FROM RUSSIA - WITH MONEY

by James D. Harmon, Jr.
Reprinted with permission from the December 27, 1999 edition of the New York Law Journal.
©NLP IP Company

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        Once again, highly publicized, questionable monetary flows have created the political climate for significant change in the nation's money laundering laws. In the mid-1980's, the Bank of Boston was the catalyst, when it failed to report $1.22 billion in international cash transfers, mostly with Swiss banks. ¹ The result was the enactment of The Money Laundering Control Act of 1986, "the first in the world to make money laundering a crime." ² This time, Russia, the Bank of New York, Citibank and the International Monetary Fund are the agents of change.

        As yet unexplained billions are said to have flowed through the Bank of New York. Was it IMF money? Or flight capital tinged with a hint of tax avoidance? Did someone loot the Central Bank of Russia? Was the Russian Mafia in the mix? Is high level government corruption the real story? Was it all of the above? No one seems to know - or is yet ready to say. No matter. Manhattan District Attorney Robert Morgenthau and the FBI are on the case. Although press reports indicate a degree of competition between them, there is plenty of room for both.

        The United States Attorney made the first move on the Russian billions, using the legal means available. Yet, the recent indictment in the Southern District of New York demonstrates the inability of current money laundering laws to reach effectively the unexplained transmission of billions of dollars.

        The government indicted a vice president in the Bank of New York's Eastern European Division, and those who allegedly transmitted $6.85 billion through two corporate accounts at the Bank of New York during the 40 month period between February 1996 and July 1999. They were not charged with money laundering, but with operating an illegal money transmitting business ³, engaging in the business of receiving deposits without legal authorization ⁴, and conspiracy ⁵ . These obscure offenses are hardly a match for the power and sweep of the mysterious Russian billions.

        To understand District Attorney Morgenthau's interest is to understand the evolution of the world's anti-money laundering initiatives. In this area, he is more than a local district attorney. District Attorney Morgenthau was instrumental in the enactment of the nation’s first attempt to control money laundering, the Bank Secrecy Act in 1970, which required the reporting of cash transactions. Testifying in support of the BSA in 1970, District Attorney Morgenthau sounded an early alarm on money laundering through foreign banks:

[T]he domestic clearing and correspondent facilities of United States banks became essential in many instances to the carrying out of illegal schemes involving foreign banks.  ⁶

        In 1984, when I became executive director of the President’s Commission on Organized Crime, I asked District Attorney Morgenthau what he thought we should do. He responded simply: "You have to do something about the banks." The root of current money laundering laws may be found in that considerable understatement. Money laundering also has much to do with crime at a local level. It may be that all politics is local, but so is all crime. Money from the street finds its way abroad through financial channels. Corrupt foreign money finds its way here as well. Either way, any real world effect is felt locally.

        Morgenthau also is a check against political influence, as are the United States Attorney and the FBI. The difference is that, where international politics are involved in a case like the Russian billions, the ultimate federal call rests with the Attorney General and the White House. We should have little faith in a dispassionate decision, no matter what the evidence, given the current administration’s acceptance of laundered campaign contributions from overseas.

Anti-Money Laundering Origins

        Money laundering is the process by which one conceals the existence, illegal source, or illegal application of income, and then disguises that income to make it appear legitimate. Michele Sindona, convicted of causing the collapse of the Franklin National Bank, described it this way:

Laundering is to switch the black money or dirty money ... [to] clean money. ⁷

        In creating three categories of laundering offenses, the Act prohibited, i.e., the conduct of ¹¹, or attempt ¹² to conduct:

1. financial transactions involving the proceeds of specified unlawful activity; ¹³
2. the international transportation of such proceeds;  ¹⁴
3. and monetary transactions in property constituting, or derived from, the proceeds obtained from a criminal offense. ¹⁵

        The law not only reached for the proceeds of conduct characteristic of organized crime such as narcotics trafficking, RICO predicates, and certain state offenses, but also encompassed at least 43 additional criminal offenses ranging from espionage to trading with the enemy to promotion of income tax evasion of criminal proceeds, through its definition of specified unlawful activity.  ¹⁶

