Anti-Money Laundering State Mechanisms E-Book

Michele Sciurba

• Herausgeber: Edition Faust
• Kategorie: Geisteswissenschaft
• Serie: Edition Faust Academic
• Sprache: Englisch

Seitenzahl: 203

Veröffentlichungsjahr: 2018

Beschreibung

This monograph offers a comprehensive analysis of the implementation of global anti-money laundering and counter-terrorism financing (AML/CTF) regulations in the United States and the European Union. It provides academics, legal professionals and interested readers with a deep understanding of the developments of the AML/CTF legal framework and guides them into the dimension of its most difficult relation with international and European human rights law. The implementation of global anti-money laundering regulations in the United Stated and the European Union has essentially led to the suspension of laws governing privacy and bank secrecy. Banks and other financial institutions now operate as an extension of law enforcement. The current Anti-Money Laundering regime jeopardises the fundamental achievements of the constitutional state. The increasing centralisation and cooperation of the competent authorities in the exchange of personal data information creates a security architecture that leads to a considerable risk of freedom restriction. In particular, the extension of the authorities´ power of intervention granting them access to citizens´ personal data without the need for initial suspicion underlines that a substantial part of the constitutional state is at risk. Furthermore, banks appear to use these policies as an instrument to clear legitimate but less profitable customers, in particular those with a migration background. Consequently, the implementation of the AML/CTF legal framework appears to follow a discriminatory path and clearly discloses incompatibility features with respect to the European Convention on Human Rights and Article 21 of the Charter of Fundamental Human Rights of the European Union. This monograph further explores factors contributing to the inefficiency of AML/CTF regulatory and legislative measures. Such factors are identified in inconsistent rules, which make the cooperation among national investigative authorities within the EU and at an international level more challenging. As a result, this work acknowledges regulatory and legislative harmonisation with respect to AML/CTF regimes as a central tool to successfully improve the effectiveness of AML/CTF regimes, while preserving the individual right to privacy, due process and civil rights.

Leseprobe

Michele Sciurba

ANTI-MONEY LAUNDERINGSTATE MECHANISMS

International Experiences,Current Issues and Future Challenges

Afterword by Ben Emmerson

Monograph

© 2018 Edition Faust, Frankfurt am Main

All rights reserved, including the right of reproduction in whole or in part in any form.

Designed by Bayerl & Ost, Frankfurt am Main

Printed in Germany

druckhaus köthen, Köthen (Anhalt);

circulation 800 copies signed to print on 12 February 2018

Michele Sciurba

Anti-Money Laundering State Mechanisms: International Experiences, Current Issues and Future Challenges: Monograph / Public Administrative Law / Michele Sciurba / Edition Faust Academic, 2018. – 160 pp.: Annex – Afterword: pp. 123-160.

Executive editor/Leitende Lektorin: Sarah Schuster

Bibliografische Information der Deutschen Nationalbibliothek

Die Deutsche Nationalbibliothek verzeichnet diese Publikation in der Deutschen Nationalbibliografie; detaillierte bibliografische Daten sind im Internet abrufbar über <http://dnb.d-nb.de>

German National Library Cataloguing in Publication Data

A catalogue record for this book is available from the German National Library

UDC 35.08 (082+083)

ISBN 978-3-945400-55-5

eISBN 978-3-945400-62-3

Contents

Preface

I.Theoretical and Methodological Aspects of Anti-Money Laundering State Regulation: The US Experience

I.1Brief History of Combating Money Laundering

I.2The Bank Secrecy Act 1970: A Model for Modern AML Regimes

I.3The Current AML Regime in the US

I.4The USA Patriot Act

I.4.1The USA Patriot Act’s Effect on Financial Institutions

I.4.2Consequences of the New Sanction Regime under the USA Patriot Act: BNP Paribas and Commerzbank

I.5Conclusion

II.The Global Financial Crisis’ Worldwide Impact on the Implementation of Anti-Money Laundering Standards in the OECD Countries

II.1The Extension of International Anti-Money Laundering Objectives

II.2Combating Tax Evasion under the Anti-Money Laundering Framework

II.3The EU AML Regime’s Development Subsequent to the 4th AMLD in View of Future Regulatory Challenges

