"the invisible threat: money laundering in eastern and southern africa"

This publication was supported by funding from the Royal Norwegian Government as part of its support for research into trends of money laundering in east and southern

Africa. In addition, the Institute receives general financial support from the governments of the Federal Republic of Germany, Denmark, the Netherlands and Sweden.

The invisible ThreaT

eDiTeD bY Charles GOreDeMa

Money laundering in Eastern and Southern Africa

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www.issafrica.org

© 2010, Institute for Security Studies

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Copyright in the volume as a whole is vested in the Institute for Security Studies, and no part may be reproduced in whole or part without the express

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The opinions expressed in this book do not necessarily reflect those of the Department of Defence, the SA Army, the Institute for Security Studies, its Trustees, members of the ISS Council, or donors. Authors contributed to this ISS publication in their personal capacity.

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Contents

About the authors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . viiAcronyms and abbreviations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .x

Chapter 1

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1Charles Goredema

Realities and myths of money laundering and terrorist financing in

Eastern and Southern Africa . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1

Chapter 2

Risk-based approaches to money laundering and the financing of terrorism in a dynamic environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11Charles Goredema

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11

Risk in context . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14

Risk of gatekeeper contamination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17

Composition and ownership of institutions within the financial services industry . . . . . . . . . . . . . .18

Risks emanating from organised crime . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

Findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

Taking risks and vulnerabilities seriously: Practical implications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

Chapter 3

Money laundering and the global financial crisis of 2008 . . . . . . . . . . . . . . . .31Bothwell Fundira

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31

Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

The nature of the crisis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

Impact of the crisis in Southern Africa . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

Chapter 4

The control of money laundering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47George Kegoro

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

iv

The legal regime governing forex bureaus in UGANDA, KENYA and Malawi . . . . . . . . . . . . . . . . . . . 48

The control of forex bureaus in Kenya, Malawi and Uganda . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55

Money laundering in Kenya, Malawi and Uganda . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58

Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64

Chapter 5

Trade-based money laundering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67Humphrey P B Moshi7

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67

Conceptual framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68

Scope and magnitude of counterfeiting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70

The impact of counterfeiting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73

Efforts to combat counterfeiting and piracy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75

Concluding remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78

Chapter 6

Laundering the proceeds of privatised violence . . . . . . . . . . . . . . . . . . . . . . . . .81Leon Kukkuk

Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81

Angola . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82

The Democratic Republic of the Congo . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87

Money laundering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92

The way forward . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103

Chapter 7

New corridors and new markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109Ray H Goba

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109

Characterising the illicit drug trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .111

Commonalities of the illicit international drug trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .113

The budding south-south cocaine trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .117

The nature and form of drug-money laundering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125

Effective drug trafficking counter-measures for drug-money laundering in Southern Africa . . . 129

v

Chapter 8

Taking sides . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135Joras Ferwerda

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135

The causes of a lack of political will to fight money laundering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136

The effects of a lack of political will to fight money laundering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137

The possible solution to a lack of political will . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145

Chapter 9

Cross-border trade-based money laundering in Southern Africa . . . . . . . . .151Charles Kamba . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .151

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151

Institutional framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154

Challenges in combattingTBML . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 173

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Charles Goredema is with the Cape Town office of the ISS, where he heads the Organised Crime and Money Laundering Programme . He holds Bachelor of Law (BL), and Bachelor of Laws (LLB) degrees from the University of Zimbabwe and a Master of Laws (LLM) degree from the University of London . Goredema worked as a prosecutor for seven years and as a lecturer in criminal justice law at three universities in southern Africa for 12 years . He has been involved for ten years in research into trends in organised crime, financial crime and money laundering in southern Africa and parts of east Africa . Goredema organises and speaks at many meetings, workshops, seminars and conferences in the region and beyond . He has published numerous articles and reports on organised crime and money laundering .

Goredema is currently managing research projects on trends in organised crime and money laundering in Angola, Botswana, Kenya, Lesotho, Malawi, Mauritius, Mozambique, Namibia, South Africa, Swaziland, Tanzania, Uganda, Zambia and Zimbabwe .

George Kegoro is the Executive Director of the Kenyan Section of the International Commission of Jurists . Kegoro holds qualifications in law and in international conflict management from the University of Nairobi . He is an ad-vocate of the High Court of Kenya and served as Secretary to the Commission of Inquiry into Post-Election Violence in Kenya in 2008 . In 2004 he was Joint Secretary to the Commission of Inquiry into the Goldenberg scandal . He also served as the Secretary of the Law Society of Kenya and worked as a State Counsel in the office of the Attorney-General, with responsibilities for legal research for purposes of law reform .

