, have done much to eliminate these ambiguities. To combat money laundering at the root, international judicial assistance needs to go beyond exchanges of evidence and extradition and include the seizure and transfer of illicit proceeds. The three UN Conventions provide for the freezing and seizing of illicit proceeds and property for the purpose of eventual confiscation. When ratified by the State Party, these Conventions become embodied in its domestic law and provide some harmonization and predictability in the global response to money laundering.

49

83 Ibid. p. 360

84 Ibid. 85 Ibid. p. 362

86 Ibid.


CONCLUSION

These guidelines target the work of judges and prosecutors in Serbia, who are tasked with the investi-gation and prosecution of corruption and money laundering. Preserving the integrity of the judiciary is the vital ingredient in achieving effective convictions and recovering illicit proceeds. The linkage between corruption and money laundering and their effect in discouraging economic development, while promoting increased criminality, have already been discussed. However, combating the financ-ing of terrorism has heightened urgency in the global fight against money laundering and requires greater international vigilance and co-operation. This effort has given rise to a multiplicity of multi-lateral conventions and principles, which reinforce mutual collaboration and afford broader powers of investigation, seizure, confiscation and extradition. Nevertheless, these instruments will remain unutilized without adequate judicial diligence and resolution in pursuing perpetrators and bringing them to justice. The roles of the judiciary and prosecution are fundamental and crucial, and their integrity, impartiality, independence and tenacity will determine success in convicting corrup-tion and money laundering. Once crime loses the allure of enormous profit, far fewer perpetrators will risk incarceration and loss of personal freedom. By eliminating the stimulus, one can reduce overall criminality: By recovering the proceeds of crime, one can improve legal and judicial institutions.

The international scope of corruption and final crime means that State signatories to conventions and adherents to principles must unite their strengths. Countries are relying on mutual assistance and co-operation to deal with clandestine and surreptitious criminal processes, which may be extraterrito-rial and multi-jurisdictional. Serbia has experienced a high degree of State corruption and organized crime and is confronted with enormous challenges in successfully prosecuting such malfeasance. It is key for Serbian law enforcement and judicial authorities to be able to meet these challenges, in order to reaffirm, that rule of law institutions have been firmly implanted and are properly functioning. As a participant in the community of nations, Serbia has the responsibility of dealing effectively with its own internal criminality, which, at the same time, would assist in reducing the spread of criminal activ-ity abroad. The increasing globalization of crime requires concerted international co-operation and response from the police and judiciary in many countries. In this regard, it is hoped that these guide-lines will be consulted and used by its intended target audience and will provide a useful contribution to the prosecution of related financial crimes. In so doing, the repercussions might prove beneficial not only to Serbia, but impact positively beyond its borders.

50


ANNEX:

CASE STUDY ON BANK SECRECY AND SHELL COMPANIES, FROM WORKING PAPER: DOMICILIARY COMPANIES AS A LOGICAL INSTRUMENT OF INTERNATIONAL CORRUPTION

By Erich Diefenbacher, Transparency International, Berlin

www.transparency.org/working_papers/diefenbacher/diefenbacher.html


The Swiss-Liechtenstein Example:

Switzerland maintains a monetary union with the Principality of Liechtenstein, which has its own company law specialized in concealing investment. The combination provides for the transfer and investment of illicit proceeds from crime, corruption and tax evasion. The home state of the financial criminal is unable to establish a connection between the capital, the original investor and the new purported owner. This is accomplished by transferring the capital to a legal entity, frequently in the form of a “foundation”, which, under Liechtenstein law, can be dissolved at any time and is not subject to official state supervision. Moreover, the founder may, at the same time, be the beneficiary and the manager of the foundation’s assets. A genuine foundation separates the founder from its property definitively and guarantees the interests of the beneficiary. The so-called “donor” usually transfers the administration of the foundation to Liechtenstein or Swiss trustees (lawyers, notaries), which are bound by professional secrecy. In Liechtenstein, non-profit foundations do not require registration, names are removed from foundation documents and bank accounts are numbered, thereby provid-ing complete anonymity. Financial statements and tax declarations in Liechtenstein are not required for a foundation, whose assets are merely deposited and lying dormant. Accounts can be opened in a Liechtenstein or Swiss bank in the name of this off-shore entity, instead of that of the owner of the capital. All subsequent banking transactions may be conducted by a trustee nominated by the bank on behalf of the “so-called owner”. The structures may become more sophisticated, whereby a holding company controls and manages the property of a collection of off-shore entities. Subsidiary companies can be established through the use of these “shell companies”, “foundations” and trusts to transfer large amounts of illicit funds. Such vehicles were used by Marcos, Duvalier, Mobuto, as well as in the corrupt practices of the former German Democratic Republic.

52

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LIST OF THE COUNCIL OF EUROPE’S TREATIES


No Title Sl. Glasilo Na snazi

099 030

European Convention on Mutual Assistance in Criminal Matters and Additional Protocols

Sl.l. SRJ-M 10/2001 11/17/2001

051European Convention on the Supervision of Conditionally Sentenced or Conditionally Released Offenders

Sl.l. SFRJ 4/1990 3/2/1991

088European Convention on the International Effects of Deprivation of the Right to Drive a Motor Vehicle

Sl.l. SFRJ 4/1991 3/2/1991

090European Convention on the Suppression of Terrorism

Sl.l. SRJ-M 7/2002 7/11/2002

097Additional Protocol to the European Convention on Information on Foreign Law

Sl.l. SFRJ 7/1991 7/20/1991

141Convention on Laundering, Search, Seizure and Confiscation of the Proceeds from Crime

Sl.L. SRJ-M 7/2002 7/11/2002

167112

Convention on the Transfer of Sentenced Persons and Additional Protocols

Sl.l.SRJ-M 4/2001 7/5/2001

173 Criminal Law Convention on Corruption Sl.l.SRJ-M 2/2002 3/9/2002

086098 024

European Convention on Extradition and Additional Protocols

Sl.L SRJ –M 10/2001 11/17/2001

070European Convention on the International Validity of Criminal Judgments

Sl.l. SRJ-M 13/2002 12/28/2002

073European Convention on the Transfer of Proceedings in Criminal Matters

Sl.l. SRJ-M 10/2001 11/17/2001

191Additional Protocol to the Criminal Law Convention on Corruption

nije jo{ uvek ratifikovana

189

Additional Protocol to the Convention on cyber-crime, concerning the criminalisation of acts of a racist and xenophobic nature committed through computer systems

nije jo{ uvek ratifikovana

185 Convention on Cybercrime nije jo{ uvek ratifikovana