II.4Conclusion

III.Anti-Money Laundering and Counter-Terrorist Financing State Mechanisms in the European Union

III.1The Fight against Organised Crime in the European Union

III.2The Unfinished Task of Harmonising EU Criminal Law

III.3The Significance of Article 82 TFEU for the Cross-Border Prosecution of Financial and Organised Crime

III.4Conclusion

IV.The Fourth Anti-Money Laundering Directive: EU Policy Undermining The Rights To Privacy and Data Protection of EU Citizens

IV.1The 4th Anti-Money Laundering Directive

IV.2The Current AML Regime in the EU

IV.3Inefficiencies of Current Anti-Money Laundering and Counter-Terrorism Financing State Mechanisms in the Prevention of Terrorist Attacks

IV.4The Latest Issues for the EU Anti-Money Laundering Regime: Brexit and the Fifth Anti-Money Laundering Directive

IV.5Conclusion

V.Human Rights Violations and Discriminatory Side Effects in the Fight against Terrorism: Current Anti-Money Laundering and Counter-Terrorism Financing Policies in the UK

V.1The Principle of Confidentiality and Loyalty

V.2Progressive Abrogation of Banking Secrecy

V.3Areas of Discrimination under the Current AML and CTF Mechanisms: Evidences from the UK

V.4Applications of AML and CTF Rules in Breach of Human Rights Law

V.5Conclusion

VI.International Institutional Cooperation and Standard Setting in the Fight against Money Laundering and Terrorism Financing

VI.1The Creation of an International Anti-Money Laundering Network

VI.2International Cooperation of FATF, IMF and World Bank

VI.3Unsolved Problems in International Institutional Cooperation

VI.4Conclusion

VII.Corruption in the Ukraine, Brazil and Equatorial Guinea: Economical, Social And Political Consequences

VII.1The Symbiotic Relationship between Corruption and Money Laundering

VII.2Recent Juridical and Administrative Developments in the Ukraine

VII.3The Integration Process of the Ukraine into the European Union

VII.4The Current AML Regime in the Ukraine

VII.5Corruption in Brazil: The Petrobras Scandal

VII.6Recent Anti-Corruption and AML Improvements and Reforms in Brazil

VII.7Administrative Corruption in Equatorial Guinea

VII.8The Influence of Oil on Equatorial Guinea’s Economy

VII.9Recent Anti-Corruption Developments in Equatorial Guinea

VII.10Conclusion

VIII.The Global Impact of the Growing Compliance Industry on Financial Institutions in the Fight against Money Laundering, Terrorism Financing and Tax Evasion

VIII.1The Compliance Obligation of Financial Institutions

VIII.2The Rise of Compliance Requirements: Strengthening AML Policies

VIII.3Adverse Consequences of Growing Compliance for Financial Institutions

VIII.4Conclusion

Annex

List of Abbreviations

Index

Bibliography

Table of Cases

European Court of Human Rights

International Law Sources

EU Legislation

European Commission Documents

Statutes and Statutory Instruments

Recommendations, Guidelines and Standards

Books

Journal Articles, Reports and Studies

Newspaper and Online Sources

Acknowledgement

Curriculum Vitae

Afterword

Preface

This academic work examines the objectives, development, implementation and effectiveness of global anti-money laundering regulations in the US and EU and the impact of their present implementation on civil and human rights. Anti-money laundering (AML) legislation was originally aimed at protecting financial institutions from misuse and only subsequently was expanded to include counter-terrorism financing (CTF) regulations. The implementation of these regulations have largely suspended the norms and laws governing privacy and bank secrecy, turning banks and other financial institutions into an extension of law enforcement. They have also imposed burdensome reporting requirements on banks, which in order to avoid legal liability and sanctions imposed by AML/CTF legislation for non-compliance have engaged in excessive and early reporting of suspicious financial activities. Banking de-risking policies have placed ordinary citizens under a general blanket of suspicion and resulted in them being denied bank accounts or having existing bank accounts closed. In addition, banks appear to use these policies to rid themselves of legitimate but less profitable customers, who are often socially at risk. As a result, the implementation of the AML/CTF legal framework as it stands is discriminatory and infringes the European Convention on Human Rights and the Charter of Fundamental Human Rights of the European Union.

