CHAPTER-II

CHAPTER II

LEGISLATIONS GOVERNING MONEY

LAUNDERING REGIMES GLOBALLY

2.1. INTERNATIONAL DEVELOPMENT OF MONEY LAUNDERING

LAW AND REGULATION - CONVENTION AND TREATIES

Efforts by the United Nations to combat organized crime can be traced to 1975, when the 5th
UN Congress on the Prevention of Crime and the Treatment of Offenders examined changing
dimensions of criminality, focusing on the notion of crime as business. Although the focus on
organized crime continued, it was overshadowed for much of the 1980s by more specific
concerns over drug trafficking and money laundering. These concerns resulted in the UN
Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances, adopted in
December 1988., which superseded earlier conventions signed in 1961 and 1971 and, in
effect, established the framework for subsequent efforts to combat drug trafficking and
money laundering1. Many of the international conventions are largely hard law obligations2,
though alongside soft law is also used. It is a fact that soft laws have impressive influence in
the global fight against money laundering. The Vienna Convention created three categories of
criminal offenses related to money laundering, although it did not use the term “money
laundering” in any of the three categories. Another area where the G-7 and the United
Nations have complemented each other’s activities pertains to the activities carried out by
criminal organizations to legitimize the proceeds of their activities, a complex process
summarized in the term money laundering. The 1988 Vienna Convention highlighted the
need to do something about the proceeds crime, illicit markets, and money laundering.
Similarly, the 1970 UN Educational, Scientific, and Cultural Organization (UNESCO)
Convention on the Means of Prohibiting and Preventing the Illicit Import, Export, and
Transfer of Ownership of Cultural Property was intended to prevent illicit trafficking in art
and antiquities. In contrast to these earlier initiatives, the draft convention focuses not on
particular items that are trafficked but on more generic issues. Accordingly, it establishes four

1
supra note 107; p188
2
Hard laws need to be ratified by State before it comes into effect

29
 CHAPTER-II

offenses: participation in an organized criminal group, money laundering, corruption, and

obstruction of justice.

The basic difference between the 1988 Vienna Convention and the 2000 Palermo Convention
is that the former applies only for drug related offences while the later applies to all serious
crime. UN was the first international organization to take action against money laundering,
and it is significant because of its ability to establish international law. Though the UN
initially concentrated on drug related money laundering, it later expanded the scope to many
other serious crimes, especially terrorism and financing of terrorism. FATF which is an
international trend setter in the area, took cognizance of various international conventions
while framing standards in AML/CFT for national regimes.

2.1.1 UN Convention against Illicit Traffic in Narcotic Drugs and Psychotrophic

Substances, 1988 (Vienna Convention)

The 1988 Vienna Convention was an initial effort and the participating governments were so
diverse, there are differences in each country’s criminalization of money laundering,
enforcement methods, methods of convictions and range of punishments. Despite the fact that
the UN had just adopted its 1988 anti-drug convention, the G7 countries with the USA, UK
and France in particular were not satisfied that these measures would be sufficient to prevent
the use of financial institutions for the laundering of drug proceeds. In 1988 at the G7
meeting in Harrisburg, USA proposed for the creation of a task force to promote the
programme of the Vienna Convention, which was opposed at that time by France was later
reinstated by them a year later at the G7 Paris summit in 1989 on the condition that they had
the initial Chairmanship and that the tax offences be included in the FATFs. But. Switzerland,
Austria and Luxemburg agreed to support the effort only if tax issues were taken off the
agenda. After consensus and compromises, the FATF was initially established as an ad-hoc
body but which has continued to be a major agenda-setter in prevention of money
laundering3.

This is one of the most important international treaties in the past 50 years. It not merely
requires its signatory states to criminalise the laundering of drug money, and to confiscate it
where found, but lays down so far as possible a common wording for the criminal statutes,

3
supra note 106; p9

30
 CHAPTER-II

and a common mode of enforcement. It also requires full and prompt co-operation between
the signatory states for the enforcement of these laws anywhere in the world. This agreement
in December 1988 commits all countries that ratify it to introduce a comprehensive criminal
law against laundering the proceeds of drug trafficking and to introduce measures to identify,
trace, and freeze or seize the proceeds of drug trafficking. The UK was one of the first
countries to ratify this Convention which has been ratified by over 50 countries4. The treaty
also promotes international cooperation as a key to reducing the global threat of money
laundering and requires states to provide assistance in obtaining relevant financial records
when requested to do so without regard to domestic bank secrecy laws5. One of the first
formal definitions of money laundering to gain international recognition is that found in the
Vienna Convention. The key elements of this definition include the conversion of illicit cash
to a less suspicious form, so that the true source or ownership is concealed and a legitimate
source is created. This definition was used by many countries when they drafted anti-money
laundering laws6. The scope of the Convention is to oblige parties to criminalize and
confiscate drug trafficking and money laundering. It also provides international cooperation
in all aspects of investigation, prosecution, and judicial proceedings, including extradition and
mutual legal assistance. Article 3(1)(a) regulates the criminalization of illicit drugs and
psychotropic substances. This article obliges each party to establish a comprehensive list of
activities involved in drugs-trafficking that are considered criminal offences under its
domestic laws. This includes production, manufacture, cultivation, possession or purchase of
any narcotic or psychotropic substances. This article also includes manufacture,
transportation, or distribution of any equipment, materials or substances, known to be used
for manufacturing illicit drugs. In addition, this article also required each participating party
to criminalize the organization, management, or financing of the drug offences enumerated in
the convention.

2.1.2 Political Declaration 1988

The Law Enforcement, Organized Crime and Anti-Money-Laundering Unit of UNODC is

responsible for carrying out the Global Programme against Money Laundering, Proceeds of
Crime and the Financing of Terrorism, which was established in 1997 in response to the
mandate given to UNODC through the United Nations Convention against Illicit Traffic in

4
[Link] accessed 18/01/2014
5
[Link] accessed 18/01/2014
6
[Link] accessed 18/01/2014

31
 CHAPTER-II

Narcotic Drugs and Psychotropic Substances of 1988. The Unit's mandate was strengthened
in 1998 by the Political Declaration and the measures for countering money-laundering
adopted by the General Assembly at its twentieth special session, which broadened the scope
of the mandate to cover all serious crime, not just drug-related offences7.

This foresaw inter alia the

“Establishment of an effective financial and regulatory regime to deny criminals and their
illicit funds access to national and international financial systems, thus preserving the
integrity of financial systems worldwide.” including

(1) Customer identification and verification requirement applying the principle of “know
your customer” in order to have available for competent authorities the necessary
information on the identify of clients and the financial movements that they carry out
(2) Financial record keeping

(3) Mandatory reporting of suspicious activity

(4) Removal of bank secrecy impediments to efforts directed at preventing, investigating

and punishing money laundering.

2.1.3 Suppression of the Financing of Terrorism Convention, 1999 (SFT)

It may not be common knowledge that there was an UN Convention for the Suppression of
the Financing of Terrorism proposed on 9th Dec 1999 which was open for signature from Jan
10, 2000 to December 21, 2011. Prior to 9/11 only 41 member nations had signed it, but soon
followed up by 91 more members. The Convention required ratification by 22 member
nations, which was lacking at the time of 9/11, but subsequently on 10th April 2002 the
Convention came into force. International Convention for the Suppression of the Financing of
Terrorism (the SFT Convention, 1999), requires ratifying countries to criminalize terrorism,
terrorist organizations, and terrorist acts. It applies to the offense of direct involvement or
complicity in the intentional and unlawful provision or collection of funds, with the intention
or knowledge that any part of the funds may be used to carry out any of the offenses
described in the convention, or an act intended to cause death or bodily injury to any person
not actively involved in armed conflict in order to intimidate a population, or to compel a
government or an international organization to do or abstain from doing any act. The

7 491
[Link]/moneylaundering accessed 30/11/2014 supra
note 130; p124

32
 CHAPTER-II

convention requires each country to take appropriate measures, in accordance with its
domestic legal principles, for the detection and freezing, seizure, or forfeiture of funds used
or allocated for the purposes of committing the described offenses. The convention came into
force on April 10, 20028. In terms of the 1999 International Convention for the Suppression
of Financing of Terrorism, those offences are deemed to be extraditable, and signatories must
establish their jurisdiction over these offences make the punishable by appropriate penalties,
take alleged offenders into custody, prosecute or extradite violators, cooperate in preventive
measures and exchange information and evidences needed in related criminal proceedings9.
The financing of terrorism was an international concern even prior to the attacks on the US in
September 2001, and in response to this concern the UN adopted International Convention for
the Suppression of Financing of Terrorism 1999. This Convention requires ratifying states to
criminalize terrorism, terrorist organizations and terrorist acts10. The Convention requires
each state party to take appropriate measures, in accordance with its domestic legal
principles, for the detection and freezing, seizure, or forfeiture of any funds used or allocated
for the purposes of committing the offences described, as well as take alleged offenders into
custody, prosecute or extradite them, cooperate in preventive measures and countermeasures,
and exchange information and evidence needed in related criminal proceedings. The offences
referred to in the Convention are deemed to be extraditable offences between state parties
under existing extradition treaties and under the Convention itself. It will not only strengthen
India's reach against those financing terrorism but also act as a check against generation and
accumulation of black money through terrorism or organized crime11. This Convention has a
major shortcoming as it does not provide for a monitoring agency to oversee enforcement of
the Convention. However, the Convention has been supplemented by the UN Security
Council Resolution 1373 of September 28, 2011 and since the Resolution has been placed
under Chapter VII of the UN Charter, it empowers the Security Council to enforce it terms by
using measures ranging from sanctions to use of military force12.

