The twin problems of corruption and money laundering together have a devastating impact on national economies, international security, and human development. The World Bank and the International Monetary Fund (IMF) consider corruption the greatest obstacle to lifting millions of people out of poverty. Money laundering is vital to all profit-driven crime: the illegal trafficking of drugs, arms, and people, extortion and kidnapping, tax evasion and fraud, and especially corruption. From the spectacular collapse of the Bank of Credit and Commerce International in the early 1990s to current controversy over the British government’s cancellation of an investigation into a corruption-tainted $86 billion arms deal, such crimes have attracted the attention of governments and the general public alike. As a result, these closely linked problems are the targets of a panoply of international policy and legal initiatives.
Corruption and money laundering are symbiotic: not only do they tend to co-occur, but more importantly the presence of one tends to create and reciprocally reinforce the incidence of the other. Corruption produces enormous profits to be laundered, estimated at more than $1 trillion of illicit funds annually, funds that are increasingly laundered in the international financial system. At the same time, bribery, trading in influence, and embezzlement can compromise the working of anti-money laundering (AML) systems. This book analyzes the nature of the corruption-money laundering nexus and the various forms it can take. It proposes measures to enhance the effectiveness of AML systems by protecting their integrity, and argues for the potential contribution of AML measures to the fight against corruption.
A crucial concern motivating both the recent surge in policy interest in a corruption-money laundering nexus and this book is the implementation failures experienced in combating each issue in isolation. Why has the enactment by more than 180 countries of apparently comprehensive AML laws, regulations, and organizational structures failed to have a demonstrable impact on the level of money laundering? Similarly, why has the widespread acceptance of global anticorruption standards failed to reduce the level of largescale international corruption? This book suggests that the current strategies to deal with money laundering and corruption have fallen short of expectations at least in part because these problems have been considered in isolation. Our contention is that by investigating money laundering and corruption in a systematic and above all integrated fashion, the knowledge of both illicit activities and the remedies to address each will be improved. Following the money trail should help to detect and deter corrupt exchanges, while protecting AML agencies from corruption can be expected to boost their future effectiveness. Criminals do not consider financial crimes in isolation; neither should those seeking to attack such practices.
The central proposition of this book can be simply put: that corruption and money laundering, previously researched in isolation from each other, are closely interrelated. The failure to properly understand the corruption–money laundering nexus inhibits our knowledge of each problem, and undermines the success of policy measures to tackle them. Through a policy and legal analysis, the book shows how corruption facilitates money laundering, and vice versa. Furthermore, it demonstrates specifically how the responses developed to combat one type of financial crime can productively be employed in fighting the other. Though detailed definitions are provided in chapter one, money laundering can be understood as the process of obscuring the illegal origins of money derived from crime, corruption as the abuse of entrusted authority for private gain. Money laundering can take many different forms, but corruption covers an even wider range of behavior, from petty bribery to insider trading to wholesale looting by kleptocrat dictators. To prevent the discussion from being pulled in too many directions, coverage is limited to instances of large-scale corruption, often featuring senior political figures (so-called grand corruption), involving the cross-border movements of money or assets. As well as involving the largest dollar amounts, this kind of corruption poses the greatest threat to economic development, political stability, and the exercise of representative government. The occurrence and magnitude of these crimes are difficult to measure with any certainty, but corruption and money laundering are serious problems for most countries all over the world, rich and poor, large and small.
Although both corruption and money laundering have been high on the international governance agenda for some time, calls to analyze the relationship between them are much more recent. In the past few years the World Bank, the United Nations, the Asian Development Bank, and others have called for a more integrated approach to these two problems. For example, in 2007 the World Bank Governance and Corruption strategy noted that “Corruption and money laundering are a related and self- reinforcing phenomenon.” Similarly, the United Nations has stated: “There are important links between corruption and money-laundering . . . A high degree of co-ordination is thus required to combat both problems and to implement measures that impact on both areas.” Together with the launch of a joint UN–World Bank Stolen Assets Recovery initiative in September 2007 and its subsequent endorsement by the G7 leaders, these pronouncements underline the prominence of this issue, but also the current lack of detailed studies of the overlap and links between these kinds of crime.
In part this gap in our knowledge is to do with the relative novelty of corruption and money laundering as global policy priorities. Each has only come to prominence from the early 1990s. But more important is the artificial separation whereby agencies tend to focus too narrowly on their missions: anticorruption agencies deal with corruption, but not money laundering; AML bodies deal with money laundering, but not corruption. Furthermore, given the political sensitivity of large-scale or grand corruption and money laundering, diplomatic niceties tend to prevent a forthright consideration of policy and legal problems in confronting these issues.
Evidence for the arguments advanced in this book is drawn from a range of official documents and reports, academic writings, and media coverage. Especially important, however, are a series of discussions and interviews conducted by the authors in 2007 in Washington, London, Vienna, Paris, Strasbourg, Sydney, and Bangkok with key policymakers. Chaikin’s earlier hands-on experience working with the Philippines government to recover funds stolen by former president Marcos also features prominently, especially in chapter six. Although the examples and lessons discussed are drawn from all over the globe, there is a particular focus on the corruption–money laundering nexus in the Asia-Pacific region. Despite the drug- related money laundering from the Golden Triangle and Afghanistan, and the grand corruption and crony capitalism in the Philippines, Indonesia, and elsewhere, these sorts of crime are probably no more prominent in the Asia-Pacific than anywhere else. But this region does provide a unique mix of rich, poor, and middle income countries operating under very different legal and political systems, together with an incredible diversity of cultures. Aside from global arrangements, there is a reasonable degree of regional cooperation to combat corruption and money laundering, but not to the atypically high degree found in Europe or the North Atlantic region more generally, where most analysts and scholars have devoted their attention.
