Commercial Transactions - Money Laundering - A Study by Artur Victoria

One heartening development on the global financial scene is that it is being shown that coordinated international pressure on countries which fail to regulate against financial malpractice can have an impact. Although to be highly effective it does seem to need be backed up by some form of economic sanction or threat of sanctions.

One area where this has been particularly true has been the crack down on money laundering. While it is war against drugs rather than corruption that propels these campaigns, money laundering is vital to the bribery process. Action against money laundering is beneficial to the anti corruption movement. In almost all cases of international corruption those bribed usually need to have the 'dirty' money deposited in banks offshore or in countries associated with banking secrecy. The reasons for using such banks vary, sometimes to avoid detection but usually to allow the money to be spent outside the home country.

This situation may seriously hinder the effective implementation of OECD Convention on corruption as well as the fight against organised crime and money laundering.

Perhaps the most encouraging change within the Western European region has occurred in Switzerland. The heads of the big Swiss Banks - the legendary Gnomes of Zurich - once noted for their peerless discretion -have come under pressure to open up their books where their accounts are believed to be used in serious crime.

The initial impetus for transparency came from the belief that huge amounts of money deposited in accounts in Swiss Banks by Jewish people who were later murdered in the Holocaust was being withheld by Swiss banks shielding behind banking secrecy laws. The Swiss government overcame their longstanding reluctance in 1995, allowed these allegations to be investigated and required Swiss banks to assist. But the Swiss government, under growing pressure from outside, has extended the precedent and required banks to act where there are clear moral and legal issues at stake.

Most encouraging was the decision of the Swiss justice authorities to block several accounts held in the name of former Nigerian President Sani Abacha. It is believed that Abacha and his family moved some $600m into foreign banks accounts without facing any serious due diligence query by bankers. Credit Suisse, the main bank involved with handling the Abacha millions, is now facing a probe from the Swiss authorities. Switzerland also froze $50m in bank accounts tied to Vladimiro Montesinos, the former head of Peru's Secret Service, after Zurich investigators launched a probe into suspected money laundering.

In contrast, Cyprus has emerged as a money laundering centre in recent months. Much of the $2bn diverted out of Serbia by the family of the former dictator Slobodan Milosevic seems to have gone through Cyprus. The Island has also been a route for money laundering out of the CIS into the West. Since 1998 the G7 and the OECD countries have threatened more notorious tax havens with economic sanctions unless they overhaul their financial laws to make themselves more transparent and more co-operative with overseas law and tax authorities. Many of the notorious offshore centres are now in the process of cleaning up their act. Blacklists published by the OECD and FATF have put those centres with lax regulation in the world spotlight. Of 15 named in June 2009 some seven have made major reforms. Others are improving and only a recalcitrant few are refusing to take action.

The Bahamas, once a magnet for dirty money, appears to be turning over a new leaf. The integrity of the international financial system.

The Bahamian Finance Minister Sir William Allen said in March 2001 he accepted that lax regulation had been a problem. The Bahamas has moved resolutely to respond to what it recognises as a legitimate concern in international finance about the conduct of financial institutions and quasi institutions operating on the margins of finance and financial activity." The idyllic Cayman Islands once the refuge of every rich crook has reacted to the gathering storm clouds. President of FATF, Jose Maria Roldan, commended efforts by the Cayman Islands to pass anti money laundering legislation. In a letter sent to Financial Secretary the Hon. George McCarthy, the FATF president congratulated Cayman for responding to the FATF's blacklist.

The Cayman Islands has just 30,000 citizens but nearly 600 banks - making it the fifth-largest banking centre in the world. Some offshore tax havens remain recalcitrant even cheeky with local politicians reluctant to get off the gravy train. Grenada has proved a particularly poor regulator. After several years of allegations the Grenada authorities only acted at the beginning of 2001 and took over and liquidated the highly dubious First International Bank of Grenada. The bank was licensed solely on the capital asset of a red ruby, said to be valued at $20m (£13m). The bank offered early investors returns of up to 500 per cent, one of the highest rates ever offered by an offshore bank. Offshore banks cannot work effectively without the cooperation of major Western banks. In February 2001the US Senate minority Committee published a report highlighting a number of cases where banks on different offshore havens helped launder money or assisted financial scams. But more importantly the report also attacks a string of major US banks who, through the practice of correspondent banking, helped dubious offshore banks get dirty money onshore. First in the firing line was Citibank, closely followed by J.P.Morgan Chase and the Bank of America. All faced tough grilling about lax regulation of money coming from offshore banks at a Senate hearing.

But there is also a growing realisation within the banking sector that self-policing must work if the big banks want to maintain their credibility .