Kegoro has contributed chapters to various publications on such subjects as counter-terrorism and human rights, anti-money laundering and anti-corruption .

Humphrey P .B . Moshi is a Professor of Economics at the University of Dar-es Salaam . He holds of two degrees in business studies and a PhD in economics from the University of Muester, Germany . He has served as a visiting scholar at the IMF, Washington DC, and at the University of Mannheim, Germany, as well as a consultant to governments, public and private institutions within the East African region and beyond . Moshi was the economic adviser to the Minister

About the authors

viii

for Finance (United Republic of Tanzania) and the Chief Economic Adviser to the President of Zanzibar . He has published widely on issues of socio-economic development, including money laundering . He was one of the key architects for the establishment of the Eastern and Southern African Anti-Money Laundering Group .

Charles Kamba is a Zimbabwean lawyer with a keen interest in commercial law and human rights law and in researching trends in money laundering . He holds Bachelors and Masters degrees in law from the universities of Zimbabwe and Cape Town, respectively . He practised law in Harare before going into com-merce . Kamba was the Company Secretary and Legal Advisor of Intermarket Life Assurance . He has served as a Board Member of Zimbabwe Lawyers for Human Rights . In 2009 he studied the vulnerability of certain countries in Southern Africa to practices of transfer pricing and trade-based money laundering .

Leon Kukkuk is an independent researcher, writer and journalist, with a decade of experience in international development . He has been commissioned, among others, by Global Integrity, the United Nations in Angola, the African Security Sector Network, the Institute for Security Studies and the African Policing Civilian Oversight Forum . Kukkuk’s current research interests include corruption, transparency and accountability of international institutions, African conflicts, transnational economic crime syndicates, money laundering, as well as the challenges facing reform in the security sector, particularly oversight and ac-countability in international policing and peacekeeping operations .

Ray Goba received his initial legal education in Zimbabwe, later doing post-graduate studies in law and public affairs at the University of Minnesota and the Hubert Humphrey Institute in the US . He also received specialised training in criminal prosecutions and was briefly a Procurator Fiscal Depute in Aberdeen, Scotland . After serving as a prosecutor in various Zimbabwean courts, Goba was appointed Chief Law Officer and Head of the Serious Economic Crimes Section in the Attorney-General’s Office . As Acting Director of Public Prosecutions, he successfully prosecuted the first money-laundering case under the Serious Offences (Confiscation of Profits) Act of 1990 . Goba participated in many inves-tigations of bank and foreign-exchange fraud, and sat on boards of inquiry into economic misconduct . Goba has consequently retained a keen interest in money-laundering control .

In 1998, Goba became Deputy Prosecutor-General in Namibia . After serving as Deputy Government Attorney and later, Acting Government Attorney, he

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became the Director of Legal Services and International Cooperation in the Ministry of Justice of Namibia .

Bothwell Fundira is currently a financial and investment consultant and a businessman . He holds an undergraduate degree in accountancy from the University of Zimbabwe and a Masters in Business Administration from the University of Warwick (UK) . He is a Fellow of the Chartered Institute of Management Accountants (UK) . Fundira worked for more than 25 years in the financial sector where he held various executive positions in finance, administra-tion and investments . He has researches and reports on money-laundering activ-ity in Southern Africa, particularly in Zimbabwe and has spoken on the subject at events in South Africa, Botswana, Zambia, Mauritius, Kenya, Uganda, Malawi and Tanzania . He has written various contributions on money laundering, some of which are available on the ISS website at www .issafrica .org .

Joras Ferwerda holds a Masters in Economics and Social Science from the Utrecht University School of Economics in the Netherlands, where he is currently studying for a PhD in economics . His special focus is money-laundering control in Europe . He did the first study on the quantity and effects of money laundering in the Netherlands for the Dutch Ministry of Finance, and a study on money laundering in the real estate sector for the Dutch Ministry of Finance, Justice and Interior Affairs . He organised the conference ‘Tackling Money Laundering’ with international experts on money laundering in Utrecht, the Netherlands . He is presently engaged in an EU-financed project on the effectiveness of anti-money laundering and countering terrorist financing policies in the 27 EU member states . He has published a book and journal articles on money laundering .