The political pressure to combat international terrorism in the wake of 9/11 sparked a flurry of AML/CTF legislation aimed at cutting off funding for terrorists. In the US, there was the passage of the USA Patriot Act 2001 and the tightening of the Bank Secrecy Act 1970; in the UK the Proceeds of Crime Act 2002 was passed and at the EU level the Fourth Anti-Money Laundering Directive (4th AMLD) was implemented. These laws added tax evasion to the list of money launering offences and, in conjunction with current Financial Action Task Force (FATF) Recommendations, have created a change from a punitive to a preventive rationale for this legislation.

Given the original aims of AML and CTF legislation, marrying these two distinct law enforcement objections into one legislative package has produced mixed results. Both in terms of efficiency and fairness, AML/CTF legislation seems to fall short of its goals. The changing face of global terrorism since 9/11, especially with regard to terrorist financing, raises questions as to whether the FATF Recommendations implemented in the 4th AMLD are in fact the best means for preventing terrorist financing and, thus, terrorist attacks. In recent years, as terrorist organisations have been defeated on the battlefield and the fight has moved to civilian targets in Europe and elsewhere, it has become clear that planning and executing a terrorist attack does not require a significant commitment of financial resources or reliance on dubious and complex international financial transactions. Hence, in addition to being discriminatory and incompatible with international and European human rights law, it is questionable whether current AML/CTF mechanisms are effective.

A contributing factor to the inefficiency of AML/CTF regulatory and legislative measures is inconsistent rules. An example of this inconsistency is the treatment of the 4th AMLD with respect to tax predicate offences. Such inconsistencies make it more difficult for national investigative authorities within the European Union and internationally to cooperate with each other. As a result, this monograph argues that regulatory and legislative harmonisation with respect to the United States and other FATF members is central to improving the effectiveness of AML/CTF regimes.

This academic work also examines the connection between money laundering and corruption. Corruption is often a challenge for developing economies and countries transitioning to democratic forms of government. It weakens political and economic reform by creating perverse incentives that undermine free and fair competition. Political corruption opens up the system of public policy to the highest bidder. In many developing countries, the presence of rich natural resources offer abundant opportunities for corruption and bribery that put the brakes on democratic reforms and economic development. In fact, reducing corruption is the single most important factor for improving government efficiency and public service.

Finally, this monograph suggests how AML/CTF regimes can be improved by harmonising national and international legislative and administrative requirements without ignoring violations of civil liberties. Clearly, terrorism poses a grave danger to international security. There is, therefore, a legitimate interest in national and international security. The legitimate need for national security needs to be balanced, however, against the individual right to privacy, due process and civil rights. National security cannot be used as a blanket excuse to suspend or disregard fundamental rights. While much research in the field has focused on the effectiveness of AML/CTF legislation, there has been a striking lack of interest in the impact of the current implementation of these rules on human and civil rights. This monograph seeks to close this research gap by examining how AML/CTF legislation in the US, the EU and the UK can more effectively combat money laundering, terrorist financing and tax evasion without compromising fundamental human and civil rights.

Michele Sciurba

10 February 2018

I.

Theoretical and Methodological Aspects of Anti-Money Laundering State Regulation: The US Experience