        The Act provided criminal enforcement authorities with additional tools for their trade, making money laundering offenses RICO predicates as well, and subject to investigation through court authorized electronic surveillance. ¹⁷

        The reasons for making money laundering a separate offenses stemmed from the recognition that money launderers who complied with the currency reporting requirements of the Bank Secrecy Act could "operate with virtual impunity." ¹⁸

        The 1986 Act strengthened the Bank Secrecy Act compliance function of the Department of the Treasury, giving Treasury summons authority, imposing fines for wilful and negligent Bank Secrecy Act violations and making so-called structured transactions criminal.  ¹⁹

        Under unusual uniform regulations implementing the Act, federal regulatory agencies required the boards of federally insured financial institutions to approve and adopt Bank Secrecy Act compliance procedures in a way that was reflected in the corporate minutes.  ²⁰

        Each of these things, i.e., the role of corporate boards, enhanced enforcement capabilities, increased information flow, a strengthened Bank Secrecy Act was significant. Yet, the way in which in which money laundering was made criminal does not quite reach the Russian billions.

        The 1986 law set off a chain reaction. In one-way or another, money laundering is the subject of legislation, regulation, bilateral and multilateral agreements around the world. Many, if not all, of the individual States, including New York, have enacted their own anti-money laundering statutes.  ²¹ Money laundering has been the subject of a United Nations convention and European Union directives to its members. Many nations - among them, Australia, Canada, France, Hong Kong, Switzerland, Japan, India, Bulgaria and the Czech Republic, for example - have also adopted laws against money laundering. The Treasury has used its regulatory authority to require financial institutions to report suspicious transactions. ²² Still the Russian billions flowed undetected for years.

Current Legislative Initiatives

        What is happening now is different. Kleptocracy on a grand scale is a new phenomenon. Free market initiatives and the end of the Cold War have set huge money flows in motion. They are largely illicit governmental capital flows, caused by political instability and economic realignment. They also create a whole new set of risks to society and financial institutions. These off-the-books billions make the mob’s money look like chump change by comparison.

        Russia is not the only problem. The Senate is investigating hundreds of millions of dollars passing through Citibank private banking accounts that are tied to prominent foreign political leaders or their families, in Mexico, Venezuela, Nigeria, Indonesia and Pakistan, as well as Gabon. ²³ How to address this new set of risks is the subject of identical legislation introduced in the House and Senate, known as the "Foreign Money Laundering Deterrence and Anticorruption Act." ²⁴

        The proposed Congressional findings reflect the new reality of entire governments-for-sale. At its core, the legislation is premised on danger to the financial and economic stability of nations, the threat to the integrity of international financial markets, harm to foreign populations--sometimes to the point of impoverishment, reduction in the efficiency of global interest rate markets and the migration of off-shore financial centers to remote locations. ²⁵

        In general, the legislative matrix on the Congressional table seems guided by the principle that there should be no such thing as an anonymous transaction. The Anticorruption Act would require the source and disposition of all moving money to be identifiable, especially when foreign sources are involved.

[I]t is critically important that banks exercise due diligence in knowing who their customers are and whether their transactions are legitimate. To do otherwise risks making the western financial system complicit in the endemic corruption that has victimized so many peoples across the globe. ²⁶

        In mandating due diligence, the House and Senate bills would prohibit certain banking practices conducive to money laundering, require the identification of the owners of accounts of foreign entities, expand the reach of federal money laundering laws, and prohibit making false statements about a transaction or a customer. The trade-off is that financial institutions and their agents would receive near complete civil immunity for making disclosure of suspect transactions.

