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Strategies in combating organized financial crime and corruption
WHITE-COLLAR CRIME IN EUROPE
Overview of the 3d Colloquium on Cross-border Crime in Central and Eastern Europe “Cross-border Organized Financial Crime and Corruption”, which took place in Bratislava, October 12 to 13, 2001
October 12 to 13, 2001 in Bratislava (Slovak Republic) the Third Colloquium on Cross-Border Organized Financial Crime and Corruption took place. The following countries were represented at the Colloquium: the Netherlands, Great Britain, Belgium, USA, Ukraine, Slovenia, German, Austria, Czech Republic and Slovak Republic. The Colloquium host was the National Police Academy of the Slovak Republic in Bratislava.
The discussions were devoted to three main topics: Financial Crime, Corruption and Strategies for fighting Organized Financial Crime and Corruption. Dominantly the presentations and discussions had theoretical character but reports concerning situation with financial crime and corruption took place as well.
Financial crime. Financial crime in understanding of the participants of the Colloquium is a crime directed against financial institutions with abuse of financial systems and use of financial instruments. Victims of financial crime are all taxpayers. Crimes discussed in the frame of financial ones included Tax Fraud and Tax Evasion, Bank Fraud and Money Laundering.
It is a growing problem in the modern world. Financial crime share in criminal statistics is about 10-15%. Fraud in banking sector is under rise. This growth has started from 1997. Abuse of electronic banking and plastic card fraud are new kind of financial crimes. Computer crime is very rare in the sphere of banking sector. There are no examples when hackers from outside committed crimes against banks in Slovak Republic. It was an attempt to copy a web site of a bank in one person’s server and represent this person’s site as an official web site of the bank after some improvement. There are about 3,4 billion customers use smart cards in the Slovak Republic. Law enforcement is not ready for such quantity of operating card in terms of prevention and investigation.
^ New forms and trends of money laundering have appeared. Criminals use more often banks and bank accounts situated abroad. For money-laundering operations postal money orders, guarantees operations, securities guarantees abused quite often; forged documents are used, financial institutions are abused. Cash is used; currency is US dollars. Majority of money laundering schemes are not difficult. What is difficult it is to recognize (reconstruct) the scheme and trace the money. Most frequent financial conduct includes: hiding the whereabouts of assets; pretending ownership of straw man; loans between front firms; personal loans to small and medium size companies; investment in sport, casinos etc.; loan back (often without interest or payment); last minute (paper) ownership change; simple export of cash; inflation of turnover; good living. Crime money is invested ones, and then they operate in legal business as legal assets. At the end of the day they are good for the economy, they work. The worst situation is in Russia (Ukraine). Russians (Ukrainians) robber their countries by exporting money abroad.
The biggest problem favoring money laundering in the Central Europe is off shore companies. It is easy to buy a bank and/or off shore company, one can do it by the Internet. Particular problems with off shore companies are: they can’t have any activity in the country of registration; it is difficult to find the place where it is really working, so it is very difficult to find a jurisdiction; it is very difficult to find a real benefiting person; people in the country of registration are not real benefiting persons; there is no decision makers in the country of registration; no liability for not paying taxes; no proof of paid-up capital; no double taxation agreements; no book keeping requirements of accounts; strict bank secrecy; liberal foreign exchange control; excellent on-side services. Such conditions favors money laundering and make investigations difficult.
In the Slovak Republic the legal monitoring system to control money laundering covers four different levels. It is Criminal Code; Statuses with rules of Criminal Procedure; National Council of SR on Proof of Source of Assets and Prevention of Legalization of Illegal Proceedings Act; and European Union Directives. Protection from Money Laundering has 3 vertical levels: (1) when persons and entities enter the market (they are inspected by banks, securities etc.); (2) Financial Intelligence Unit (official law enforcement bodies) find, detect schemes of money laundering; (3) international cooperation in battling money laundering: exchange of information between law enforcement and banks. A lot of countries have bilateral agreements on exchange of intelligence information. In Slovak Republic it is good and professional according to them.