8
supra note 230; p5
9
supra note 368; p57
10
supra note 1; p-III-4
11
Ministry of Finance, CBDT, Government of India (2012), “Black Money – White Paper”, May 2012
12
Satapathy, C. (2003) “Money Laundering: New Moves to Combat Terrorism”, Economic & Political
Weekly,Vol.38 No.7 (Feb 15-21, 2003) PP 599 to 602),[Link]

33
 CHAPTER-II

2.1.4 UN Convention against Transnational Organised Crime, 2000 (Palermo

Convention)

The Palermo Convention is important because its AML provisions adopt the same approach
previously adopted by the FATF in its 40 Recommendations on money laundering. The
Palermo Convention seeks to strengthen the power of governments to combat serious crimes
by providing a basis for stronger common action against money laundering through
synchronized national laws, so that no uncertainty exists as to whether a crime in one country
is also a crime in another. Palermo Convention was of significance because of the fact that it
was the firstly legally binding UN instrument in the field of organized and serious crime.
Signatory countries pledge to (1) criminalise offences committed by organized crime groups
including corruption and corporate or company offences (2) combat money laundering and
seize the proceeds of crime (3) accelerate and extend the scope of extradition (4) protect
witness testifying against criminal groups (5) strengthen cooperation to locate and prosecute
suspects (6) enhance prevention of organized crime at the national and international levels (7)
develop a series of protocols containing measures to combat specific acts of transnational
organized crime13.

The Convention aims to promote international cooperation to prevent and combat

transnational organized crime. The scope of this Convention covers the prevention,
investigation, and prosecution of participants in an organized criminal group (article 5), the
laundering of crime proceeds (article 6), corruption (article 8), and obstruction of justice
(article 23). However, one thing that should be noted is that these crimes must be
transnational in nature. Regarding the criminalization of laundering criminal proceeds, this
Convention formulates it identical to the Vienna Convention and the Strasbourg Convention.
The difference lies in the predicate crime as a result of which the proceeds have been
generated. If the former links the predicate crime to drugs-related crimes and the latter does
not link it to any specific crime but leaves it open ended to the state parties, this Convention
encourages state parties to consider the widest range of predicate crimes including serious
crimes, participation in organized criminal groups, corruption, and the obstruction of justice.

The treaty has two main goals. One is to eliminate differences among national legal systems,
which have blocked mutual assistance in the past. The second is to set standards for domestic
laws so that they can effectively combat organized crime. The new convention also aims to

13
supra note 368; p58

34
 CHAPTER-II

tackle the root cause of transnational crime-profit. It will include strong measures that will
allow law enforcers to confiscate criminal assets and crack down on money laundering. And
it will call for the protection of witnesses. The treaty and its protocols were drafted by a
special committee involving more than 120 UN member countries and adopted in November
2000 by the Millennium General Assembly. They were opened for signature at a high-level
meeting in Palermo, Italy, the following month and will go into force after 40 governments
have ratified them. The new treaty seeks to align national laws in criminalizing acts
committed by organized criminal groups. Under the convention, this behaviour includes
organizing, directing or aiding serious offences committed by an organized criminal group.
And it entails agreeing with one or more other persons to commit a serious crime for financial
or other material gain. Transnational crime nets huge profits, which are laundered through
licit businesses or stashed in "safe" accounts. Cutting off these funds or hindering their
storage could cause major damage to the running of entire criminal networks14.

2.1.5 United Nations Convention against Corruption 2003(UNCAC)

The issue of money laundering was also taken up in the United Nations Convention against
Corruption 2003 and are summarized in Art-14 captioned “Measures to prevent Money
laundering”, Art. 52 “Prevention and detection of transfer of proceeds of crime” and Art.54
“Mechanism of recovery of property through international cooperation in confiscation”. The
basic idea here is to prevent money laundering related to corruption though the actual
measures foreseen in dealing with the problem of money laundering are not limited to
corruption related money laundering alone, but to all types of transfers related to the illicit
acquisition of personal wealth. Thus, in the preamble of the convention speaks of the need to
“prevent, detect and deter in more effective manner international transfer of illicitly acquired
assets and to strengthen international cooperation in asset recovery”. The underlying
“proceeds of crime” are defined in Art.2 as “any property derived from or obtained, directly
or indirectly through the commission of an offence”15.

2.1.6 Political Declaration and Plan of Action, 2009

The 2009 Political Declaration and Plan of Action on International Cooperation towards an
Integrated and Balanced Strategy to counter the World Drug Problem was adopted at the
High-level segment of the 52nd Session of the CND 12th March 2009. Art.29 of the

14
[Link] accessed 15/01/2014
15
supra note 130; p 125

35
 CHAPTER-II

declaration states that “illicit crop cultivation and illicit drug production, manufacturing,
distribution and trafficking have been increasingly consolidated into a criminally organized
industry generating enormous amounts of money laundered through the financial and non-
financial sectors.” Parties to the Declaration committed themselves to “strengthening the
effective and comprehensive implementation of regimes for countering money laundering and
to improving international cooperation including judicial cooperation, to prevent, detect and
prosecute such crimes, dismantle criminal organizations and confiscate their illicit proceeds.
Member states decided to establish 2019 as a target date for States to eliminate or reduce
significantly and measurably money laundering related to illicit drugs. Art.50 (UN Political
Declaration 2009) states that the laundering of money derived from illicit drug trafficking and
other serious crime continues to be a global problem that threatens the security and stability
of financial institutions and systems, undermines economic prosperity and weakens
governance systems16.

2.1.7 Salvador Declaration on Comprehensive Strategies for Global Challenges, 2010

(Salvador, 2010)

The international efforts were followed up later in 2010 by the “Salvador Declaration on
Comprehensive Strategies for Global Challenges: Crime Prevention and Criminal Justice
Systems and Their Development in a Changing World” was signed again calling upon
Member States to take measures17. The 2010 “Salvador Declaration on Comprehensive
Strategies for Global Challenge: Crime Prevention and Criminal Justice System and Their
Development in a Changing World” was adopted by the 12th UN congress on Crime
Prevention and Criminal Justice (Salvador, Brazil, 12th to 19th April 2010) Art.22 of the
Declaration emphasized the need for adoption of effective measures to implement the
provisions on preventing, prosecuting, and punishing money laundering contained in the UN
Convention against Transnational Organized Crime and UN Convention against Corruption,
and encouraged member states to develop strategies to combat money laundering based on
the provisions of these two Conventions. In Art.23 it goes a step further and encourages
“Member states to consider developing strategies or policies to combat illicit financial flows
and to curb the harmful effects of uncooperative jurisdictions and territories in tax matters”
In Art.24 of the Declaration recognized the need to deny criminals and criminal organizations
the proceeds of their crime, and called on Member states to adopt effective mechanism for

16
ibid
17
supra note 454; p7

36
 CHAPTER-II

the seizure, restraint, and confiscation of proceeds of crime and to strengthen international
cooperation to ensure effective and prompt asset recovery.

2.1.8 Financial Action Task Force (FATF)

The FATF, a 36-member inter-governmental body established by the 1989 G-7

Summit in Paris, has primary responsibility for developing a worldwide standard for AML
and CFT. It works in close cooperation with other key international organizations, including
the IMF, World Bank, the United Nations, and FATF-style regional bodies. The work of the
FATF, has been supported by the G-7 and the G-20, most recently in the context of initiatives
to address the 2008-2009 international financial crisis and its aftermath. Less than a year after
money laundering was first addressed in Vienna Convention- a legally binding international
agreement, the leaders of the then G-7 countries agreed to establish the FATF as a platform
for coordinating and strengthening their efforts to “follow the money” and to “take profits out
of crime”[Link] the 1989 Paris summit, the G7 leaders issued a firm statement supporting and
advocating ratification of the 1988 UN Convention. They nevertheless chose to set up a
separate body, called the FATF, to implement the AML regime. FATF is a policy making
body which works towards generation of necessary political will to bring about national
legislative and regulatory reforms19. In an initial phase, the rule makers did indeed operate in
a technical environment. When established in the year 1989, FATF entered a field which did
not exist before and new to a regulatory. Being a nascent domain only a handful of experts
from a limited member states drafted the 40 Recommendations. In the mid-90s the
environment changed as more and more actors in private, public, national and international
entered the AML field, and thereafter it was no longer technical. Rather it showed symptoms
of institutional environment. Instead of relying on the expertise along, FATF tried to enhance
the participation of various actors in the field. Since the G7 had no secretariat or statute, the
FATF office was established at the OECD. FATF was mooted by G7 specifically because
they saw a deficiency in the UN’s ability to fight drugs. Contrary to the G7/8, the UN has
worldwide membership, but reaching consensus is often difficult. Its bureaucratic structure
and lack of resources make the organization ineffective. Rivalries between groups of nations
also complicate efficient execution of tasks and collective management20.

18
supra note 25; p139
19
Alain Damas (2007), “The Financial Action Task Force”, Anti Money Laundering – International Law &
Practice, [Link] H Muller, et al., John Wiley & Sons Ltd
20
supra note 119; p5

37
 CHAPTER-II

In 1990, within a year after its creation, the FATF drafted Forty Recommendations to counter
money laundering. Instead of creating an international law the Recommendations preferred
harmonization of domestic laws through ‘soft law.’ Though the quasi-legal instrument does
not have a binding force, when a sufficient number of nations adopt it, the instrument has
political, institutional and moral backing. After the September 2001 attacks in the US, FATF
mandate was expanded to include combating the financing of terrorism (CFT). The FATF
recommendations are today endorsed by more than 170 jurisdictions, and is currently
developing into international AML standards (FATF 2008) Unlike the FATF system,
however, the UN Convention does not establish an enforcement system that generates useful
information about compliance, because the Convention’s provisions regarding the detection
of criminal financial activity are extremely vague. In the preamble to the Action Plan,
reference was made to a United Nations Commission on Narcotic Drugs resolution which de
facto elevated the status of the FATF as the global standard in the fight against money
laundering. The far more detailed FATF recommendations were thus de facto introduced
through the back-door into the international system as the standard setters for fight against
money laundering. FATF 40 recommendations set out principles for action, as they permit
flexibility in implementing principles according to the country’s own particular requirements
and constitutional provisions. Although not binding as law upon any country the 40
recommendations have been widely endorsed by the international community and relevant
organizations as the international standard of AML. FATF’s Forty Recommendations on
Money Laundering and its nine Special Recommendations on Terrorist Financing constitute
the international standards on AML/CFT. Therefore, legal framework of a country’s money
laundering regime should be consistent with these standards. Meeting the international
standards almost always requires legislative and/or regulatory action depending upon the
legal system of the country, its laws and rules. Any inconsistency with international standards
may neutralize or negate the money laundering regime. If there are potential conflicts,
additional legal or legislative actions may be needed to eliminate them to achieve a legal
framework that satisfies international standards21. FATF recommendations covered the
criminal justice system and law enforcement, the regulation of financial system, international
cooperation, and criminalization of money laundering, with predicate offenses that traversed
beyond trafficking in drugs in effect, the recommendations can be understood as an attempt to
establish an anti–money laundering regime with two broad components. The FATF