I.1 Brief History of Combating Money Laundering

The purpose of money laundering (ML) is to circulate money originating from a criminal offence back into the regular money cycle in order to legalise it. The history of fighting against ML began in the United States (US) in the 1920s. Probably the best-known money launderer was gangster boss Alphonse Gabriel “Al” Capone. Although Capone laundered income from illegal bootlegging and contract killings through various fictitious companies and fake transactions, the US investigative authorities could not produce adequate proof that he was engaged in money laundering. The US Federal Government, however, was able to charge Capone with tax evasion.1 In United States v Sullivan2, which was a precedent for Capone’s prosecution, the Supreme Court had ruled that illegal income must be taxed. In the end, Al Capone was sentenced for tax evasion in 1931 based on the fact that he failed to submit tax declarations in 1928 and 1929.3 The fight against money laundering and organised crime has ultimately become a key issue for law enforcement. The Bank Secrecy Act of 1970 (BSA)4 requires financial institutions to have compliance mechanisms in place to monitor and report daily aggregates surpassing USD 10,000 in order to counteract organised crime and prevent money laundering.5 At the same time, however, the BSA de facto greatly reduces banking secrecy and the privacy of bank customers, which was previously protected, so that the government can receive information about customers banking operations. The adoption of the Right to Financial Privacy Act (Privacy Act)6 in 1978 initially served as a counterbalance to this legislation.

The basic three-tier model of money laundering includes: (1) the laundering of money obtained from illicit activities, such as drug trafficking or insider trading, (2) via sham businesses, such as restaurant chains, (3) in order to integrate the seemingly legal “dirty” money into the normal banking system.7 The fight against money laundering has been connected to the fight against organised crime and international drug trafficking from the beginning. In the 1970s, the “war on drugs” was the starting point for developing international Anti-Money Laundering (AML) regulations, such as the United Nations (UN) Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances8 in 1988.9 In addition, the leading industrial nations decided to take joint action in order to curb the criminal misuse of the financial system for the purpose of laundering drug money at the G7 summit in Italy in 1987, which resulted in the creation of the Financial Action Task Force on Money Laundering (FATF) in 1989, an intergovernmental body commissioned with setting global AML standards.

In 1990, the FATF issued 40 recommendations that served as AML standards for financial institutions. In addition, the FATF created a blacklist of non-cooperative countries and territories (NCCT) faced with severe restrictions in terms of international financial market participation.10 This list illustrates the FATF’s major global influence notwithstanding its lack of legislative status. After the September 11 attacks fundamentally changed the world’s security situation, the FATF published nine specific recommendations on the fight against terrorist financing (TF). Taking into account this new focal point, the UK adopted the Proceeds of Crime Act (POCA) 200211 in addition to the Terrorism Act 200012 and the Anti-terrorism, Crime and Security Act 200113. The European Union (EU) implemented the Second Anti-Money Laundering Directive (2nd AMLD)14 in December 2001, through which the FATF Recommendations first applied in the European Community.

In the wake of rising national and international security concerns, banks are exposed to severe sanctions and bear legal liability if they fail to comply with AML and Counter-Terrorism Financing (CTF) legislation. As a result, banks have implemented de-risking policies. These policies, however, undermine the confidential nature of the relationship between banks and their customers and disregard the central importance of the duties of loyalty and confidentiality. Based on the risk profiles of their customers, banks try to limit their own risks preventively, for example, by denying accounts or terminating existing accounts of legitimate customers. The risk-profiling policies animate banks to dismiss less profitable customers, discriminate against specific customer groups and justify this conduct with the need to mitigate risks. Using this approach, banks de facto not only act as extensions of law enforcement, but also raise civic and human rights concerns by disregarding the private relationship to their customers. The competent authorities have created a security structure with a significant risk of a restriction of freedom through the increasing cooperation in the centralisation and exchange of personal data. Today, the authorities’ extended power of intervention allows them access to the personal data of any citizen without reasonable suspicion of wrongdoing. The current Anti-Money Laundering regime has evolved into a system that puts the constitutional state at risk and essentially jeopardises the achievements of the state under the rule of law.

