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U.S. Department of State

Great Seal Jonathan Winer, Deputy Assistant Secretary for International Narcotics and Law Enforcement Affairs
Testimony before the Senate Caucus on International Narcotics Control of the Subcommittee on Trade of the Senate Finance Committee
Washington, DC, July 30, 1996


The Threat to U.S. Trade and Finance From Drug Trafficking
And International Organized Crime
Mr. Chairman and members of the caucus and subcommittee: Thank you for this opportunity to discuss the multiple threats which drug trafficking and organized crime pose to U.S. trade and finance. The Administration is deeply concerned about transnational organized crime for two basic reasons.
First, it is a direct threat to the physical safety and economic well-being of Americans at home and abroad. Money laundering is the lifeblood of narcotics trafficking, and organized crime fuels criminal activity, including violence, in the United States.
Second, transnational organized crime threatens America's national security and foreign policy interests in a number of regions of the world, undermining legitimate economies and threatening emerging democracies.
As requested, I will examine how major criminal organizations and drug traffickers are exploiting international financial mechanisms to launder illicit proceeds, how they are using trade mechanisms to smuggle drugs and contraband and what the Department of State and the interagency community are doing about it. I will also address the adequacy of our laws and those of other nations to balance the competing demands of industry for financial services and of law enforcement for evidence.
As we know so well, the international financial community today has become a world in which banks and investment houses, like the national and international corporations they serve, conduct financial operations around the clock, through a network of branches, subsidiaries, and customers, all linked by computers and other electronic communications media. It is a complicated, fast-paced process, making proper regulation and oversight all the more difficult. It makes the cooperation we receive from other financial center countries and trading partners in our efforts to prevent criminal utilization of our financial and trade industries all the more urgent and important.
Money Laundering: The Heart of the Problem
Money is a commodity: that is the key to understanding the global money laundering phenomenon. Indeed, the bedrock of the global financial system is the purchase and sale of money as a commodity. Just as investors buy and sell securities and monetary certificates, businessmen buy and sell money foreign exchange on both formal and informal markets, both to finance trade and investment transactions and for speculative reasons. Professional money launderers working for organized crime syndicates often use the same techniques in foreign exchange markets as corporate money managers. A corporate money manager enters into the foreign exchange markets to buy and sell currencies at the most favorable rate in a constant effort to improve the manager's average position at the time of payment. Similarly money launderers use a bidding system to buy/sell drug proceeds, especially U.S. dollars. Just as a sound investment portfolio will contain a variety of financial instruments, both legitimate and criminal money brokers vary their holdings.
Competitiveness is the operative word in the international banking system. Speed is often critical to competitiveness. Profits are won or lost with even a small shift in exchange rates. Compounded by the sheer volume of such transactions, the demand for speedy confirmation of prices and conclusion of transactions complicate the ability to spot questionable transactions.
Competitive pressures on both businesses and countries can give rise to "gray markets," often in special zones with lax government regulatory oversight. These gray markets can be exploited by drug traffickers and other criminals as fertile ground for illicit transactions and money laundering. Take the example of Panama's Colon Free Zone. The estimate is that as much as 80% of the goods sold in the Colon Free Zone--which generates in excess of $10 billion in sales each year--are purchased by Colombian importers. In many cases, importers buy dollars and especially dollar-denominated instruments, including personal checks, from money brokers who have purchased these instruments from money merchants in the hire of the cocaine cartels. In some cases, the actual sale is paid for by personal checks or bearer instruments, none exceeding $3,000 even though the total sale is in six or even seven figures.
While the Panamanian example provides a glimpse of the problem, we do not have accurate estimates of the extent to which drug traffickers and other criminal organizations have penetrated legitimate business through money laundering. Nevertheless, we know the problem is large enough to raise serious commercial concerns. First, given the high profit margins associated with most criminal activity, and particularly with drug trafficking, criminal organizations which venture into legitimate business fields have a tremendous competitive advantage which enables them to outbid honest vendors. Second, there is concern that criminal groups overtly and covertly control financial institutions, including banks, which, as BCCI proved, renders our laws moot.