21
supra note 230; p3

38
 CHAPTER-II

emphasized the need for legislative measures to enable authorities to identify, trace, evaluate,
and confiscate laundered money or property of corresponding value. In addition, it opposed
anonymous accounts and highlighted the need for measures to gather information about true
identity of the persons on whose behalf transactions were carried out. The Recommendations
try to approach AML regime with two broad components. The first component pertains to
domestic regulatory regime which encompasses monitoring and reporting of cash transactions
above a limit, reporting of suspicious transactions, mandate of KYC norms by banks, and
customer due diligence measures. The second component relate to international cooperation
encompassing mutual legal assistance treaties, cooperation in investigation and sharing of
information. Though not a formal convention the Recommendations has provided a bench
mark for member states. FATF has also other roles to play like monitoring the progress of
member states through Mutual Evaluation and to review money laundering trends, techniques
and counter measures and to share this information with member s to enhance their capacity
to respond innovative techniques in money laundering22. The main feature of FATF
recommendations is that they have a mixed preventive and repressive character. Although the
recommendations of the FATF and CFATF (Caribbean FATF- formed in Jamaica in
November 1992) have no formal basis in international law, it can be said that they are at least
politically binding since they have been ratified by the individual countries23. To date, FATF
has successfully monopolized rule-making authority in this field, as a large number of states
have started to implement its standards. Overall FATF has been widely regarded as a
successful rule maker. Empirical study suggests that international organization imposes limits
on the way they exert force, and FATF uses blacklist only to nudge states to cooperate24.
Though FATF 4o recommendations are comprehensive, some argue that flaws also exist.
Such as absence of recommendation of protection of civil and human rights. This raises
concern particularly in the context of increasing powers available to regulatory and law
enforcement agencies, to identify, investigate and prosecute money laundering.

The first role of FATF is to monitor the progress of the member states in implementing
measures to counter money laundering through annual self-assessments and more detailed
mutual evaluations. This is done through review processes that provide opportunities to put
considerable moral and political pressure on jurisdiction which are not in compliance with the

22
supra note 107; p124
23
supra note 22; p54-55
24
Dieter Kerwer & Rainer Hulsse “How International Organizations rule the world – The case of the FATF on
Money Laundering”; p64

39
 CHAPTER-II

recommendations. Under FATF pressure, for example, Austria grudgingly agreed to deal with
anonymous savings accounts that ran counter to notions of transparency and accountability25.
Setting standards would be of little unless there is a mechanism in place for seeing whether
they were adhered to. The FATF assesses formal compliance with the prescribed standards
and their effective implementation, through a process of Mutual Evaluation. This involves
assessment of a country by experts from other countries, who will thoroughly examine
whether the country is fully compliant with each of FATF Recommendations, or if not, where
they fell short. A report is presented to the FATF Plenary Session, and two years later the
country must report what it has done to remedy those areas where the report has found
weakness. Strength of the FATF is endorsed to the willingness of its members to undertake
self-assessment and mutual evaluation process against the 40 Recommendations. The 31
members of FATF do not merely develop recommendations and interpretative notes. The
mission and objective of the organization include implementation of 40 Recommendations
through two-pronged approach (a) self-assessment exercise and (b) a more detailed mutual
evaluation procedure26.

In order to encourage all countries to adopt measures to prevent, detect and prosecute money
launderers the FATF has adopted a process of identifying those jurisdictions which serve as
obstacle to international cooperation in the area. The process uses a twenty-three-point
criteria/parameter, which are consistent with the 40 Regulations to identify such Non-
Cooperating Countries and Territories (NCCT) and place them on a publicly available list. In
the event of an NCCT country not making sufficient progress in implementing the
Regulations, counter measures may be imposed. In addition to the application of applying
special attention to business relationship and transaction from such countries, FATF can also
impose further counter measures which may be applied in a gradual, proportionate and
flexible manner. The counter measures may also include FATF member countries terminating
transactions with financial institutions from such a country. The black list of FAT is
transparent with regard to the conditions under which a country gets on the black list or not,
as it publishes the criteria for identifying countries and territories non-co-operative in anti-
money laundering and terrorist financing, along with the assessment of blacklisted countries
and the development of these countries regarding the criteria. Black lists at the most are soft
law arrangements, as there is no fine or penalty for blacklisted countries. So,

25
supra note 107; p123
26
supra note 410; p53

40
 CHAPTER-II

intergovernmental organizations can just hope that international community will react and
punish the listed countries by withdrawing from business and by reducing exports or imports.
It can only hope that compliant banks and institutions will avoid dealing with them27.
Expertise played a pivotal role even in drawing a blacklist of money laundering havens.
Throughout the NCCT process, FATF ensured openness, fairness and objectivity in its
evaluation, as experts developed the evaluation criteria. The whole process was aimed not to
arbitrarily blacklist a jurisdiction, but to make an objective assessment by neutral experts.
Thus, legitimacy was considered important eve I what simply looks like power politics.
FATF did not simply impose coercive measures upon uncooperative countries but tried to
endow these measures with legitimacy. FATF has considered its rule making process as an
expertise that produces useful and correct solutions, and not political compromises.

If one goes by the annual blacklist published by the FATF and noticing countries
disappearing from the list every year, it would give an impression that the control is very
effective. It is seen that between the period 1999 to 2006 less countries seemed to engage in
laundering, as the list goes. As of 13th October 2006, there are no NCCTs., and countries
seem to be eager to disappear from the list. It can be concluded that FATF blacklisting of
non-cooperative countries is no longer a way of identifying money laundering countries.
While the FATF money laundering black list is now empty, there are only three countries all
of them European, left on the OECD blacklist, which is a shorthand description of ‘the list of
uncooperative tax heavens. These three European countries left are Andorra, Liechtenstein,
and Monaco28. However, it is possible to reconcile the existence of the blacklist with an
understanding of FATF as a standard setter. The crucial insight is that the blacklist only plays
a limited role in how FATF works. Firstly, to recall, FATF had been a successful rule maker
even before it resorted to this mechanism. After its revival in 2007 it is clear that it was not a
temporary aberration. Though the black list aims for basic acceptance, the problem is how to
make States comply with AML rules, when the regulations have only a force of
voluntariness29.

The blacklist for money laundering and terrorist financing is ambiguous with regard to
transparency as well. Rawlings and Sherman concluded that the national blacklists used by
countries tend to be out of date, inaccurate and arbitrary, and that the methodologies used to

27
Brigitte Unger and Joraw Ferwerda (2008), “Regulating Money Laundering and Tax Havens – The Role of
Blacklisting”, Tjalling C. Koopmans Research Institute; p13
28
supra note 511; p4
29
supra note 508; p63

41
 CHAPTER-II

compile blacklists are often opaque and do not tend to follow any formal procedure30. There
is a debate on how far the two black lists are reliable (FATF & OECD) The OECD black list
has been criticized as one which is being incomplete, as big and powerful countries are
missing. By the criteria set out by the OECD, the United States is now guilty of practicing
harmful tax competition. The view which supports this is that banks in the US are the
depositories for hundreds of billions of dollars from non-residents whose interest income it
not taxed, while resident interest income is taxed at 30%. This ‘no tax’ policy of the US has
kept this large sum of money in the banking system since 1921. According to one view FATF
was hijacked by its important member state, the USA. It was opined that Clinton
administration was the force behind the NCCT process. There is no evidence to point out that
FATF abandoned its pursuit of blacklisting to safeguard its legitimacy as a voluntary standard
setter. Another explanation points out that the reason for abandonment of black list is all
countries in the list had by then implemented AML regulations. Another view points out to
the limited administrative support FATF had to cope up with additional workload of NCCT
process. Other view is that international financial institutions, such as IMF opposed the
NCCT practice pointing out that the practice is against the nature of the Fund31. Ultimately,
the FATF has threatened an economic embargo of any recalcitrant state refusing to mend its
wayward ways. From a policy perspective such economic sanctions have history of negative
impact without accomplishing the desired results. FATF hard-line approach in letter and spirit
violates two Charters of UN, as well as other international Conventions. Any measure to
compel compliance with Recommendations, and such compulsion which is contrary to the
UN Charter and other conventions, may also threaten the integrity and legitimacy of decades
long international efforts to combat money laundering32. Assuming arguendo, that money
laundering does threaten the peace among nations, there remains no international justification
for imposing sanctions upon the targeted “non-compliant” jurisdictions for any failure to act,
or for not acting in a way prescribed by G-7 nations33. The FATF’s new “comply-or-else”
policy will not only discourage provisional membership, but may also lead to resentment It
may also force certain jurisdictions to supply wrong information, or by passing a AML
legislation without any efforts to implement it. Common sense dictates that adoption a most
effective legislation without full political backing of a state is unlikely to yield desired results.

30
supra note 511;p12
31
supra note 508; p66
32
Todd Doyle, “Cleaning up Anti Money Laundering Strategies – Current FATF tactics needlessly violate
International Law” Houston Journal of International Law, Vol.24-2; p281
33
ibid; p297

42
 CHAPTER-II

According to British counter laundering consultant Nigel Morris, the FATF has consistently
overlooked the failures of its own members, while blacklisting of some countries led to
pressure and resulted in hurriedly passing AML laws without the financial, technical and
human wherewithal34.

FATF members have turned their attention to specific money laundering mechanism such as
information remittance system, trade-related schemes, internet banking, and company
formation agents, resulting in money laundering typologies. To strengthen the global AML
network FATF is committed to broaden its membership to include new countries, and
creation of regional grouping like for example the creation of ESAAMLG (Easter and South
African Anti-Money Laundering Group) in August 1999. FATF has constantly sought to
extend the scope of AML measures sectorally, geographically and functionally. In the first
half of 2000 FATF published criteria for identifying non-cooperative jurisdiction. Fifteen
jurisdictions with serious systemic problems were identified.