I.2 The Bank Secrecy Act 1970: A Model for Modern AML Regimes

In 1970, the US adopted the BSA which, for the first time, required financial institutions to report deposits, withdrawals, exchanges of currency, or transfers exceeding USD 10,000. In order to meet the BSA’s requirements, the financial institutions had to install corresponding internal controlling and monitoring systems. Compliance officers now monitored the daily activities and trained the bank personnel to meet the new demands under the BSA.15 In addition, the Money Laundering Control Act16 of 1986 defined ML as a serious crime punishable with a fine of up to USD 500,000 or up to 20 years of imprisonment.17 In the late 1980s, the UN and EU added the issue of global cross-border activities of organised crime to their agenda.18

One of the BSA’s main tasks is to impede money laundering while helping US banks to be less vulnerable to ML activities. In order to integrate AML programs into financial institutions, designed to uncover and stop financial crimes, the BSA has authorised the Secretary of the U.S. Department of the Treasury to adopt regulations appropriate for the implementation of the Act and require implementation from banks and financial institutions.19 Organised crime responded to the new measures under the BSA by dividing transfers of “dirty” money into amounts below USD 10,000 to avoid potential monitoring. In response to this behaviour, the supervisory authorities tightened the reporting requirements for suspicious transactions to amounts exceeding USD 5,000.20 The BSA regime placed different requirements on individual financial institutions and intermediaries. Western Union, for example, has to report transactions exceeding USD 3,000. All things considered, the BSA represents a starting point in two respects. First, it marks the beginning of modern AML legislation for combating organised crime. Notably, similar AML legislation has been implemented globally based on the BSA model. Second, the BSA began a creeping erosion of banking secrecy, abandoning the protection of bank customer privacy. In the entire Western world today, virtually any bank customer can become the subject of a money laundering investigation without reasonable suspicion or grounds.21

I.3 The Current AML Regime in the US

The establishment of the BSA in 1970 marks the beginning of AML legislation in the US and has been an integral part of the fight against money laundering and organised crime, especially in relation to drug trafficking. Subsequently, the Money Laundering Control Act created the legal basis for severe penalties for money laundering offences in the 1980s22 and the 1990s23.24 The founding of the Financial Crimes Enforcement Network (FinCEN) in 1990 put a strong emphasis on cross-border tax evasion under the BSA.25 Yet, after 9/11, the fight against terrorist financing became a central part of AML legislation in the US. For this reason, the USA Patriot Act 200126 contains several AML provisions27, despite the focus of the Act on the fight against international terrorism. This includes the obligation of financial institutions to establish AML programs in section 352.28 In 2003, the U.S. Treasury delegated the administration and enforcement of the BSA’s provisions to the Director of the FinCEN based on the Treasury Order 180-0129 in the course of the inclusion of CTF into AML objectives. Today, the board of directors of individual financial institutions is in charge of maintaining an effective AML control structure in line with BSA requirements for the monitoring and reporting of suspicious activities. The internal control mechanisms must carry out risk assessments to monitor specific risk areas vulnerable to money laundering and terrorist financing. Thereby, all Know-Your-Customer (KYC) and customer due diligence requirements must meet the requirements of the AML rules under the BSA.30

The US has taken a pioneering role in the fight against organised crime and tax evasion by creating international collaborations that have led to the adoption of UN Treaties, recommendations of the Council of the Organisation for Economic Co-operation and Development (OECD) and the founding of the FATF. After 9/11 painfully demonstrated the vulnerability of the Western world to terrorist attacks, all OECD countries responded with a massive expansion of governmental powers in order to fight against money laundering and terrorism financing, such as those in the Patriot Act 2001 in the US. To that end, the USA Patriot Act, the FinCEN and the Office of Foreign Assets Control (OFAC) established a new AML/CTF security architecture that makes extensive monitoring, reporting and controlling in financial institutions its highest priority. Moreover, this new system has considerably broadened the definition of “company activities” as compared to the activities that were previously subject to the provisions of the BSA.31 A similar expansion took place in the EU with the implementation of the Fourth Anti-Money Laundering Directive (4th AMLD)32, and in the FATF member states with the implementation of the FATF 4033+ 934 Recommendations, respectively. Under the banner of waging a “war on terror”, bank secrecy was de facto abolished. Noticeably, the Patriot Act suspends the presumption of innocence and disregards the right to a fair trial and, thus, is largely incompatible with human rights law and international law. Although the USA Freedom Act 201535 has replaced large parts of the Patriot Act in the meantime, little has changed regarding this substantive incompatibility.