Slovak Republic has already changed a law on money laundering. The old law was from 1997 and regulated prevention of legalization of funds obtained from organized crime activities. The new one is enacted from January 1st 2001. It names sources of illegal money and sets liability for legalization of proceeds of any crime. It has definition of suspicious transaction and obligation to report about such transaction to the Police. For example “Tatra Banka” (one of the leading banks in the SR) has detected 173 suspicious transactions since the law is in power and after detailed inspection 39 of them were reported to the Police.
Definition of suspicious transaction is critical issue. Each bank has its list of suspicious transactions and this list is continuously updated. Suspicious transaction is not only withdraw of cash, it is also could be direct debits, opening of account 2-3 days before the transaction happened, inspection of cash flaws in new accounts. To make work with the transactions more effective scoring system for customers concerning suspiciousness, know-your-customer policy are used.
Anti money laundering legislation and policies have negative consequences as well. They resulted in growth of corruption within banks and other financial institutions. Now bankers are criminals when they are doing their job. They are paid bribes, blackmailed etc. to do their job. These regulations at international level create “private states” that (intentionally or not) imperil crime control efforts in other nations. They can lead to international commercial sanctions like loss of customers from major international companies. At national level private institutions of the same character have appeared.
Anti money laundering policies and schemes can be used in detection of terrorist funding. There are three kinds of sources of terrorist funding: (a) legal sources when people voluntarily support the terrorists; (b) legal assets gained from tax evasion; (c) and money gained from illegal operations like drug trafficking, smuggling, and selling of weapons.
New approach in understanding money laundering was proposed. Money laundering is nothing more then ordinary management of criminal finances or criminal financial management. When criminal has assets of crime he will manage them: to spend, to invest, to give them legal source, use both in legal and illegal business. Money laundering or criminal financial management includes following kinds of activities: change of identity of stolen cars, objects of art etc.; documentary fraud (keeping documents which hide source of money or give incorrect information about the source of the money) and subsequent covering acts; lying about the hiding place; downloading illegal software. Criminals work for pension. During their life they are buying property, invest money in businesses, pension funds, create own criminal pension funds.
New term has appeared – “financial fingerprints”. It means a kit of documents, which reflect financial activity of a natural or corporate person. Unlike the situation with ordinary fingerprints, if somebody hides financial ones he will be punished for this because it means hiding of income, source of money flows etc.
Money laundering is closely connected to Tax fraud and Tax evasion. The difference is that the money laundering uses illegal capital and in tax evasion the legal one, which is hidden; in money laundering quite often foreign entity and owners are used, and tax evasion possible only in one jurisdiction. Money laundering is usually committed by group of persons when a single person can commit the tax evasion. Tax crimes committed by very intelligent individuals. This crime has international aspect in terms of claims of VAT refund. Tax fraudsters use mediators – so called “white horses”, which claims the VAT refund providing forged documents for taxable service, that performance has been made. They use as a rule computer business, it’s difficult to estimate the real price of the goods. Organized criminal groups use bank staff, very good trained individuals to commit crimes. Forged documents like business records for receiving credits; loans etc. are used very often in the crime patterns. Corruption of tax and Police officers favors commission of financial crimes by organized criminal groups.
Financial crime in the Europe in the majority of cases is committed by criminal structures. Criminal structures could be organized in 2 forms: criminal networks and criminal organizations. Networks are just number of people who know each other and communicate from time to time to commit crimes. Organization has it’s clear structure with horizontal (division of labor) and vertical (division of power) division of competence.