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ALC Armée de Libération du CongoAML anti-money launderingAML/CFT anti-money laundering/combating the financing of terrorismAMLIU Anti-Money Laundering Investigations UnitBC Bill of CollectionBCP Banco Comercial PortuguésBEE Black Economic EmpowermentBIA Banking Institutions ActBMPA black market peso arrangementBoB Bank of BotswanaBoN Bank of NamibiaBPS Botswana Police ServicesBRELA Business Registrations and Licensing AgencyBURS Botswana Unified Revenue ServicesCD Control DocumentCDO collateralised debt obligationCECA Corruption and Economic Crime ActCFTC Commodity Futures Trading CommissionCGD Caixa Geral de DepósitosCIPRO Companies and Intellectual Properties Registration OfficeCLO collateralised loan obligationCMM Corporate Money ManagersCOMESA Common Market for East and Southern AfricaCTI Confederation of Tanzanian IndustriesDCEC Directorate on Corruption and Economic CrimeDEA Drug Enforcement AgencyDEC Drugs Enforcement CommissionDFI direct foreign investmentDRC Democratic Republic of the CongoDTO Drug Trafficking OrganizationEAC East African CommunityEITI Extractive Industries Transparency InitiativeEPZ export processing zones

Acronyms and abbreviations

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ESA Eastern and Southern Africa(n)ESAAMLG East and Southern African Anti-Money Laundering GroupFARDC Armed Forces of the Democratic Republic of CongoFATF Financial Action Task ForceFCA foreign currency accountFCC Fair Competition CommissionFDI foreign direct investmentFDLR Democratic Forces for the Liberation of RwandaFEC Fédération des Entreprises CongolaisesFIA Financial Intelligence ActFIC Financial Intelligence CentreFIU financial intelligence unitFNLA National Front for the Liberation of AngolaForex foreign exchangeFTSE Financial Times Stock ExchangeGATT General Agreement on Trade and TechnologyGIABA Inter-Governmental Group against Money Laundering in West AfricaGTI Great Triangle InvestmentsHIV Human Immunodeficiency VirusICC International Chamber of CommerceIDC International Development CorporationIMF International Monetary FundINCB International Narcotics Control BoardIPIS International Peace Information ServiceIPR intellectual property rightISS Institute for Security StudiesJSE Johannesburg Stock ExchangeKAM Kenya Association of ManufacturersKIPI Kenya Industrial Property InstituteKSh Kenyan shillingsLC Letter of CreditMBS mortgage-backed securitiesML/TF money laundering/terrorist financingMLC Movement for the Liberation of CongoMLC Mouvement pour la Libération du CongoMoF Ministry of Finance

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MONUC United Nations Organization Mission in the Democratic Republic of the CongoMOU Memorandum of UnderstandingMPLA Popular Movement for the Liberation of AngolaNBFI non-banking financial institutionNCA National Credit ActNCC Dutch Central CatalogueNinja no income, no job and no assetsNPR National Public RadioODC Offshore Development CompanyOECD Organisation for Economic Co-operation and DevelopmentOTC over-the-counterPOCA Prevention of Organised Crime ActPPLMA Prohibition and Prevention of Money Laundering ActPVC Polyvinyl chlorideRBZ Reserve Bank of ZimbabweRCD Rassemblement Congolais pour la DémocratieRCD-ML Rally for Congolese Democracy – Movement for LiberationRCD-ML Rassemblement Congolais pour la Démocratie-Mouvement de LibérationREIT real estate investment trustRepo repurchase agreementRPF Rwandan Patriotic FrontSACCI South African Chamber of Commerce and IndustrySACU South African Customs UnionSADC Southern African Development CommunitySEC Securities Exchange CommissionSTR suspicious transaction reportTBML trade-based money launderingTBS Tanzania Bureau of StandardsTFDA Tanzania Food and Drugs AuthorityTNG Transitional National GovernmentTNI Transnational InstituteTRA Tanzania Revenue AuthorityTRIPS Trade-Related Aspects of Intellectual Property RightsUAE United Arab EmiratesUDPF Ugandan People’s Defence Forces

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UDSM University of Dar es SalaamUNBS Uganda National Bureau of StandardsUNCAC United Nations Convention against CorruptionUNCST Uganda National Council for Science and TechnologyUNITA National Union for the Total Liberation of AngolaUNODC United Nations Office on Drugs and CrimeUNTOC United Nations Convention against Transnational Organized CrimeWCO World Customs OrganizationWHO World Health OrganizationWIPO World Intellectual Property OrganizationWTO World Trade OrganizationZIMRA Zimbabwe Revenue AuthorityZRA Zambia Revenue Authority

1

Chapter 1

IntroductionCharles Goredema

ReALITIeS ANd MyTHS oF MoNey LAuNdeRING ANd TeRRoRIST FINANCING IN eASTeRN ANd SouTHeRN AFRICAMoney laundering is an activity which is apparently simple to describe . The classic definition, with which many people are familiar, appears on www .ameri-canbanker .com and states that money laundering consists of:

the conversion or transfer of property derived from a criminal offense for the purpose of concealing, or disguising, the illicit origin of the property, or of assisting any person who is involved in the commission of such an offense, to evade the legal consequences of the action; the concealment or disguise of the true nature, source, location, disposition, movement, rights with respect to, or ownership of property, knowing that such property is derived from a criminal offense .