Though FATF has tried to enhance its legitimacy by taking the view of experts and new
members, there is no proof that its standards have been complied with accepting such with
legitimacy a thorough analysis indicate that FATF legitimization efforts have played a role in
enhancing compliance with its rules. This assumption is based on two counts. First many non
FATF members had complied with its rules, much before the black listing or coercive moves.
Secondly FATF puts much effort in legitimizing its rules and makes it public as to how
important it considers the views of experts and their participation35. The prospect of
sanctions would imperil one of the FATF’s most impressive sources of legitimacy the fact
that compliance with the organization’s guidelines has been secured despite the fact that
participation is voluntary and its recommendations non-binding. The case of anti-money
laundering offers an excellent illustration of how this specific form of global rule-making
involves a specific institutionalization of power. FATF understood that compliance of its own
members alone would not be enough, and it needs to secure compliance of non-members, in
effect global compliance, if it wanted to rule out money laundering.

FATF recommendations were considered to be legitimate precisely because they were written
by neutral experts with superior knowledge of the problem. If countries are convinced of the
fact that rules are made by experts, it provides solutions to all of them A study of FATF

34
supra note 227; p783
35
supra note 508; p60

43
 CHAPTER-II

plenary meetings would reveal that it is not a political forum but a gathering of experts.
Hence, FATF leaves little doubt its most important meetings are dominated by experts. More
than that, FATF has encouraged development of regional groups to adhere to the same
standards. By the U.S. government’s count, about 130 jurisdictions - representing about 85%
of world population and about 90 % of global economic output - have made political
commitments to implementing the Forty Recommendations36. The expertise base in the
FATF is also a signal to non-members that it is an impartial regulator. The legitimacy of its
measures is based on the fact that they are backed by experts. Overall, numerous procedural
features of the AML regime make it reasonable that expertise is at least one important helpful
factor for rule-following. The pacesetter behind most of the AML initiative was and still is
the FATF. The forty recommendations are a comprehensive blue print for action against
money laundering. They cover the criminal justice system and law enforcement, the financial
system and its regulation and international cooperation. While FATF has always framed its
guidelines as legally non-binding ‘recommendations’ it developed strong compliance
mechanism that applied not only to its members, but also against non-members

For many years FATF was restricted to the principal twenty-six industrialized countries of
which five are commonwealth members. However, in line with its new strategy for increasing
the effectiveness of international anti-money laundering efforts, in 1999 it was decided to
expand its membership to a number of strategically important countries who can play a major
regional [Link] FATF has no formal constitution, and Prof Peter Aldridge, head of school
of law at Queen Mary, University of London suggested that it needed one, as it had operated
on a adhoc and temporary basis for the last few decades. If it was to be a standing body it
should in his view, be property constituted and established by an international
[Link] FATF has small secretariat and limited membership and operate by
consensus. Prior to the creation of FATF there was a chasm ii the global governance of crime.
British politicians and officials became increasingly embarrassed at allegations in
international forum such as FATF, the UN and the EU that Britain was allowing its offshore
territories to behave like pirates. FATF emphasizes that it wants to remain an exclusive
organization, and this perhaps has prompted it to limit its members, to retain its current
structure and character. However, FATF is still far from being an inclusive standard-setter, as

36
Joseph Myers (2001), “ International standards and cooperation in the fight against money laundering”,
Economic Perspectives Vol-2 No.6 An Electronic Journal of US Dept of State; p9
37
supra note 21; p16
38
supra note 299; p14

44
 CHAPTER-II

a member of thirty-four is hardly universal and smaller countries without strategic relevant
continue be excluded from standard setting process.

From its inception the focus of FATF has been to circumvent the physical movement of
currency and abuse of financial institutions for laundering purpose. It was only during 2006
that the FATF took note of the threat of TBML and issued its first typology report on the
subject, which was later followed by Best Practices Paper on TBML in the year 2008, and
thereafter report on Money Laundering Vulnerabilities in free Trade Zones of 2010.
However, in spite of the concerns raised by many commentators and recognition of the
problem as early as in 2006, FATF Recommendations revised in the year 2012 again failed to
specifically address the issue of TBML39.

Although FATF is termed as a universal organization, among the limitations are that it is not
a formal organization and it has limited membership and limited permanent staff. FATF’s
limitation affects its legitimacy and its ability to make and implement policies both with the
governments and private sector. FATF nations should be careful in using their influence
responsibly, and not to take advantage of their dominant position in bullying other
jurisdictions, and interfering with the sovereignty of a State. Two wrongs do not make a thing
right, and hence to eliminate one form of lawlessness by resorting to another is a recipe for
failure. Therefore, FATF should withdraw its threat sanctions, and instead encourage
members to implement AML laws within their domestic borders40. And finally, since
membership in FATF is voluntary, members always have the option of escaping sanctions by
leaving the organization. Non-members do not have this option, but the black list was short-
lived. Overall, the sanctions attached to anti-money laundering standards are so weak that
they are best classified as standards rather than coercive rules to conclude, despite the fact
that money laundering is a policy problem that should require binding rules, regulators dealt
with it by standards. The FATF process of selecting countries and jurisdiction which are not
meeting the minimum international standards was quite controversial, as was the process to
delist them once they met those standards. Adherence to the antimony laundering-rules seems
to follow the logic of power politics, and the non FATF members have little choice as the
combined economic power of members outweigh their powers. Therefore, non-members, to
put it in a paradox, are forced to comply [Link] available statistics show that the

39
Ramandeep Kaur Chinha (2014), “Trade-based money laundering: ever-increasing threat with little
regulation”, J.I.B.L.R. 2014, 29(11), p665-671
40
supra note 516; p306
41
supra note 126; p622,627

45
 CHAPTER-II

amount of criminal proceeds that have been confiscated in recent years are continuously
increasing, demonstrating that the member states of the FATF are achieving continuous
progress in their fight against financial crimes.

Complementing the systematic efforts by the FATF to develop and extend an effective AML
regime has been the creation of informal networks such a Financial Intelligence Units (FIUs),
the U.S. Treasury’s Financial Crimes Enforcement Network (FINCEN) and Australia’s
AUSTRAC. This cooperation is formalized through establishment of Egmont Group. The
regular meeting among members benefits sharing of information through network of FIUs
linked by secure internet connections. The formal meetings merely provide a framework to
enhance the co-operative effort. Both the UN and FATF have played critical role in setting
international norms. While the UN did this through Conventions, FATF has established a
mechanism of performance review of national governments and imposition of peer pressure,
which has proven effective in establishing a regulatory approach to money laundering, at not
all States are signatories to International Conventions42.

2.1.9 UN Global Programme Against Money Laundering - GPML

UN is actively operating a programme called GPML headquartered in Vienna, Austria. It has

the ability to adopt international treaties or conventions that have the effect of law in a
country once that country has signed, ratified and implemented the convention, depending
upon the country’s constitution and legal structure. In certain cases, the UN Security Council
has authority to bind all member countries through Resolution, regardless of the action of
independent members. It has through UNDCP initiated an international agreement to combat
drug trafficking and money laundering the Vienna Convention in 1988, which came into
force on 11th November 1990. The obligations resulting from the 1988 Convention was
further detailed in 1998 Political Declaration and the related Action Plan (“Countering Money
Laundering”) passed unanimously by the UN General Assembly at its 20th special session on
the World Drug Problem held 8 to 10th June 1998 the 1988 Vienna Convention is today
almost universally adhered to (184 state parties as of July 2010) and has formed for many
countries the basis for their anti-money-laundering legislation. The GPML is a research and
assistance project with the goal of increasing the effectiveness of international action against
money laundering by offering technical expertise, training and advice to member countries
upon request. IMoLIN is a one-stop anti-money laundering/ countering the financing of

42
supra note 107; p125,129

46
 CHAPTER-II

terrorism research resource, which was established in 1998 by the United Nations on behalf
of a partnership of international organizations involved in AML/CFT. The UNODC is a
subsidiary body of the UN, established in 1946 with the aim of assisting ECOSOC, in
supervising the application of the international drug control treaties and advising the Council
on all matters pertaining to the control of narcotic drugs, psychotropic substances and their
precursors”43. In 1991 the UN General Assembly established a Commission on Crime
Prevention and Criminal Justice within the ECOSOC, which ensured the involvement of
national governments in the efforts to combat transnational organized crime. At the inaugural
meeting of the commission, Judge Giovanni Falcone, a renowned anti-Mafia figure in Italy
who was subsequently assassinated by the Mafia, proposed a global conference to establish
the basis for enhanced international cooperation against organized crime44.

2.1.10 UN Resolution 1373

Resolution No.1373 of UN also established Counter Terrorism Committee (CTC) to monitor

the performance of member countries in building a global capacity against terrorism. CTC
which is comprised of 15 members of Security Council, is not a law enforcement agency. It
does neither issues any sanction nor does it prosecute or condemn individual countries. While
all international Conventions require signing, ratification and implementation by countries to
have domestic law in force, a Security Council Resolution passed in response to the threat of
international peace under Chapter VII of UN Charter is binding upon all UN member
countries. The UN Security Council Resolution 1373 adopted on 28th September 2001
obligate countries to (a) deny all forms of support to terrorist groups (b) prohibit active or
passive assistance to terrorism (c) suppress provision of safe haven or support for terrorists,
including steps towards freezing of assets of persons/organization/entities involved in terrorist
acts (d) cooperate with all member countries in criminal investigation and sharing of
information about planned terrorist acts and operations45.

2.1.11 UN Resolution1267

The Committee of Resolution No.1267 issues list of individuals and entities whose assets are
to be frozen and puts in place procedures to make additions or deletions to the list on the basis

43
supra note 454; p4
44
supra note 107; p118
45
supra note 1; p-III-5

47
 CHAPTER-II

of representation from Member states. The recent list is available from the website of 1267
Committee46.

2.2 INTERNATIONAL ORGANIZATIONS & OTHER AGENCIES

The role of major International Organisations such as United Nations, IMF World Bank,
Commonwealth Secretariat, Interpol, OECD, etc. are very important especially in the context
of Anti-Money Laundering regulations as they play a crucial role in formulating and advising
the content of enactments passed by member nations and thus play the pivotal role in the
AML Processes. The guidance and draft model legislations issued by these international
organizations from time to time are of significant use to the member nations who generally
follow these model enactments in their domestic legislations.