        The pending legislative proposals would criminalize the opening or maintaining of:

1. accounts belonging to or for the benefit of unidentified owners, ²⁷
2. correspondent accounts or correspondent bank relationships with unregulated foreign "shell" banks, ²⁸
3. and so-called payable-through accounts for a foreign banking institution on behalf of unidentified customers. ²⁹

        If enacted, the legislation would expand the definition of money laundering to reach fraud or theft aimed at foreign governments, misuse of IMF funds and non-disclosure of ownership of corporations, accounts and trusts. It would do so by adding the following specified unlawful activities, among others, prohibited under the various money laundering offenses:

1. fraud, or any scheme to defraud, committed against a foreign government or foreign governmental entity;
2. bribery of a public official, or the misappropriation, theft, or embezzlement of public funds by or for the benefit of a public official;
3. the misuse of funds of, or provided by the International Monetary Fund or any other international financial institution; and
4. any offense under any Federal law consisting of the failure to report the ownership or control of a foreign corporation, the ownership or control of a foreign financial account, or a beneficial interest in a foreign trust. ³⁰

        The House and Senate legislation also would prohibit making false statements concerning the identity of "any person" in connection with a financial transaction with a financial institution. ³¹

        The Secretary of the Treasury would be required to oppose any financial assistance by a international financial institution, other than to address basic human needs, for any country that is not effectively dealing with a high level of corruption, including money laundering.  ³²

        The pending bills attempt to reconcile the difficult position in which banks find themselves vis-a-vis their customers. On the one hand, banks are expected to report suspicious transactions. On the other, they may have exposure for doing so. Under the proposed legislation, neither financial institutions, nor their directors and officers, employees nor any independent accountants would be held liable "to any person" for disclosing any possible violation of law or regulation to an appropriate government agency. ³³ However, the proposed legislation would prohibit notification of the report of a suspicious transaction to any person involved or named in the transaction, either that the transaction has been reported, or any information included in the report to any such person. ³⁴

        In a unique way, the legislation would tend to remove problem employees from the banking business anywhere. When asked for an employment reference, a financial institution could reveal that its former employee possibly had been involved in suspect conduct. In particular, unless they acted with malice or with reckless disregard for the truth, financial institutions and their agents would not be liable "to any person" for disclosing, in any written employment reference, information concerning the possible involvement of a former employee in any suspicious transaction relevant to a possible violation of law or regulation. ³⁵

Conclusion

        There is some irony in the position in which financial institutions now find themselves. Banks can and should voice the legitimate privacy interests of their customers. They have not been shy about doing so. Earlier this year, financial institutions soundly and successfully thrashed Treasury’s proposed "Know Your Customer" regulations.  ³⁶ These regulations would have required banks to establish due diligence procedures in order to determine a customer's identity, sources of funds and normal and expected transactions. Treasury received over 17,000 comments, including one from the Bank of New York urging that the regulations "should not be adopted."  ³⁷ Among other reasons, Bank of New York was "very concerned" that the proposed regulations would "require a level of due diligence and transaction monitoring that is significantly broader" than the procedures in place and "would impose the obligation to seek out illegal activities." ³⁸

        Yet, the flowing billions have compromised the ability of banks to assert privacy interests in the more public forum of Congressional hearings. In recent testimony, Citigroup’s co-chairman, John Reed, reportedly has even supported bringing "bribes and looting government treasuries" under federal laundering laws. ³⁹

        The handwriting is on the wall - especially with Mr. Reed’s apparent endorsement. Financial institutions operating in the U.S. are off-limits to foreign corrupt money. Banks simply must use due diligence in checking out new and existing customers. Banks should get over the cultural hurdles which Mr. Reed has acknowledged as: becoming advocates and losing objectivity, while lacking the "temperament or discipline needed to ask clients detailed questions about their funds and transactions..." ⁴⁰ Temperament aside, bankers are asked in the first instance to monitor existing accounts for suspicious activity. But it is also the job of the banker to open accounts and expand client deposits. Only management, encouraged by board audit committees, can resolve these conflicting demands.

It is in their interest - and our own - that they do so.

James D. Harmon, Jr. operates THE HARMON FIRM LLC., the investigations company.

Copyright © 1999 The Harmon Firm, Inc. All Rights Reserved.
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