Modern definitions ascribe a broader meaning to the concept, by including assets derived from non-criminal, unlawful conduct .1 The concern underlying the criminalisation of what is in essence derivative conduct is straightforward: unlawful action should not be rewarded by allowing the perpetrator or his or her associates to retain the fruits of such action . In the case of crime, its victims, where they exist, should be compensated, or if feasible, be reunited with their

2

Introduction

property . It is a matter of debate whether the best way of achieving such an outcome is to create a statutory offence .

This book explores some of the complexities prompted by the application of the definition of money laundering to practical situations encountered in Africa . It exposes the inaccuracy of the term ‘money laundering’ as a descrip-tion of what may be concealed or converted . It is not only money that can be unlawfully handled in the way envisaged by the definition . Any value-storing commodity can be ‘laundered’, with money being but the commonest example . In many transactions tainted by characteristics of money laundering, no money actually changes hands . Drugs are often exchanged for stolen stock, or stolen motor vehicles or illicitly acquired marine produce (abalone/perlemoen) . In rare instances, drugs could be exchanged with real estate . The so-called hawala cur-rency exchanges revolve around the transfer of corresponding value, sometimes across long distances . Black market currency swaps operate in the same way .

The essence of the exchange is the transfer of value, usually – but not always – between unrelated parties . Only if money laundering is understood in this way can phenomena such as trade-based money laundering be analysed . This concep-tualisation also assists in locating shadowy gambling transactions within debates about money laundering . It may also resolve the issue of whether money ema-nating from the appropriate public authorities (i .e . which is not counterfeit) can ever be regarded as dirty or hot . Traditional economic theory holds that money is value-neutral,2 while criminal lawyers contend that the association of money with crime or its production by crime can taint it .

However, this does not adequately explain the relationship between the evasion of tax on lawful income and money laundering . Substituting the word ‘value’ for the word ‘money’ cannot explain the somewhat illogical linkage between money laundering and terrorist financing .

The conventional money-laundering cycle is usually graphically portrayed as a dynamic sequence of transactions, in which the starting point is the acquisition of proceeds from an economic crime . The next step is the deposit of the proceeds into a bank account (placement), whereupon the proceeds are mixed with other funds . The criminal may then begin to disperse the proceeds to various destina-tions, within the bank and beyond it (layering) through manual or electronic instructions . In the next step, the criminal typically withdraws the value depos-ited or part of it for various uses, including the support of further criminality (integration) .

3

Charles Goredema

Figure 1: A typical money-laundering scheme

Source: Adapted from UNODC

4

Introduction

The first problem that money-laundering analysts have with this simplistic presentation is that while it purports to show a cycle, it actually illustrates several acts of laundering . The definition would regard the placement of proceeds of crime as a completed act of money laundering, unless at that point a declara-tion of the illicit source is made . Similarly the layering is an aggravation of the laundering started at the placement stage . The use of the proceeds at the end of the cycle is also a distinct act of money laundering .

The second problem with the cycle theory is that it glosses over typical money-laundering transactions in cash-dominated environments, especially economies in which bank penetration is low . The cycle portrays the bank as the first point in the legitimate economy which the criminal turns to in order to invest ill-gotten funds . The more likely scenario in a cash-dominated environment is that, fol-lowing the accrual of such funds, the criminal invests them in a moneymaking venture . The money produced through that venture is subsequently deposited in a bank account, ostensibly as lawfully earned proceeds of business . Then, having established a reason for possessing them, the criminal deals with the funds in the same way they would with lawful income . In a recent work, Moshi discusses the challenges created for a money-laundering control regime by this alternative circulation of funds in the money-laundering cycle,3 which is shown below:

Figure 2: The money-laundering cycle where the bank is not the first port of call

Purchase of cash-generating

business

Deposit of funds received from the business

Proceeds of banking

accounts shifted around

Funds withdrawn for

use

Predicate crime, for example, corruption

5

Charles Goredema

In chapter four, George Kegoro looks at a related dimension peculiar to cash-dominated economies – the challenges that confront foreign currency exchange houses (forex bureaus) in implementing measures against money laundering . He observes that forex bureaus emerged in the early 1990s as part of World Bank-instituted reforms of the financial sectors, ‘when African governments began the liberalisation of exchange controls after decades of state control’ . Licensed as an alternative to commercial banks in the supply of foreign exchange, the forex bureaus’ operations were meant to increase the sources of foreign exchange and make trade in such exchange competitive .