I draw your attention to a report issued last month to the European parliament on money laundering which considered some of the key questions of the EU that are the subject of today's hearing. The June 6 report stated: "an aspect of money laundering which has not been examined in detail or in depth is its effect on world liquidity, national money supplies and volatility of exchange rates," noting that such inquiries were "in their infancy," and calling on the European Commission to seek answers to such issues as the velocity of money affected by flows of illegal funds, the impact on money supplies on countries involved in the circuit of laundering, how illegal funds are invested, and the impact of money laundering on the stability of national and regional financial markets. For the most part, we do not have answers to these questions today, though we are upgrading our data analysis to begin to obtain them.
The Challenge to Law Enforcement
The term money laundering involves a seemingly endless range of illegal activities. It is an especially difficult problem to tackle because most of the techniques used to convert, transform, exchange or simply move money and/or monetary instruments are normal, legal practices of our financial community and are critical to both its competitiveness and to the competitiveness of economies in general.
In the broadest sense, the means used to move assets are only considered illegal when they are used to convert, transform, exchange or move proceeds in a deliberate manner to conceal the origins which may involve illegal activities such as drug trafficking, arms smuggling and the like. Hence, the problem is to separate the vast bulk of international trade and finance that is legitimate and necessary from the percentage which is pursuant to criminal activity.
Disturbing, too, is the trend of criminal enterprises to rely on the services of disreputable money brokers who are increasingly crafting effective schemes to evade normal monitoring, detection and reporting devices.
Often, these money brokers will commingle funds from licit and illicit enterprises. Thus, legal and enforcement problems begin, for example, with the fact that the final sale by a Panamanian agent to a Colombian importer can be--and often is--quite legitimate. The importer does not know the origins of the dollars or instruments he buys. Moreover, he may be doing business with a money broker who has no connection to the cartels, other than buying dollars and instruments from a cartel-controlled source. These businessmen and even the money broker are operating at least one level removed from the drug trade itself, thus compounding the problems of enforcement and prosecution in every jurisdiction, which limits the application of its anti-money laundering laws to the single predicate offense of drug trafficking.
Stemming Corrupting Influences on Modern Banking
Today, financial institutions are vulnerable to money laundering in large part due to the same features that have facilitated the growth in international trade and finance--the combination of correspondent banking relations and electronic transfers. The electronic highway now links banks and non-bank financial institutions (NBFIs) worldwide to facilitate expanding world trade and financial services, placing ever-greater priority on banks to establish the legitimacy of transactions, including, as necessary, the identity of beneficial owners and their sources of funds. There are few controls on electronic transfers, and, compounding the problem, the bank or non-bank of origin is increasingly based outside major financial centers in jurisdictions which do not adequately control money laundering and other financial crimes.
Moreover, there is emerging concern about possible misuse of some new financial services, such as direct access banking which permits customers to process transactions directly through their accounts by computers operating off software provided by the bank. While such services enhance customer access and choice, they can also limit the bank's ability to monitor account activity, such as of joint accounts and pass-through banking schemes which have been a traditional method of layering. Beneficial owners of funds can now manipulate the identity of the ultimate recipient of the funds without the review by bank officers. We need to ensure that these new bank services do not limit the utility of systems in place to have both originator and recipient information travel with the electronic funds transfer.
Governments throughout the world also need urgently to address the problem of uneven regulation of non-bank financial systems, especially with regard to the placement stage for cash. Non-bank financial institutions include a wide variety of exchange houses, check cashing services, insurers, securities and commodities dealers and gold and precious metal dealers. Even in the United States, which is taking a leadership role in ensuring effective oversight of non-bank financial institutions, we are still in the process of reviewing how best to balance the overall need to maintain a vibrant financial system with ways of addressing problems like money laundering and illicit transactions.
It is still difficult to assess the degree to which newer electronic banking practices--such as financial transactions via the internet--may render banks more or less vulnerable to money laundering. Few governments even have control mechanisms adequate to identify and trace such transactions when they occur.
Similarly, concerns about the regulation of offshore banking have not lessened, although more jurisdictions now have laws which subject offshore banks to the same degree of regulation as onshore institutions. The assurance of absolute secrecy by many jurisdictions which license such facilities makes it possible for such facilities to be manipulated to move and conceal or generate illicit proceeds.
The UN Convention: A Vehicle to Combat Financial Crimes
Over 100 governments have ratified the 1988 UN Convention, which remains one of the most effective vehicles we have to force concerted action against money laundering and other financial crimes. However, inconsistent enforcement of the Convention's anti-money laundering provisions is an important factor in the continued high level of global financial crime.