2.2.1 United Nations

The purpose of Palermo Convention is to promote international cooperation in preventing and

combating transnational organized crime more effectively. Countries are to required take
measures against smuggling of migrants by land, sea, and air as well as manufacturing and
trafficking of firearms and ammunition. The United Nations is one of the most experienced
global providers of AML training and technical assistance, The UN Global Programme
against money laundering, Proceeds of Crime and Financing of Terrorism (GPML) part of the
UNODC was established to assist member states to comply with the UN conventions and
other instruments that deal with money laundering and terrorist financing. The AML/CFT
Mock Trial Program is an important training activity, designed to support and enhance
judiciary capacities in dealing with complex financial crime cases. The long-term objective of
this Program is to develop a methodology and a prototype of mock trials that could be used in
other developing countries47. The UN office on Drugs and Crime provides technical
assistance on legislative drafting, financial intelligence, capacity building, and a range of
other services to aid government and law enforcement agencies, implement their obligations
under Vienna Convention and related AML initiatives. The effectiveness of the Security
council’s effort to combat money laundering and the financing of terrorism can be measured

46
ibid; p-III-6
47
US Department of State (2011), “Money Laundering and Financial Crimes” International Narcotics Control
Strategy Report , March 2011; p30,33

48
 CHAPTER-II

in various ways, such as the exponential increase in the ratification of counter-terrorism

conventions. By requiring the states to take steps to combat the financing of terrorism and
calling for ratification of the 2001 Convention, the Security Council has helped to lay the
essential legal foundation for all cooperation, which is, indisputably, a significant
achievement. The criticism that Security Council resolutions take a selective approach to
financial crime by focusing only on the financing of terrorism without requiring prudential
identification and detection mechanism appears to have no basis. Although terrorist financing
and money laundering differ in both purpose and practice, development of mechanisms to
protect all financial systems will ultimately prevent or intercept suspicious transactions,
regardless of their ultimate goal. The interaction between money laundering and the financing
of terrorism and of the necessitates for a single approach to combating them. Keeping that in
mind it has chosen to interpret resolution 1373 (2001) broadly by viewing anti-money
laundering mechanisms as one of the modalities for combating the financing of terrorism48.
IMoLIN, a one-stop AML/CFT research resource, which was established in 1998 by the
United Nations on behalf of a partnership of international organisations involved in anti-
money laundering. AMLU presently administers and maintains IMoLIN on behalf of the
following 10 partner organisations: the Asia Pacific Group on Money Laundering (APG), the
Caribbean Financial Action Task Force (CFATF), Commonwealth Secretariat, the Council of
Europe–MONEYVAL, the Eastern and Southern Africa Anti-Money Laundering Group
(ESAAMLG), the Euro Asian Group (EAG), the Financial Action Task Force (FATF),
Financial Action Task Force on Money Laundering in South America (GAFISUD), Interpol,
and the Organization of American States (OAS/CICAD). Within IMoLIN is AMLID, a
unique password-protected service, having data base of AML/CFT laws of countries in an
easily searchable format. Within that GPML also maintains the largest available online legal
library of AML/CFT national legislation. The database now contains legislation from some
163 jurisdictions and, since January 2005, more than 300 new and amended AML/CFT laws
and regulations were included in the database49.

48
Joel Sollier (2007), “The United Nations Security Council – and the effort to combat money laundering and
the financing of Terrorism”, Anti Money Laundering – International Law & Practice, [Link] H Muller, et
al., John Wiley & Sons Ltd
49
supra note 41; p53-54

49
 CHAPTER-II

2.2.2 International Monetary Fund (IMF)

The IMF’s engagement in anti–money laundering and countering the financing of terrorism
dates from early 2001. Until 2001 IMF resisted proactive involvement in AML measures but
in the new political climate IMF has become more involved in AML/CFT policy due to
prudential and macroeconomic effects of money laundering on national and international
financial systems. In November 2001 the IMF issued a communiqué calling on all members
to ratify and fully implement the UN instruments to counter terrorism. Then in the summer of
2002 the IMF and World Bank commenced a 12- month joint pilot programme of
assessments of the international standards conducted with the FATF and OGBS. From the
summer of 2002 to April 2004, 41 countries were assessed for compliance with the
international standards. The World Bank and the IMF during 2003–04 responded to requests
from more than 100 countries to help them build institutional capacity to fight money
laundering and terrorist financing. The technical assistance provided mainly focused on
framing laws compatible to international standards, improving coordination between regional
partners and government departments, and to build institutional capacity for financial sector.
They have continued to work with the FATF, FATF-style regional bodies (FSRBs) and the
OGBSs on the worldwide programme of anti-money laundering and counterterrorist
financing evaluations and assessments. IMF is concerned about the consequences of money
laundering as it undermines the integrity and stability of financial systems, distort
international capital flows, and discourage foreign investment. They have negative impact on
a country’s financial stability and macroeconomic performance resulting in welfare losses. In
the present scenario of increasingly interconnected world, these negative effects are global.
Problems in one country can quickly spread to others, especially in the region50. During the
past the efforts of IMF helped in shaping domestic and international AML policies. These
include over 70 AML assessments, providing inputs for implementation of financial integrity
related issues, fund supported programs, and research projects. IMFs broad experiences in
exercising surveillance over members’ economic systems has been helpful in providing
financial integrity advice in the context of compliance with AML/CFT standards. To keep in
line with the growing importance of financial integrity issues in the AML and CFT related
program, the IMF Executive Board in 2004 agreed to make the AML assessment ad capacity
development activities as regular part of their work. On June 1, 2011, the Executive Board
discussed a report reviewing the evolution of the IMF’s AML/CFT program over the past five

50
Doug Hopton (2006), Money Laundering- A concise guide for all business, Gower Publishing; p13,26

50
 CHAPTER-II

years and provided guidance as to how to move forward in this area. Following this, on
December 14, 2012, a Guidance Note on the inclusion of AML/CFT in surveillance and
financial stability assessments
(FSAs) was issued. On March 12, 2014, the IMF Board reviewed the Fund’s AML/CFT
strategy, and in the process (i) endorsed the revised FATF AML/CFT standard and
assessment methodology, (ii) encouraged staff to continue its efforts to integrate financial
integrity issues into its surveillance and in the context of Fund supported programs, when
financial integrity issues are critical to achieve program objectives, and (iii) decided that
AML/CFT issues should continue to be addressed in all FSAPs but on a more flexible basis51.

An example of IMF surveillance in AML/CFT policy is its study on FIUs tracing their
development over ten years. With more than 80 FIUs gained admission into the Egmont
Group the informal international association of FIUs established in 1995, and many more
countries planning to establish an FIU or improve the effectiveness of the existing ones.

2.2.3 The World Bank

The World Bank and the IMF, the two premiere global financial institutions, have declined to
take a leading role on the cross-border dirty-money issue. They are playing a secondary role,
but not one in the front.

As a former World Bank official put it the Bank and the Fund are primarily concerned with
their owners, that is wealthy countries. They are extension of national bureaucrats, favor for
status-quo and are not for experiments, and will not touch issues such as illicit flows and
capital flight539.

2.2.4 The Common Wealth of Nations

In May 1996, Commonwealth Secretariat produced a model law on the prohibition of money
laundering, which provides a basis from which domestic legislation can be developed. In June
1996 the Commonwealth Finance Ministers agreed to endorse a comprehensive and practical
set of guidance notes for financial sector, which was revised and updated in July 2000 and
further revised in July 2003.

51
The IMF and the Fight Against Money Laundering and Financing of Terrorism - April 2014 539 supra
note 153; p253

51
 CHAPTER-II

2.2.5 INTERPOL

A discussion of international cooperation to combat transnational crime would not be

incomplete without considering the efforts of Interpol. Established in 1923 and based in
Lyon, France, Interpol has National Central Bureaus (NCBs) in member states, operates in
four official languages (Spanish, French, English, and Arabic), and seeks to facilitate mutual
assistance between law enforcement agencies in different countries52. In spite of its successes,
however, Interpol’s role has always been limited because its legal status has been somewhat
hazy. Moreover, it is often described as a “policemen’s club” rather than a more formal
international organization. Even if it is a weakness, it is also one of its strengths. In the long
term, the transnational trust network it creates among police officers of different jurisdictions
for its formal operations is important53.

2.2.6 Organisation of Economic Co-operation and Development (OECD)

OECD has identified around 47 countries which are engaged in harmful tax practices. To
counter this many OFCs argue that because of high tax rates in OECD countries, citizens and
corporate are driven to their jurisdiction and therefore the members of later have to improve
their tax regime, and not to compel OFCs to raise their taxes. Of course, the variety of
services offered by OFCs may not only facilitate tax avoidance and tax evasion, but also
money laundering. and hence it must be ensured that the money flowing through OFCs is
legal and legitimate in its origin.

2.2.7 European Union / European Commission (EU/EC)

The European Union consists of 15 countries and is precursor to the integration of various
nations in Europe. Historically committee of experts were instrumental in developing money
laundering policies to EU and the Vienna Convention is the reflection of efforts of countries
belonging to EU54. Prior to its renaming as EU, the Council of Europe community issued EC
Council Directive 91/308 of June 10,1991 on prevention of use of financial system for the
purpose of money laundering. The need for European Community intervention countering
the criminal use of the system was deeply felt, especially due to prevalent scenario of
freedom of capital movements and the principle of the freedom to supply financial services.

52
supra note 235; p125
53
supra note 107; p126
54
supra note 410; p4 543 supra
note 30; p42

52
 CHAPTER-II

The Commission was eager to demonstrate that the benefits of moving capital across borders
did not accrue to organized crime. Law and order considerations had been put forward to
justify former capital movement, while it was important to prove that freedom of capital
movements did not provide criminals with increased opportunities to move funds around,
especially within an increasingly globalised economy55. One development of particular
significance took place in September 1990 the Committee of Ministers of the Council of
Europe adopted a new Convention on laundering, search, seizure and confiscation of the
proceeds of crime, known as Council of Europe Convention the decision to expand the
definition of money laundering beyond its traditional association with drug trafficking, in
Council of Europe Convention was not entirely unexpected, as it finds support in the
legislative practice that existed in certain states such as Swiss Penal Code. The decision was
also influenced by FATF recommendation report in 1990 to consider expanding the scope of
offence of money laundering to reach any other crime for which there is a link to narcotics or
to all serious crimes. The activities of European Union56 in the field of AML policies have
not only resulted in Money laundering directive which is binding on all 15 member states.