Argument and Chapter Overview
Before mapping out the structure of the individual chapters to come, it is important to establish the book’s three central aims. The first is to describe and analyze the various ways in which corruption and money laundering are related and often mutually reinforcing. The second aim is to diagnose vulnerabilities and shortcomings in the existing treaties, laws, and policies to combat corruption and money laundering, especially in the way these measures are implemented in practice. Last, the book argues for policy and legal reforms to target these kinds of financial crime more effectively.
With these overall goals in mind, chapter one first defines and explains corruption and money laundering. The second section gives a thumbnail sketch of the historical evolution of international standards to counter each type of crime. The remainder of the chapter explicates the corruption–money laundering nexus, illustrating the symbiotic tendencies at work with a case study from the South Pacific. Finally, it makes the argument (developed in the subsequent chapters) that success requires a more integrated approach to these related crimes. Such an integrated approach is both practical in legal and policy terms, as well as making good economic sense.
Chapter two provides an overview of the current initiatives relevant to the money laundering–corruption nexus. Because of the sprawling and uncoordinated nature of many of the relevant standards and policy developments in this area, often organizations pursuing complementary goals are unaware of the potential for productive intellectual exchange between them. It is still harder for those in private business and outside observers of the policy process to obtain such a synoptic view. This chapter will provide a succinct coverage of the various international initiatives in this area, from the United Nations to the Asian Development Bank. The strengths and weaknesses of these initiatives are then evaluated in subsequent chapters.
There is a presumption among practitioners that few of those engaged in corruption and money laundering are convicted for their activities, and only a very small proportion of the money involved in each is seized. Chapter three discusses the vulnerabilities that have led to such disappointing results. One example is the failure of many countries to criminalize money laundering related to corruption. The next section discusses the deficiencies in applying standard anticorruption techniques (particularly registers of assets and income sources) to AML bodies, but also to judges and prosecutors. The decision on whether or not to prosecute politically sensitive cases should be insulated from the government of the day. In the private sector, the ability of unregulated firms to establish and sell anonymous shell companies represents a significant weakness. Last, the bureaucratic disconnect between anticorruption and AML bodies undermines preventative surveillance and investigations.
Ensuring the integrity of political leaders and other senior public officials is simultaneously the most important and most difficult challenge of good governance. Chapter four explores how the finances of senior public officials (also know as politically exposed persons or PEPs) should be scrutinized to promote honesty and accountability. It is argued that the existing definition of senior public officials is too narrow. This category should include subnational leaders, senior figures in political parties, military and security police leaders, those directing public enterprises, and politically connected religious leaders. The treatment of extended families or clans, and extramarital affairs, are further complications. The most serious omission, however, is the restriction of PEP regulations in a large majority of countries to cover only foreign and not domestic officials. At present just how PEPs are to be identified is underspecified and has largely been delegated by public authorities to private firms, especially banks, who often do not have sufficient expertise and resources to perform this task. At the very least, governments must be prepared to give much more specific guidance to firms on this matter.
Grand corruption and money laundering are inescapably international phenomena. As such, any adequate response is fundamentally premised on international cooperation. Some of the most important issues discussed in chapter five are the exchange of intelligence, evidence, and suspects (extradition) across borders. The chapter surveys the variety of relevant international treaties and conventions to give a brief account of best international practice in these areas. The recovery of funds stolen by corrupt officials and stashed abroad is one of the most important goals of mutual legal assistance. It is an area of pronounced interest among developing countries in Asia and elsewhere, as in the last few years hundreds of millions of dollars have been repatriated to the Philippines and Nigeria. The chapter demonstrates how policymakers can best use AML intelligence and asset confiscation provisions to recover these funds.
The chapter on Ferdinand Marcos is a practical case study of the money laundering–corruption nexus. It explains how Marcos was able to use his position as president of the Philippines to become reputedly one of the biggest thieves in history. The money laundering methods used by Marcos in hiding his corrupt proceeds were so sophisticated that government officials believe that less than 10 percent (approximately $1 billion at 1986 value) of his illicit assets were recovered after the decision of a Swiss court in 2003. Legal action to recover the Marcos plunder is still ongoing in several countries. Neither Marcos himself, nor his family, nor any of his cronies served even so much as a single day in jail for their crimes.
The Conclusion outlines the future prospects of the struggle against the corruption–money laundering nexus, and draws together the central findings and suggestions for reform made throughout the body of the book. Prominent among these conclusions is the current underutilization of AML laws, regulations, and institutions in fighting corruption. The AML system provides governments with very powerful tools for gathering financial intelligence, enhancing international cooperation and recovering assets laundered and hidden in other countries. Yet too often the potential of these measures to counter corruption is overlooked because of an excessively-rigid bureaucratic separation of roles between different agencies. Thus while a more integrated approach is not a magic bullet solution for either corruption or money laundering, currently there is a near-ironic mismatch: countries in the Asia-Pacific and elsewhere are sorely afflicted by corruption, and yet are failing to capitalize on the investment they have made in AML systems that could assist in countering corruption. Because corruption is the single most important financial crime in many countries, and perhaps even the greatest obstacle to economic development, even modest progress would provide significant benefits to national welfare. In combination the chapters to come indicate how such progress can be achieved.
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