Lamentably, the pace of implementation of the UN Convention, and the scope of its application, varies. Recent analyses of results reported by key financial centers relative to the generation of suspicious transaction reports indicate that several such centers have numbers of suspicious transaction reports which are disproportionately small, given their volume of financial activity. Moreover, too many affected or vulnerable governments have not criminalized all forms of money laundering and financial crime, nor given sufficient regulatory authority to central banks. And too many governments continue to place limitations on money laundering countermeasures, particularly the requirement that the offense of money laundering must be predicated upon conviction for a drug trafficking offense.
Quick international action on a number of fronts can help thwart money laundering and other financial crimes:
Governments must share information about financial transactions with other governments to facilitate multinational money laundering investigations.
Bilateral and multilateral international communications must be improved to inform governments and financial systems systematically about the methods and typologies of drug and non-drug related money laundering and financial crime.
Asset forfeiture laws must keep pace with anti-money laundering investigative authority; there is a conspicuous gap between the number of institutions and accounts identified by government investigations with money laundering and the authority of many governments to seize and forfeit drug and money laundering proceeds.
Corporate and individual sanctions must be imposed against financial institutions that repeatedly fail to take prudent measures to prevent their institutions from being used to launder money.
Bilateral and multilateral strategies to define responsibilities and objectives on a country-by-country basis and set specific goals for cooperating with the various money laundering and money transit countries must be refined.
Reporting requirements must be imposed on financial systems, in a way that ensure continued competitiveness, to help guard against criminal abuse of financial systems.
Major international banks should ensure that governments and regulatory agencies in all jurisdictions they serve are enforcing the same high standards as charter governments.
When implementing free trade agreements and regional compacts, appropriate steps need to be taken to discourage the use of international trade as mechanism for laundering proceeds of criminal enterprises.
As an incentive to multinational efforts, countries which cooperate on money laundering investigations and prosecutions should share forfeited proceeds so as to reflect equitably their respective contributions.
U.S. Active Measures Overseas
The President and Secretary Christopher have placed the battle against transnational organized crime at the forefront of the U.S. foreign policy agenda and have committed the diplomatic community to work closely with law enforcement, intelligence and other relevant agencies to find effective responses to this problem. In the international arena, the Department of State plays a leadership role in three key areas: foreign policy and national security initiatives, international training and technical assistance, and overseas coordination.
Foreign Policy and National Security Initiatives
In the broadest sense, we are advancing our law enforcement and national security interests by raising the issue of money laundering and financial crime in a wide range of international fora to improve international cooperation in these areas. An important example is our ongoing discussion with the G-7 countries and the Russian government. After the Halifax Summit last year, an experts group agreed to 40 specific anti-crime recommendations which President Clinton and the other heads of state adopted last month in Lyons, France. These measures will form the basis for cooperative efforts against drug trafficking, terrorism and organized crime over the course of the next year and when the United States assumes the G-7 presidency.
The Department is also working closely with Treasury, Justice and other agencies on a full range of international initiatives. We worked closely with Treasury on the Summit of the Americas process and will continue our joint efforts to ensure that measures agreed to by nations of this hemisphere become a reality. We also work closely with Treasury to support the Financial Action Task Force (FATF) which has become the leading anti-money laundering organization in the world and an important mechanism for multilateral cooperation. Treasury's efforts in the last year to ensure that FATF recommendations fully reflect the best advice the international community can give on money laundering countermeasures were rewarded last month when important changes to FATF's recommendations were adopted at its plenary session in Washington. We are also pushing a reform agenda in the UN Crime Commission to help it become an effective voice for reform and international cooperation in the financial crimes area.
Similarly, we are working closely with Treasury and Justice to implement the President's important money laundering initiative, which calls for a broader international dialogue and increased cooperation to combat global money laundering. We continue to work closely with Treasury and Justice to support the President's use of the International Emergency Economic Powers Act (IEEPA) against Colombian drug traffickers. IEEPA allows the President to freeze assets of Cali Cartel leaders, their associates and front companies in the United States. Most importantly, it prohibits U.S. persons from doing business with these individuals and entities. Even businessmen in Colombia have praised the President's action and have used it to close bank accounts and limit financial transactions with these entities. We are also working on an interagency basis to determine whether we can use IEEPA to target other criminal organizations.