The EU being sui generic compared with other policy makers like the UN, has also unique
legal instruments to be used. The reasons for this harmonization development at EU level was
due to the reason that member states did not have uniform set of rules to deal with money
laundering, as the definition, preventive methods and nature of punishments varied among
jurisdiction. Indeed, before the Directive 91/308/EEC only one member state was
criminalized money laundering. So, it was commonly held that mere unilateral measures
would not be effective against money laundering. The EU has considered the best way to
approach money laundering problem is to increase the co-operation between the member
states and to harmonize the AML laws of the member states by both negative and positive
integration. The local measures like the one in EU will result in geographical shift in the
launderers activity whose desire is to find and take advantage of a weakest link in the global
regulatory chain. This is illustrated by Zagaris as “balloon theory” according to him if
the AML measures are tightened in one jurisdiction, the launderer will move to other

55
Franco Frattini (2007), “ Initiatives of the European Commission”, Anti Money Laundering – International
Law & Practice, [Link] H Muller, et al., John Wiley & Sons Ltd; p60
56
supra note 70; p23

53
 CHAPTER-II

jurisdiction where the legislation is in its infancy, like a balloon when squeezed in some spot
will balloon to other directions57.

Because the members of the EU have a common foreign policy, and these members having
enormous influence in most international organizations and groups that make AML policy,
the EUs Policy on AML has importance beyond EU. The European Union (EU) has issued
two Directives on the Prevention of the use of the Financial System for Money Laundering
purpose, to achieve level playing field across EU. In June 1991 the European Parliament and
Council adopted the First European Directive on Prevention of the Use of the Financial
System for the Purpose of Money Laundering. The Directive required all member states to
amend their national laws so as to prevent their domestic financial systems from being
exploited for the purposes of laundering money58.
Council of Europe was established in 1949 with a human right focus. It was originally
conceived as organization ensuring and evangelizing the values underpinning the European
Convention on Human Rights. For some years it filled the gap left by the diffidence of the EU
to broach matters of criminal law. The Council of Europe does not have the power as does the
EU to bind the UK. It does however have express power to deal in the area of criminal law.
EC extends its membership to many of the area in particular Central and Eastern Europe, in
or from which dirty money is suspected to originate. In late 70s concern over growing
number of criminal acts like kidnapping prompted the EC to examine the problems that had
arisen in European Countries as a result of money laundering59. Europe has for a long time
interested in supporting AML issues, starting with early initiative of Council of Europe in
1980. The EU has issued subsequently three Money Laundering Directives, in 1991, 2001
and 2005. There are several discerning trends in the EUs AML directive for example (i)
linking with FATF standards is strong and in many ways binding (ii) G7 members such as
UK and France at the forefront are eager to push comprehensive regional standards (iii)
countries with long history of off-shore status such as Luxemborg are experiencing intense
pressure to address potential weaknesses60. Until the mid-80s the political and public opinion
perceived the European communities were not affected by organized crime. The long
tradition of legislative measures against money laundering in the US has exerted pressure on
launderers to seek shelter elsewhere, and the EU areas without internal borders can be seen to

57
supra note 9; p17,33
58
supra note 537; p34
59
supra note 102; p95-96
60
supra note 421; p6

54
 CHAPTER-II

be one possible choice for them. Other argument is that US forced the EU to show to the
world that they want to act in a unified manner61. In June 1991 the European Parliament and
Council adopted the 1st European Directive on prevention of the use of the Financial System
for the purpose of money laundering, when it recognized that money laundering will not only
damage individual institution, but the financial system, and economy as a whole. In
December 2001 the European Parliament adopted the 2nd directive to amend and extend the
first. The 3rd directive was adopted in October 2005 and there is to be a two-year period for
its adoption and hence should be implemented by all member states by the end of [Link]
1st directive of 1991 has three clear objectives. Firstly, it established the EC as a transnational
security actor by containing both regulatory and criminal law provisions, but as criminal law
competences fell outside ECs competence, Art.2 was included the wording “member states
shall ensure that money laundering as defined in this Directive is prohibited” All the member
states were thus required to introduce legislation which made money laundering a criminal
offence. The second objective of the Directive is to put a lot of pressure on financial
institutions both economically and morally, and made the persons behind the counter to act as
moral filters. The third objective is prevention strategy was mostly seen in Art.6 which
touched a nerve by lifting banking secrecy, and financial institutions were no more allowed to
hold anonymous bank accounts62. Convention No. 141 of 1990 from the Council of Europe,
laid down a comprehensive system of rules aimed at covering all procedural aspects
connected with money laundering – from the initial investigations to the adoption and
execution of the confiscation sentence. It provided for special mechanisms promoting the
widest possible cooperation required to deny criminal organizations access to money
laundering instruments and to the proceeds of crime. The fact that all EU Member States have
signed and ratified Convention No.141, an infrequent occurrence for Council of Europe
instruments, illustrates the value placed upon this instrument.

The first Directive was confined to credit and financial institutions as they were considered
to be the most vulnerable of being used by money launderers, although member states were
encouraged to extend the requirements to other industries or sectors where there was
considerable threat of handling money from criminals. The Directive was also restricted to
drug trafficking as defined in the Vienna Convention. However, member states were asked to
consider extending it to other serious criminal activity. The limitations of the First Directive

61
supra note 9; p45
62
supra note 9; p54-56

55
 CHAPTER-II

were the subject of extensive discussion and hence consultations were put in place before
bringing the Second Directive. It resulted in two major proposals. First to extend drug
trafficking to all serious crimes including tax evasion, and secondly the controversial one
being the proposal to bring non-financial sectors also into net.

When the Second Directive was adopted in 2001 it did not contain a precise definition of
serious crime but let this to be reconsidered by the Commission, which was requested to
present further proposals in 2002. Terrorist financing was also left to be dealt with under the
heading of serious crime. After FATF made significant amendments to the 40
Recommendations which was to be applied in a consistent manner across the EU, it was
consequently agreed by the member states and the Commission that a completely new
Directive to fully replace the First and Second Directives should be introduced63. 14 July
1999 saw the Commission present a proposal for an amended Directive that became known as
the Second Money Laundering Directive. Its aim was to refine existing provisions and to
plug perceived gaps arising out of the successful implementation of the first directive.
Important among this was extending the scope of predicate offences to all forms of large-
scale criminal activity with links to organised crime which are liable to generate significant
‘launderable’ revenues. Following the European Council of October 1999. An entire
paragraph was dedicated to actions necessary to counter money laundering. In particular, the
European Council affirmed that Money laundering is at the very heart of organised crime. It
should be rooted out wherever it occurs. The European Council is determined to ensure that
concrete steps are taken to trace, freeze, seize and confiscate the proceeds of crime64.
The introduction of the Third Money Laundering Directive was met with heavy criticism. The
European Union released the Directive in a climate where some Member States had not fully
implemented the reforms contained in the Second Money Laundering Directive of 2001.
Criticism was also levelled at the European Union’s release of the Third Money Laundering
Directive ahead of evaluating the impact of the Second Money Laundering Directive reforms.
The 3rd AML directive (2005/60/EC) is the widest ranging of the three and represents a
significant step towards a more comprehensive approach. The directive incorporates FATF 40
recommendations and bring certain degree of coherence between international and European
measures for fighting ML. Another harmonization efforts were made when the new council of
Europe Convention on Laundering, Search, Seizure and Confiscation of proceeds of crime

63
supra note 537; p27
64
supra note 544; p61,63

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 CHAPTER-II

and Financing of Terrorism was opened up for signature in May 2005. It was signed by 22
states including Netherlands. The convention leaves it to the latitude of each Signatory State
to decide which approach to use in determining predicate offences as long as the 20 crimes
listed in the Appendix of Convention are covered65.

The European community and its Member States have participated actively in the
development of international and regional money laundering counter measures from their
inception. These include the 1988 Vienna Convention, and the Council of Europe 1990
money laundering Convention. Also significantly, the community Member States and the
European Commission have participated in the Financial Action Task Force (FATF) either
from the commencement of its operations or shortly thereafter, taking an active part in the
development of the famous 40 Recommendations. These internationals standards were
therefore quite influential in the development of the Community response against money
laundering. In 1991, the first EC money laundering Directive when it was adopted, became
the first major regional instrument adopting a near comprehensive AML [Link]
has also been lots of criticism that EUs new risk-based approach results in a too flexible
definition of actus reus of money laundering crime. The broad character of AML law is
regarded to be necessary to respond to the ever-changing nature of the phenomenon, termed
as the Chameleon threat. On the other hand too, flexible terms may fail to provide clear
guidance and would lead to inconsistencies67. For many years the Council of Europe has
prioritised its activities in the legal sphere. Its efforts to promote modernization of the law and
closer cooperation among its members have resulted in the conclusion of more than 160
international treaties and conventions, out of which more than twenty concern matters
relating to criminal law. In several ways the 1990 Council of Europe convention on
laundering, search, seizure and confiscation of proceeds from the crime goes farther than the
UN Convention of 1988. For instance, the obligation to criminalize the money laundering is
not restricted to drug trafficking offences, as it extends to any “predicate offences”. The
legislative history explains that such measures should at least be made applicable to serious
crimes and to offences that generate huge profits68. The European Commission has noted that
money launderers generally do not look for the highest rate of return on the money they

65
supra note 173; p130
66
Valsamis Mitsilegas and Bill Gilmore (2007), “The EU Legislative Framework against Money Laundering
and Terrorist Finance: A Critical Analysis in the Light of Evolving Global Standards”, The International and
Comparative Law Quarterly, Vol. 56, No. 1 (Jan., 2007), pp. 119-140, Cambridge University Press; p119
67
supra note 9; p74
68
supra note 368; p65

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 CHAPTER-II

launder, but rather search for a place for investment, which easily allows the recycling of
money even at the cost of accepting a lower rate of return The 1990 Council of Europe
Convention on Laundering, Search , Seizure and Confiscation of Proceeds of Crime opened
for signature on 8th November 1990 is open to all states including its non-members, hence not
bestowed with moniker ‘European Convention’. The 1991 European Money Laundering
Directive, which asked the states only to prohibit money laundering, though was in principle
limited to dealing with the proceeds from drug trafficking offences, allowed states to extend
the application field to other types of criminal activity as well. in its 1999 proposal to amend
the Money Laundering Directive the European Commission, stressed for extension of the
directive’s application field to fraud, corruption and other illegal activities damaging or likely
to damage the European Communities financial interests. All preventive AML measures
adopted at an international level are focused on the role of financial institutions. Thus, the
very first international instrument which tentatively attempted to deal with the problem, the
Council of Europe Measures against Transfer and Safekeeping of Funds of Criminal Origin
comprises four preventive measures, three of which are related to the role of financial
institutions69.

