The International Environment of

Anti-Money Laundering

Dr David Chaikin Barrister, Phd in Law (Cambridge), LLM (Yale), LLB/B Com (UNSW)

Associate Professor, University of Sydney School of Business

david.chaikin@sydney.edu.au

Presentation at Anti-Money Laundering 2014

Radisson Blu Plaza Hotel, Sydney

12th September 2014

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About me …

International practising investigatory lawyer since 1980s

Specialisation : transnational asset recovery investigations and litigation

At the University of Sydney since 2006

Banking and Finance Law, International Financial Crime, Law of Asset Protection

Selected publications

An Alternative Australian Trusts Act : Empirical and Implementation Perspectives

Financial Crime Risks, Globalisation and the Professions

Money Laundering, Tax Evasion and Tax Havens

Former Senior Assistant Secretary & Head of the International Criminal Law Enforcement & Security Branch , Australian Attorney-General’s Department

Former Senior Legal Officer, Commercial Crime Unit the Commonwealth Secretariat(London -based intergovernmental diplomatic body)

Statistics – Do they Matter?

Growth of financial crime as percentage of growth of GDP?

$1.6T bribes/year, Africa loses $250B or 25% GDP (World Bank)

1/3 of poorest people (1B) live in corrupt countries with huge natural

resources (Professor Collier)

Australian companies do business in highly corrupt countries –implications?

National priority for Australian to increase export of financial services

through private banking, asset and wealth management

2013 global private wealth $152T/highest growth in Asia/Pacific (BC)

challenge :close connection between government and business in Asia/Pacific

Only 3.5% of funds under management in Australia is foreign sourced

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Illicit Network Relationships

Corruption is the biggest single obstacle to development

Trillions of dollars arising from corruption must be laundered

But how do we explain the “Chinese puzzle”?

Money laundering is at the heart of profit-driven crime

Corruption undermines effectiveness of AML & CFT strategies

Tax evasion is an element of corruption & money laundering

Public officials that are corrupt will inevitable engage in tax crimes

Money laundering techniques are used to conceal corruption

National and international financial crimes can only be

adequately combated through international co-operation

Marcos Case Study:

Conjugal Dictatorship 1965-1986

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How Did the Philippines Find Some

Swiss Bank Accounts?

Marcos left documents behind at his Palace, and so to protect

himself, he requested Credit Suisse (client for 25 years) to

transfer $213M to Austria (Operation Blue Bird)

Credit Suisse was worried about its reputation so it asked for

advice from Swiss government

Swiss Federal Council orders freeze – $356M held in 5

corporate entities at two Swiss banks (Credit Suisse, Swiss

Banking Corporation)

Original discovery and freezing formed basis for litigation

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William

Saunders

Jane

Ryan

MALER

EST Swiss

Bank

Corporation

MALER

Foundation Swiss

Bank Corp

$356,000,000

Funds

Transfer

Established

June 1971Established

March 1970

Renamed

Aug.1978

Dissolved

June 1981

Funds Transfer March

1981

Renamed

Aug.1978

Funds

Transfer May

1981

Funds

Transfer

March 1981

Established Dec 1971

Renamed

Dec.1974

Renamed

Aug.1978

Dissolved

June 1981

Funds

Transfer

March 1981Funds

Transfer

March 1981

Established

Aug. 1970

Established March 1971

Established

June 1973

Dissolved

March 1981

Dissolved

March 1981

Dissolved

Funds

Transfer

March 1981

A/C opened March 1968 A/C opened March 1968

Established

May 1981

A/C opened

Sept. 1981

Established

May 1981

A/C opened

Sept. 1981

Established May 1981 A/C opened Sept. 1981

A/C opened

Sept. 1981

Established

May 1981

$231,367,070 Cat CAR

$8,647,190 Cat NES Dec.

1989$3,597,544Dec. 1989

$17,214,432Dec. 1989 $80,556,483

June. 1991Sfr.25,278,825J

une. 1991

OSER

OMAL

DIDO

Bank Hoffman

Fides Trust

account

AZIO

Foundation

Credit Suisse

ZANDY

Foundation

Credit Suisse

VERSO

Foundation

Credit Suisse

WINTHROP

Foundation

Credit Suisse

CHARIS

Foundation

Credit Suisse

SCOLARI

Foundation

Credit Suisse

VALAMO

Foundation

Credit Suisse

TRINIDAD

Foundation

Credit Suisse

RAYBY

Foundation

Credit Suisse

ROSALYS

Foundation

Swiss Bank Co

VIBUR Foundation

Credit Suisse

PALMY

Foundation

Credit Suisse

AVERTINA

Foundation

Credit Suisse

SPINUS

Foundation

Credit Suisse

AGUAMINA Inc

Swiss Bank Corp

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Money Laundering Techniques

Advisors to Marcos dynamic responses to changes in Swiss law

Layering techniques: liquidate corporate entities in which accounts

are held; transfer monies to a holding company (eg subsidiary of

the bank) & retransfer monies to a new corporate entity

Bank accounts: false names, coded instructions, 3 level security

protection, revolving account numbers

Beneficial ownership concealed & changed (role of lawyers, agents,

trustees, cronies/friends, business associates)