Training and Technical Assistance
The United States is fortunate to have the best trained and most knowledgeable law enforcement officers in the world. However, in facing transnational crime, this is only part of the battle. We must work with effective counterparts overseas in order to accomplish our goals. Unfortunately, our law enforcement officers are often called upon to work with law enforcement officials in other countries that do not benefit from the same level of training and have not developed the expertise we have. This is especially a problem in the areas of money laundering and financial crime which can involved complex financial transactions that require equally sophisticated investigative work. Thus, U.S. international law enforcement training is critical to meeting U.S. objectives.
In undertaking international training efforts, the Department has two basic goals in mind. The first is to build institutional expertise and capability in foreign countries so that they can cooperate with us more. The second is to foster close working relationships between us and foreign law enforcement authorities. We do this recognizing that resources are limited, so we must work to reduce unnecessary overlap. This is especially important in the money laundering and financial crime areas because investigative and regulatory authority is spread among a number of agencies in the United States, as well as in many foreign countries. It is also important, of course, that these programs be administered with our broader foreign policy interests in mind. To accomplish these objectives, the Department is working closely with federal law enforcement agencies to establish priorities and implement effective and coordinated training programs.
A good example is our current training program in the former Soviet Union and Central Europe. The State Department chairs a working group on law enforcement training consisting of all of the relevant federal law enforcement and regulatory agencies. Using Freedom Support (FSA) and Supporting Eastern European Democracy Act (SEED) funds, we are funding a number of money laundering and financial crime training courses in Eastern Europe and the countries of the former Soviet Union. We are carrying out a similar effort through the International Law Enforcement Training Academy in Budapest. With the Federal Reserve and various U.S. law enforcement agencies, we have also launched an important initiative to provide training and technical assistance to the Central Bank of Russia.
For many years, the United States has provided countries with the full range of narcotics control training conducted principally by DEA, Customs and the U.S. Coast Guard. It is an effort which has paid important dividends, especially in this hemisphere. Such training and general bilateral and multilateral cooperation become all the more urgent as the movement of goods and services between countries are stimulated by the reduction in trade barriers. The North American Free Trade Agreement (NAFTA) is a prime example. Increasing volumes of trade mean additional pressure on law enforcement in terms of inspection procedures. Streamlined customs processing means that our relationships with law enforcement counterparts, the training we provide and their high level of expertise become all the more important.
Despite the challenges presented to law enforcement by the increased flow of people and goods, we believe that trade agreements are beneficial to our counternarcotics efforts. NAFTA and other trade agreements create new economic opportunities for trading partners by lowering U.S. tariffs applied to their products making them more competitive in U.S. markets. As a result, competitive manufacturers are likely to grow faster, thus creating new jobs. Higher economic growth in legitimate industries creates more jobs and improved living standards for the same lower-income people that, absent such opportunities, might resort to illegal activity. Therefore, opening U.S. markets complements our drug-fighting strategy by helping to create new economic opportunities for people in drug producing countries. In addition, the goodwill created by improved trading relations also serves to improve cooperation in other areas of the bilateral relationship; we have seen this in the increased willingness to cooperate on drug law enforcement.
In the NAFTA context, increasing legitimate trade with a country through which there is significant illicit drug trafficking, narcotics control efforts become even more imperative. The U.S. and Mexican governments are keenly aware of the seriousness of the threat posed by drug trafficking and organized crime--to both the safety and well-being of our citizens and to our economies--and we are working on various levels to strengthen cooperative mechanisms to counter the threat.
Since President Zedillo took office in December 1994, Mexico's counternarcotics effort has intensified significantly--in eradication, law enforcement action against trafficking organizations, and interdiction--and he has launched a broad-sweeping reform of the justice sector. In addition, the U.S. and Mexico have significantly expanded legal and law enforcement cooperation, not only in combating drug trafficking, but in addressing problems of fugitives, arms trafficking, alien smuggling, money laundering, and so on. We have established technical working groups to advance cooperation in specific areas, which also serve to coordinate training and technical assistance, and to resolve problems. Senior law enforcement personnel meet regularly to oversee the whole scope of cooperation. In addition, we have established a military working group which coordinates anti-drug cooperation between the U.S. and Mexican militaries.
In March 1995, President Clinton and President Zedillo established the High Level Contact Group to ensure that this important area of the bilateral relationship receives regular attention at the most senior levels of government, both to press for even greater cooperation and to resolve any issues that cannot be addressed at technical levels. This Group, in fact, is meeting this week in Washington. One of the major goals of this meeting will be to approve the outline for a joint threat analysis, the first step toward development of a joint counternarcotics strategy. This is an unprecedented action demonstrates the seriousness of the commitment by each government to a serious and focused assault on this shared problem.