2.3 EXPERT GROUPS

2.3.1 Financial Action Task Force (FATF)

FATF is the principal organ that is spearheading the fight against money laundering on a
global scale. It was set up following the concerns about money laundering expressed by the
G-7 Summit in the year 1989. The FATF operates out of the OECT office in Paris but is not a
part of it. FATF, being an intergovernmental body, whose purpose is the development and
promotion of national and international policies to combat money laundering and terrorist
financing. The FATF is therefore a ‘policy making’ body that works to generate the necessary
political will to bring about legislative and regulatory reforms.

2.3.2 Basel Committee

The Basel Committee on Banking Supervision was formed in 1974 by central bank governors
of Group of 10 countries (Note actually the group is 13 Belgium, Canada, France, Germany,
Italy, Japan, Luxemburg, Netherlands, Spain, Sweden, Switzerland, UK and USA) Individual
countries are represented by their central bank or by authority responsible for overall
69
supra note 70; p118

58
 CHAPTER-II

supervision of banking sector in the absence of a central bank. Basel standards and guidelines
are adopted with expectation that relevant authorities within each jurisdiction take all steps to
implement the suggested measures. Three of the Committee’s supervisory measures concern
money laundering, and they are (1) Statement on Principles in Money Laundering (2) Core
Principles for Banking and (3) Customer Due Diligence. In 1988 the Basel Committee issued
its “Statement on Prevention of Criminal Use of the Banking System for the purpose of
Money Laundering (Statement on Prevention)” Four principles are contained in the Statement
(a) proper customer identification (b) high ethical standards and compliance with statutes (c)
cooperation with law enforcement agencies (d) policies and procedures to adhere to the
statement . The Statement cautions that banks may be unwittingly used by criminals70.
In 1997 the Basel Committee issued its “Core Principles for Effective Banking Supervision
(Core Principles)” which provides a comprehensive blueprint for an effective banking
supervisory system. Of the total 23 core principles , the core principle 15 deal with
laundering which reads as “ Banking supervisors must determine that banks have adequate
policies, practices and procedures in place, including strict “know your customer” rules, that
promote high ethical and professional standards in the financial sector and prevent the bank
from being used intentionally or unintentionally by criminals” In addition to the above the
Committee in 1999 issued “Core Principle methodology” which has 11 specific criteria and 5
additional criteria to help assess the KYC policy. Important point is that these additional
criteria refer to the FATF 40 recommendations. In October 2001 the Committee issued an
extensive paper on KYC titled “Customer Due Diligence for Banks” These KYC
standards are intended to benefit banks beyond their fight against money laundering by
protecting the safety and soundness of the banks and the integrity of the banking system as a
whole71.

2.3.3 Financial Intelligence Unit (FIU)

FIUs are national government authorities that receive, analyse, and disseminate financial
information and intelligence for the purpose of uncovering and prosecuting crime. Though
their functions vary among jurisdictions, FIUs are statutorily empowered to receive a wide
variety of financial information from diverse sources. FIUs have access to information from
other domestic government sources, including those administering customs, tax, pension and

70
supra note 1; p-III-3,14
71
supra note 1; p14-16

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criminal laws as well as from foreign FIUs72. FSF (Financial Stability Forum) provides a
cross disciplinary forum for those interested in regulatory matters to meet, discuss and pursue
various initiatives with respect to the international financial system. FIUs can be classified by
their nature, as purely administrative or run by the police or a judicial authority. In some
jurisdictions such as UK for example a police force is charged with the responsibility of
receiving and analysing reports made by the financial institutions. The secrecy obligation
imposed on FIUs is very important in several respects. First it enables FIUs to exercise their
functions as an intermediary between financial institutions and law enforcement agencies.
Secondly the secrecy duty also protects the personnel of reporting institutions. Thirdly in so
far as the information disclosed is protected by the right to privacy the secrecy duty of course
also protects the right to privacy of the individuals to whom the information disclosed
relates73.

Primary goal of a financial investigation is to identify, trace, and document the movement of
funds so as to locate the assets which are subject matter of investigation. Such investigations
seek to discover the financial trail left by the criminals. The pressing need for data analysis of
financial crime is one of the reasons for proliferation of FIUs around the globe and their
growing importance in detecting, preventing and prosecuting laundering offences. FIUs vary
from vary from country to country but the core functions of receiving, analysing and
disseminating information remains the same. Financial institutions must report all suspicious
transactions to a centralized repository.

Only on analysing the data, FIUs can detect suspected criminal transactions. Analytical
function of FIU is supported by legal authority, adequate human resources and technical
capability by a country74.

2.3.4 World Customs Organisation (WCO)

WCO based in Brussels does a collaborative effort on international scale by customs

authorities of countries worldwide, and WCO is also deeply concerned with AML measures
by its very nature WCO plays a fairly proactive role in curbing money laundering by way of
investigation and disseminating information75.

72
supra note 133; p40
73
supra note 70; 190
74
supra note 1; p-VII-2,4
75
supra note 26; p226 565 supra
note 537; p10

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 CHAPTER-II

2.3.5 Financial Stability Forum (FSF)

The Financial Stability Forum (FSF) was convened in April 1999 to bring together senior
officials from 26 national authorities, six international financial institutions, seven
international standard-setting, regulatory and supervisory groupings, two committees of
central bank experts and the European Central Bank to promote international financial
stability through information exchange and co-operation in financial supervision and
surveillance. In May 2000 the FSF encouraged a number of offshore centres to undertake
necessary reforms and then requested the IMF to put in place an assessment programme that
would ensure long-term progress in these jurisdictions As at the end of August 2004 almost
all of the 42 countries which the FSF had identified as having offshore financial activities had
undergone an initial assessment by the IMF.

2.3.6 EGMONT Group

To combat money laundering governments have created agencies to analyse information

submitted by financial institutions. These agencies are commonly known as FIU They serve
as the focal point for the national AML because they provide for the exchange of information
between financial institutions and law enforcement agencies. To join the Egmont group a
country’s FIU must meet the Egmont definition of an FIU. A member must also commit to
act in accordance with the Egmont Group’s principles for Information Exchange between FIU
for money laundering cases. Members have access to a secure private web site to exchange
information. Combating money laundering requires the expertise of specialized law
enforcement agencies. Under the portents of the Egmont Group a loosely organized group of
national FIUs was formed the definition of an FIU contains three basic functions. Firstly, any
FIU has a ‘repository function’ in the sense that the unit is called upon to be the central
repository of information on money laundering. Second is the ‘analysis function’ relating to
processing of the information it receives, by normally providing added value to it. Processing
information may allow an FIU to decide whether or not the information warrants a judicial
investigation. The last function is its ‘clearing house’ function as the unit serves as a conduit
for facilitating the exchange of information on unusual or suspicious financial transactions76.

76
supra note 70; p184

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2.3.7 Group of 7 Countries (G-7)

Since 1978 the G7 partners have worked together effectively, to counter terrorism. In the
first stage between 1978 to 1980 terrorism was the G7 agenda, and in 1981 Ottawa summit
G7 started to take action against the problem. In 1984 London Summit G7 highlighted several
goals including the issue of raising of funds through drug trafficking. In 1986 Tokyo summit
was the first G 7 document expressing a vague commitment to lead international effort
against terrorism and established the first network of expert groups on terrorism. In 1995
Ottawa Ministerial Declaration on Countering of Terrorism called upon all states to strive and
take steps countering terrorism and to bring domestic legislation in harmony with
international conventions by the year 2000. In 2001 G7 issued a second report about fighting
the abuses of Global Financial System and continued to monitor the work of FATF. . In 2002
G7/G8 issued several documents and reports on combating the financing of terrorism. The
money laundering problem became relevant for G7/G8 before long and in eighty’s many
documents issued highlighted the need of fighting money laundering77.

2.3.8 Wolfsberg Group of Banks

On October 30, 2000 a new initiative to combat money laundering was unveiled, and what
distinguishes this from others is that it has been initiated by private sector banks. Eleven
private sector banks signed the Wolfsberg Principles which are non-binding set of guidelines
concerning money laundering, governing relationship between private banks and their clients.
Some critics are of the view that the initiative is an attempt to pre-empt further governmental
control towards private banking568. The main thrust of Wolfsberg principles is to convince
national and international regulatory agencies to adopt risk-based approach to AML issue.
While the traditional rule-based approach was ineffective because it stipulated measures
based on a pre-defined criteria or set-threshold, while the risk-based approach which is more
flexible as it leaves the priorities to the institutions78.

77
supra note 19; p23-30 568 supra
note 5; p262
78
Mark Pieth (2007), “The Wolfsberg Process”, Anti Money Laundering – International Law & Practice,
[Link] H Muller, et al., John Wiley & Sons Ltd; p97

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 CHAPTER-II

2.4 REGIONAL GROUPS

2.4.1 Asia Pacific Group (APG)

The Asia/Pacific Group on Money Laundering (APG) was officially established as an

autonomous regional anti-money laundering body in February 1997 at the Fourth Asia Pacific
Money Laundering Symposium held in Bangkok, Thailand. The purpose of the APG is to
facilitate the adoption, implementation and enforcement of internationally accepted anti-
money laundering and anti-terrorist financing standards set out in the recommendations of the
apex body FATF. It is a voluntary body though it is not a party of any international
organization or does it derive its existence through a Treaty. It takes into account periodical
developments in AML law and the initiatives taken by other international organizations and
bodies, to promote a consistence global response. The procedures of APG is based on
consensus among members79.

2.4.2 Caribbean Financial Action Task Force (CFATF)

After the inception of FATF, and following its model, 26 member countries from the
Caribbean basis and the USA have lined together to promulgate ad implement various AML
efforts under the banner of Caribbean Financial Action Task Force – CFATF. In 1991 the
Prime Minister of Aruba initiated the move as he was concerned about the influx of drug
money into Aruba. Only in October 1996 when a formal MOU was signed the organization
was formed. Non-members but co-operating nations include, USA, Canada, Mexico, France
and Great Britain, Argentina, Holland. It takes active role in AML regime of Caribbean and
Latin American regions. It has a 19 Recommendations modelled following the FATF
recommendations.