Organized criminal groups operating in financial have its own structure. At the top there is so called “Brains”, which are strategic planners of the operations. They manage the group. Profile of a “brain”, financial fraudster is following. Age is about 50, some even 70 but remain in office. They never operate in home country, always set up offices in hotels, don’t have any criminal records, have diplomatic passports bought from corrupted public officials, and have excellent knowledge in both international and domestic laws of Eastern and Central Europe countries. To commit financial fraud they set up fictitious companies registered to post boxes, use consultants and international notorieties, they draw up contracts, use forged guarantees. They use the same fraudulent schemes everywhere. They take very high commissions. There are about 500 of such fraudsters operating in Europe. They recently became more dangerous because started work together. They set up huge networks. It’s almost impossible to charge and sentence them. They are very skillful avoiding attention of the police and consequently punishment. At the middle there is mentioned above “white horses” who sign contracts, forge documents, find banks and bank servants, bribe them and law enforcement. They are the most active operatives of the criminal group activities. At the lowest level of criminal hierarchy are soldiers (or warriors, “runners”, “gofers”) who organize offices, set up accounts, withdraw money, responsible for technical issues etc. They never know the whole picture and never meet the “Brains”.
Corruption. Corruption was discussed from different prospective, like social and psychological phenomenon with measures should be taken at international level.
Psychologically corruption is leadership decease. It is a paradox of good leadership. Psychologically corrupting process consists of following stages: (1) phase of extravagance, when people start want to have more; (2) erosion of accountability, when people over evaluate their position and power, start to feel that they’ll not be punished for some violations; (3) ownership phase when a person start to think about public funds and responsibilities as about his/her own ones; (4) “Caligula appointments” when people without necessary skills appointed but who will depend wholly on them; (5) favoritism when skilled people given jobs for future favors.
Corruption as a social phenomenon consists of following elements: decision maker is a subject, always involved; he/she knows rules and criteria, which are violated; they have accountability for the violating actions; there is another, controlling authority as usual.
Corruption in private sector means fraud. Numbers in statistics could be misleading, but giving bribes is more common then taking. People give bribes often without being asked for one. Growth of corruption usually takes place after change of political power.
The United Nations has rich experience dealing with corruption. Today the UN experience is: economic growth in a country does not eliminate automatically poverty. The more they know about corruption the more realize they know nothing about this phenomenon. UN is developing Global Program Against Corruption. The main problem they faced with is definition of corruption. There are about nine different kinds of activities, which could be referred to as a corruption. They are misuse of public power for private aim, fraud in private sector, illegal political party financing, embezzlement, acceptance of bribe, nepotism, extortion of bribe, abuse of power, conflict of interests etc. It is not clear what should be included in the definition of corruption. They are also developing anti-corruption tools kit. It includes about 30 different possible tools.
In fighting financial crimes cooperation at all possible levels is very important. Exchange of information between East and West is critical. Bilateral agreements of exchange of intelligence information by law enforcement agencies of different counties; cooperation between banks at both national and international levels; cooperation between banks and police like joint police-banks databases to have fast flow of information are possible ways of effective cooperation.
Provisions of law should favor fighting crimes. To make investigation simpler it is necessary to have prescribed obligation to keep financial documents for at least 5 years. Bank secrecy is a big problem for investigators but it is possible to overcome it. All you need is a political will.
Development of institutional profiling is necessary with following databases is necessary. On the other hand America is full of computers but full of financial crime too. So the databases are not the only one treatment for financial crime. Development of computer software, which will not proceed transaction with particular titles, i.e. suspicious transactions is one of the proposed ways of suspicious transactions selection process improvement.
Special subdivisions don’t perform their functions effectively. Financial police should cooperate with other divisions in tax evasion, financial crime and money laundering. The same agencies should deal with money laundering, fraud and tax evasion. Education of law enforcement officers and government clerks who is connected to control of financial institutions should be take place. Money laundering knowledge center for tax authorities was set up in the SR for example to give basic knowledge in money laundering issues.
Because companies in Eastern and Central Europe attacked by criminals more from outside them from inside more attention should be paid at internal prevention issues. Corporate policies should be directed against fraud. Obligations to report about suspicious transactions, behavior, and accountability for internal proceedings should take place.
In fighting corruption Codes of Ethics are very important. Narrow definitions and external factors should be taken in consideration while drafting. Strategy against corruption should contain mixture of repression and prevention like in Belgium. Strategies should be multi-disciplinary and integrated. Police corruption is important issue; joint assessments should be taken to the police corruption. Laws allowing the police to conduct selective investigations of corruption offences should be implemented.
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