Overseas Coordination
U.S. success in achieving foreign policy and law enforcement objectives abroad depends on coordination within the U.S. Government of overseas law enforcement activity. The placement of U.S. law enforcement personnel abroad is an important response to the growing threat of transnational organized crime. Indeed, our missions overseas are the forward bases for protecting and advancing U.S. national interests, including our law enforcement interests.
Both the Secretary of State and the U.S. Chief of Mission have statutory responsibilities for coordinating activities of U.S. government personnel abroad. As the President's personal representative in country, the Chief of Mission is charged by the President and statutorily responsible for the direction, coordination and supervision of all U.S. Government personnel in country, except certain military personnel. The Chief of Mission must play an important role in the fight against transnational organized crime.
The Department of State's responsibilities are so important in this regard that they must not be undermined through insufficient resources to operate our missions abroad. DEA, FBI, Secret Service, INS, Customs, IRS, ATF, FAA, and a number of other agencies have important law enforcement functions to perform abroad. We currently have close to two thousand law enforcement personnel overseas and virtually all of these agencies seek to expand their presence. Unfortunately, Chiefs of Mission must consider cost and resources available in making decisions to enhance our law enforcement presence overseas.
Because the Department's own resources are shrinking as law enforcement agencies seek to expand their presence in U.S. missions, Chiefs of Mission must carefully consider such issues as space limitations, costs and manageability when assessing whether to approve new positions, even where they agree that enhanced numbers would otherwise be desirable. I therefore urge members of Congress, when reviewing the issue of law enforcement activity overseas, not to forget the State Department's responsibilities and the resources it needs to support these activities.
The Road Ahead
Though the problem of transnational organized crime appears daunting, the Administration is taking the steps needed to counter the threat. The problem is well recognized around the world; we have brought it to the forefront of the international agenda and practical mechanisms are being organized to counteract it.
There is no question, however, that much more needs to be done, especially in the areas of money laundering and other financial crimes. In an electronic world in which the banking system operates 24 hours a day, there must be increased emphasis upon thorough vetting of personnel and monitoring of company and financial institution accounts at the bank of origin, wherever in the world it is located. There is no substitute for a thoroughly applied "know-your-customer" policy.
Likewise, considerable attention must be focused on establishing international standards, on obtaining agreements to exchange information, establishing linkages for cooperative investigations, and on overcoming political resistance in various key countries to ensure such cooperation.
International standards are urgently needed to thwart corruption in commercial activity, especially bribery linked to organized crime. In fact, organized crime now uses bribery as one of its primary tools to establish front countries, gain control of legitimate businesses penetrate the legitimate economy and further its criminal activities. This corruption can spread like a virus in the public and private sectors. Foreign governments, including our allies and trading partners, can no longer afford to condone bribery and other corrupt practices. In so doing, they not only harm legitimate U.S. businesses, which are legally prohibited from engaging in this activity, but they further the interests of organized crime. Bribery and corruption must be criminalized, investigated and prosecuted both at home and abroad.
In this regard, we have made real progress. In a significant victory, we pushed through an agreement among OECD countries to deny tax deductibility for bribes and to find a means to criminalize the bribery of foreign officials. We have also put forward an initiative in the World Trade Organization to enhance transparency and openness in government procurement as a means of combating bribery and corruption in government contracts.
Further, governments need laws which establish corporate criminal liability for bank and non-bank financial institutions; apply to all manner of financial transactions not limited to cash at the teller's window; apply reporting and anti-money laundering laws to a long list of predicate offenses not limited to drug trafficking; criminalize investments in legitimate industry if the proceeds were derived from illegal acts; and enable the sharing of financial and corporate ownership information with law enforcement agencies and judicial authorities.
But governments also need strategies which project change and progress along the same continuum as the changes in both financial system procedures and the methods criminals develop to exploit them--strategies which focus on specific governments and specific financial systems.
Above all, a unified international front against criminals who corrupt our values and institutions is required. As the President said earlier this year,
"Whether the threat is the aggression of rogue states or the spread of weapons of mass destruction, or organized crime or drug trafficking, or terrorism, no nation can defeat it alone. But together, we can deal with these problems and we can make America more secure."

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