I.4 The USA Patriot Act

Over the last 20 years, technical developments have contributed to the globalisation at an ever-accelerating pace in all areas of communication, capital flows and international trade in goods. Organised crime does not stop at national borders but rather adapts itself to new regulatory developments.36 By the time of the establishment of the FATF, the First European Anti-Money Laundering Directive (1st AMLD)37, and the adoption of the UN Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances 1988, the fight against ML and financial crimes had become a central matter for international cooperation. After 9/11, the urgent question of how to detect and prevent terrorist financing was coupled with the question of how to prevent ML, as the shock waves of the attacks significantly shook the Western world. President Bush issued a series of executive orders aimed at destroying the basis for funding terrorist organisations and terrorists. The Bush administration created new investigative bodies, such as the Policy Coordinating Committee on Terrorist Financing,38 to coordinate measures against terrorist financing in the US.39 Finally, the USA Patriot Act was adopted at an unprecedented speed in order to provide an effective tool against international terrorism and terrorist financing.

The Act declared several business and financial transactions illegal, greatly expanded existing law enforcement powers and forced financial institutions to establish new customer due diligence measures. At the same time, the Act has considerably weakened privacy and confidentiality laws, providing for severe penalties in case of non-compliance by financial institutions.40 In Title III, the Act contains various provisions that greatly expand the AML and CTF regime. In section 311, the Patriot Act extends the scope of the BSA by adding section 5318A U.S. Code (USC)41.42 The Secretary of the Treasury now has the authority to impose measures in the AML and CTF context that have extraterritorial effect.43

I.4.1 The USA Patriot Act’s Effect on Financial Institutions

Section 311 of the Patriot Act has added section 5318A USC to the BSA, expanding it to include five measures with extraterritorial effect that, in case of money laundering, empower the US authorities to oblige foreign jurisdictions, institutions or financial institutions to provide: (1) additional records or reports of specific financial transactions; (2) the identities of foreign beneficial owners of certain bank accounts; (3) the identities of customers of a foreign bank conducting interbank transactions via “payable through” accounts; and (4) the identities of foreign bank customers who use correspondence accounts in interbank transactions. In addition, the US authorities may restrict or prohibit the establishment or maintenance of certain interbank correspondent or “payable through” accounts.44 Section 313 of the Patriot Act has implemented the subsection (j) in the USC Title 31 §531845, prohibiting US financial institutions, security brokers, and dealers from opening or managing correspondence accounts of foreign shell banks. This measure closed another gap to prevent potential terrorist financing. Accordingly, the shell company Bank al-Taqwa based in the Bahamas was identified as financing terrorism in November 2001.46 The Patriot Act now provides a comprehensive list of potential terrorist financiers who are denied access to the US financial market.47

Section 314 of the Patriot Act encouraged the exchange of information among investigating authorities and financial institutions with regard to terrorist acts or money laundering activities, lifting any liability of financial institutions and their employees in the event of information disclosure to the authorities. The provisions of section 314 are, therefore, in clear conflict with the provisions of the RTPA 1978 and the Gramm-Leach-Bliley Financial Modernization Act 199948. The latter already prohibits the transfer of customer information among financial institutions for marketing reasons.49 The Patriot Act suspends the core provisions of the RTFP 1978 for investigations of US authorities that are concerned with international terrorism.50 Under section 352 of the Patriot Act, the FinCEN is responsible for the exchange of information amongst financial institutions and law enforcement agencies as well as the monitoring of the implementation of AML programs in financial institutions.51 Coupled with the AML/CTF risk-based approach (RBA), these new information requirements for US financial institutions have resulted in an estimated annual cost of USD 10 billions in the US.52 Section 317 of the Patriot Act has provided notably more opportunities to the US courts to freeze and confiscate foreign assets in the US related to AML/CTF offences. The strict requirements of the AML regime in the US apply even to travel agencies due to expansion of the definition of financial institutions in section 318 of the Act.53 By resolution of a US court, section 319 of the Act now allows the US authorities to seize deposits from a foreign bank, if a terrorist has funds on this bank and a correspondent account in the US.54

I.4.2 Consequences of the New Sanction Regime under the USA Patriot Act: BNP Paribas and Commerzbank