Operate under a front of legitimacy

Executive orders to justify decisions

Documentation supported by legal opinion, financial advice

Immunities – presidential, diplomatic

Rights 9

Recovery of Illicit Monies

10 years Marcos litigation in Switzerland to recover $356 M

(plus interest) = $657M

“Illicit enrichment” basis for recovery

Little Swiss assistance in recovering hidden monies

Hundreds of millions of dollars removed from accounts

(retrospectively) prior to freezing

$5-13.2 Bn hidden, little gold accounts (Operation Domino)

Over past 25 years only $4-5Bn recovered internationally out of

corruption pool of $20-30Bn – less than 1% (World Bank)

Australian record : $100M frozen by Confiscation Task Force

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Corruption Dimension

PEP Categories & Verification

Are these PEPs?

De Factos : 95% of Chinese officials investigated for

corruption have mistresses (Wu Changchen)

Sub-National Political Figures eg Party head Bo Xilai (China),

Mayor Maluf (Brazil)

Charitable foundations set up by PEPs

Verification of PEPs through private data bases

Implications if you get it wrong eg entertainment expenses by

investment banks

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Prevention Dimension

Risk-Based Approach

Risks - legal, regulatory & reputation

Fines, civil penalties, criminal convictions, banned from access

to financial markets, loss of license

Risk aversion leading to perverse outcomes

Enhanced Due Diligence on PEPs

Verification of client information

Failure of ongoing IT AML monitoring systems

PEP cases reported in few countries (except Switzerland)

Ex post facto judgments by government

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Tax Dimension

Massive leakage of confidential financial information (Swiss &

Liechtenstein Banks, Corporate Services Providers [Offshore

Leaks project – 100K companies, 2.5 M records, 2.5M emails]

Offshore Voluntary Disclosure

Multilateral support for automatic exchange of tax information

US Foreign Account Tax Compliance Act (FATCA)

Foreign financial institutions to disclose US taxpayers or face draconian

penalties (30% withholding tax)

78 countries, include Australia signed up (not Russia or China)

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US Dimension Increased enforcement by US against foreign financial institutions in

sanctions, terrorist financing, corruption & money laundering cases

Largest-ever terrorism-related civil forfeiture ($800M+ NY building

owned by Iranian Gov’t, $5Bn judgment claims)

FCPA deferred prosecution agreements – only 3% returned to “victim

country” (Zagaris)

Is US experience replicable in Australia?

US constitutional rights appear to be greater but Australian courts

have set limits on ML prosecutions

Extensive reliance on paid informers & whistleblowers in US

Many US money laundering cases are “sting operations” which might

be judged illegal entrapment amounting to an abuse of process in

Australia

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China Dimension

41 M private businesses (cf 140K 1978 ); 2nd highest no of

millionaires (2.4M), 3rd highest UHNWI (983)

Wealthy diversifying risk by moving funds out of China

China strict currency control laws is obstacle

Chinese underground banking centred on HK

Between 2000 and 2011 the Chinese economy lost $3.79T in

“illicit financial flows” ($3.2T invoicing trade fraud) (GFI)

“Offshore leaks” data: BVI, HK preferred destinations

Increased enforcement against corruption in China

Corrupt monies moving out of China

Growth of shadow banking in China

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Money Laundering Trends?

Concealment through Secrecy Structures

IBCs ( BVI, Panama ) Anglo/American trusts

Deception/Layering of Financial Transactions

False or Disguised Documentation

Minimum controls over opening “government accounts”

Use of national security as a cover for money laundering

Trade-based money laundering

Casinos, sports betting

Free Trade areas

Underground banking /Shadow banking

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Trends in the Law: Transparency except

Australia, US ...

The Australian Crime Commission identified exploitation of business

structures as key enabler of organised crime

Misuse of structures is connected to AML regulation of lawyers, accountants

and trust & company service providers

“For too long a small minority have hidden their business dealings behind a

complicated web of shell companies, and this cloak of secrecy has fuelled all manners

of questionable practice and downright illegality” (UK Prime Minister Cameron)

70% of cases investigated by UK Serious Organised Crime Agency

(SOCA) and more than 70% of the civil recovery cases by the Serious

Fraud Office (SFO) raised beneficial ownership issues

EU plan changes to law to oblige companies to disclose up front beneficial

ownership to national corporate registrars

Australia: Tranche 2 & effective beneficial ownership rules

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