2.4.3 Europol

Europol is a regional police organization of Europe. Its membership comprises of police

forces in the EU. It is active in countering money laundering measures by coordinating with
investigations. Over the years Europol have built up substantial experience in fighting drug
trafficking, illicit immigration networks and trafficking in human beings, illicit vehicle

79 571
[Link] accessed on 18/8/14
supranote 62; p234

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 CHAPTER-II

trafficking, cybercrime, money laundering and forgery of money. Europol is the European
central office to combat euro counterfeiting also.

2.4.4 Eastern and Southern Africa Anti-Money Laundering Group (ESSAMLG)

The purpose of the Eastern and Southern Africa Anti-Money Laundering Group
(ESAAMLG) is to combat money laundering by implementing the FATF Recommendations.
This effort includes co-ordinating with other international organizations concerned with
combating money laundering, studying emerging regional typologies, developing institutional
and human resource capacities to deal with these issues, and coordinating technical assistance
where necessary. ESAAMLG enables regional factors to be taken into account in the
implementation of anti-money laundering measures. ESAAMLG was launched at a meeting
of Ministers and high-level representatives in Arusha, Tanzania, on 26-27 August 1999. A
memorandum of understanding (MoU) based on the experience of the FATF and other
FATF-style regional bodies was agreed to at that meeting. Following the signature of the
MoU by seven of the potential members, ESAAMLG came into formal existence. All
members are Commonwealth countries which have committed to the FATF Forty
Recommendations. The group held its first meeting on 17-19 April 2000 in Dar es Salaam,
Tanzania. Following the events of 11 September 2001, ESAAMLG expanded its scope to
include the countering of terrorist financing. ESAAMLG members participate in a self-
assessment process to assess their progress in implementing the FATF Forty
Recommendations. The ESAAMLG Secretariat is located in Dar es Salaam, Tanzania80.

2.4.5 MONEYVAL Committee

The object of MONEYVAL is to ensure that its member states in the Council of Europe have
put in place, an effective system to counter money laundering and terrorist financing and to
comply with the relevant international standards in these fields. It has been impressed upon
the member states that these standards are compatible to those contained in the
recommendations of the FATF, including the Special Recommendations on Terrorist
Financing, the 1988 United Nations Convention against Illicit Traffic in Narcotic Drugs and
Psychotropic Substances, the United Nations Convention against Transnational Organised
Crime, the 1999 United Nations International Convention for the Suppression of the
Financing of Terrorism, the Directive 2005/60/EC of the European Parliament and of the

80
[Link] accessed
18/01/2014

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 CHAPTER-II

Council of 26 October 2005 on the prevention of the use of the financial system for the
purpose of money laundering and terrorist financing and the relevant implementing measures
and the 1990 Convention on Laundering, Search, Seizure and Confiscation of the Proceeds
from Crime, concluded within the Council of Europe

2.5 GLOBAL ENFORCEMENT REGIME

2.5.1 Territorial Jurisdiction

As historically nation states restricted their criminal law to their boundaries, launderers took
advantage of this limited jurisdiction by moving proceeds across national borders. Although a
large number of international organizations have started ruling the world through standards,
their importance is seldom acknowledged. The reason is a lack of understanding of why
international organizations find soft rules attractive and how they should become effective.
Indeed, it is a common complaint by many developing countries that developed jurisdictions
pay too little heed to the economic impact of large amounts of capital being transferred out of
the developing world. Engaging in trade or any kind of financial transaction involving a
jurisdiction subject to a financial embargo is a serious criminal offence, but it is not itself
money laundering.

In most cases the proceeds of a crime are located may lack jurisdiction over the offence
which took place abroad and as a result may be unable to order confiscation of these
proceeds. Laundering offence may give jurisdiction to a state in whose jurisdiction the
laundering activity took place but the predicate crime took place in a jurisdiction abroad.
Even if the state lacks prescriptive jurisdiction for the predicate offence, criminalization of
money laundering nevertheless allows the judicial authorities of a state to order confiscation
of proceeds located in another. Often every single laundering act will be considered as a new
money laundering offence and as a consequence such offence can be repeated number of
times. Courts in certain jurisdiction such as Belgium consider the offence as collective and
single, while in USA for each offence an indictment is awarded81.

2.5.2 Extra Territorial Jurisdiction

When a government of one state wants to enforce internationally a transnational crime, it will
try to make this offence illegal under international law. That certain conduct is considered as
81
supra note 70, p215-219

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international offence mostly follows from an international convention, but can also follow
from customary practices among states. In order to be used as basis for proceedings in respect
of laundering, a predicate offence committed abroad, must have the nature of a criminal
offence in the country where it was committed and in the domestic law. FATF
Recommendation 1, in paragraph five, provides that predicate offenses should extend to
criminal conduct that occurred outside the country’s borders, if that conduct constituted an
offense in the other country and would have constituted an offense had it occurred
domestically. This is the so-called “dual criminality” standard that is the minimum
requirement82. A system will work only well if there are no loopholes. Thus, there is a clear
need for universal participation in international money laundering efforts at the global level,
and a high degree of transparency. Otherwise, the system will remain only as strong as its
weaker link and will be exploited by organized crime. The problem does not seem to be a
lack of international instruments but more likely, shortcomings in the implementation of
existing instruments83. Dual criminality is a long-standing requirement in extradition law of
most of the countries. Under the dual criminality principle an act is not extraditable unless it
constitutes a crime under the law of both the state requesting extradition and the state from
the extradition is sought. The justification for the principle is that it ensures that a person’s
liberty is not restricted when his/her conduct is not recognized as criminal in the state
receiving an extradition request84. The political, economic and social interests of countries are
often affected by, and related to, the region in which the country is located. Acts of the
neighbouring countries perhaps has the greatest effect on its close neighbours, especially in
the area of law enforcement and economic relations. These regional bodies provide the
opportunity for essential interests to be pursued and for co-operative mechanisms to be
developed. The Asia Pacific Group on money laundering APG, one such group currently
consists of 26 members85.

More than physical persons, juridical persons are internationally active to a great extent.
Unlike the former the latter can be present in more than one country at the same time. The
application of nationality principle to foreign corporate crimes, however requires the solving
the basic question of how the nationality of an institution which is a corporation should be
determined. Double criminality as a precondition for extra territorial jurisdiction should not

82
supra note 230; p13
83
supra note 130; p130
84
supra note 112, p61
85
supra note 21; p25

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been as purporting to safeguard the legality principle, but as a mechanism for avoiding
conflict of laws. Without the requirement of double criminality, the nationality principle
would create a risk that individuals and corporations alike would be confronted with
obligations under their national law that would conflict with the territorial law86.

US authorities in particular tried to pierce foreign banking secrecy by issuing extra-territorial

disclosure orders, that is disclosure orders in respect of information held abroad. Although
most states are now in principle willing to lift foreign banking secrecy laws on the request of
a foreign state, for the purpose of foreign money laundering investigation, this willingness is
not absolute, but is subject to a number of legal conditions and exceptions. The effectiveness
of the fight against ML that is the impact on crime (both predicate crime and the crime of
money laundering) is moreover difficult to measure as the extent of the existing crime is a
matter of speculation.87

The question of whether a state has jurisdiction to order confiscation of the proceeds from
predicate offence coincides with the question of whether the state has jurisdiction over than
offence, as confiscation in principle is a criminal sanction which is imposed for the offence.
The money laundering offence gives jurisdiction to a state in whose territory the money
laundering acts took place and hence it allows it to take action in respect of proceeds that are
located in its territory, but derived from an offence outside its jurisdiction Thus even if a state
lacks prescriptive jurisdiction in respect of the predicate offence, the criminalization of
money laundering nevertheless allows the judicial authorities of that state to order the seizure
or confiscation of the proceeds located in its territory which would otherwise be excluded.
American law enables civil forfeitures of proceeds from a number of designated offences
against a foreign nation, namely drug offences in respect of which it is required that they be
punishable both under American law and according to the lex loci delicti with at least one
year imprisonment – 18 USC 981 (a) (1) (B)88. Apart from administrative assistance, another
new trend in international evidence gathering is the use in particular by the US law
enforcement authorities is unilateral measures which purport to give an extra territorial reach
in order to obtain evidence. Although this trend is most notable in respect of evidence
gathering, there are also examples of extra territorial seizures or even extra territorial
confiscation of assets. Unlike the fiscal offence exception, the political offense exception

86
supra note 70; p233,236
87
ibid; p318,424
88
ibid; p216-217

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which originated in the law of extradition is intended to protect individual rights. It protects
persons who have committed the offence against the political institutions of a state and who
are therefore deemed not to stand a chance of receiving a fair trial in that country89.

2.5.3 National & International Co-Operation

The international community could consider the possibility to introduce effective punitive
measures, such as a financial quarantine for every country that did not adhere to the
international [Link] money presumably like cleaner air comes with a price.
Increasing scrutiny of money flow may result in loss of customers who may migrate to
competing systems which are less regulated. Regardless of the volume of money flowing
through a bank, routine reporting systems can be burdensome, and especially the requirement
to report ‘suspicious transactions’ can be a nightmare depending on penalties for non-
compliance91.

2.5.4 Mutual Legal Assistance

The mere existence of an agreement is not an appropriate measure, which in reality amounts
to cooperation. To make information exchange work there must be a political will and a
commitment to the rule of law In a number of cases governments have agreed to cooperate
but the agreement has been a cosmetic cover to protect the local money laundering
[Link].7 (1) of VC declares that Parties shall afford one another the widest measures
of mutual legal assistance in investigations, prosecutions and judicial proceedings in relation
to criminal offences established in accordance with Art.3 Para 1. Art.9 refers to other forms
of cooperation and training. Art.8, of MLC requires parties to afford each other upon request,
the widest possible measures of assistance in the identification and tracking of
instrumentalities, proceeds, and other property liable to confiscation.93

89
supra ntoe 70; p300
90
supra note 19; p19
91
supra note 227; p796
92
supra note 20; p93
93
supra note 70; p261

68