Forex bureaus have assumed importance in the management of money laun-dering loopholes, partly because of the attraction of hard currencies in transac-tions to facilitate capital flight, and partly because of their sheer numbers . Kegoro looks at the challenges that arise in addressing the problem of money laundering in forex bureaus in Kenya, Malawi and Uganda and the measures that have been put in place to meet them . Kenya has more forex bureaus than banks . This was also the case in Malawi before the closure of forex bureaus in 2009 . Since then, all bureaus are required to be part of banks .

Drug trafficking arguably has the longest relationship with money launder-ing . In chapter seven, Ray Goba discusses money-laundering activities in the drug trafficking markets in Namibia and Angola . He goes further than discuss-ing the link between drug trafficking and money laundering to consider how the industry is funded . He achieves this by locating the discussion of drug trafficking within the context of illicit trade in general . The funding of drug trafficking is an increasingly important subject, given the continual interceptions of drug mules in all parts of the region . At the time of writing, the spouse of a high-ranking government minister in South Africa is being prosecuted for allegedly using drug mules to carry drugs between South American countries and Southern Africa . In this regard, Goba’s contribution provides an interesting look at the intersection between criminal networks and part-time criminals, such as truck drivers .

The global economic crisis that began in mid-2008 precipitated significant downturns in Africa . The impact manifested itself in a spike in the number of financial crimes, some of which preyed on the victims of the crisis . It is prob-ably not an exaggeration to say that there has never been such a proliferation of investor fraud and pyramid schemes as what we have encountered during 2010 . In chapter three Bothwell Fundira examines the other implications of the global financial crisis on the incidence and patterns of money laundering .

6

Introduction

The incidence of and fluctuations in organised crime activities constitute a significant challenge to anti-money laundering (AML) infrastructure through-out the world . Among the obligations imposed on financial institutions with the dawn of AML regimes is that of assessing risk . They are not alone in this regard, as state institutions also share this obligation . Chapter two, on risk-based approaches to money laundering, looks at the implications of implementing an AML framework that is informed by a comprehensive assessment of risk in de-signing an AML regime . In it, I argue that one of the spin-offs would be the iden-tification of a broader range of stakeholders beyond the conventional accountable entities and financial intelligence units . Perhaps out of an abundance of caution, a tendency to combine risk-based customer profiling with rules-based profiling is creeping in . In the prescribed treatment of suspected terrorist-financing trans-actions, the approach is decidedly rules based, as the discretion to exercise the option not to report is taken out of the hands of respective institutions .

At the global level, lists prescribed by the United Nations Security Council, under the heavy influence of the US Treasury’s Office for Foreign Assets Control, virtually operate as the alpha and the omega of who is and who is not a terrorist organisation . The advent of cash threshold reporting by certain sectors in South Africa, which might soon be emulated in other countries, heralds the introduc-tion of a similar approach outside the sphere of terrorist financing . From the beginning of October 2010, attorneys and motor vehicle dealers are required to report cash transactions of at least R25 000 ($3 547) to the Financial Intelligence Centre . In the absence of evidence of a comprehensive risk assessment, the as-sumption that cash transactions are prescribed as reportable on the basis of per-ceived risk has to be questioned .

In chapter nine Charles Kamba probes the extent to which countries in Southern Africa are able to detect trade-based money laundering . Trade-based money laundering can be defined as the process of disguising the proceeds of crime and moving value through the use of trade transactions in an attempt to legitimise their illicit origins . Methods used include:

Over invoicing – excess value is transferred to the seller as a result of the QQ

paymentUnder invoicing – excess value is transferred to the buyer when the payment QQ

is madeMultiple invoicing – by issuing more than one invoice for the same goods, a QQ

seller can justify the receipt of multiple payments . This will be harder to detect

7

Charles Goredema

if the colluding parties use more than one financial institution to facilitate the transactionShort shipping – the seller ships less than the invoiced quantity or quality of QQ

goods, thereby misrepresenting the true value of goods in the documents . The effect is similar to over invoicingOver shipping – the seller ships more than the invoiced quality or quantity of QQ

goods, thereby misrepresenting the true value of goods in the documents . The effect is similar to under invoicingDeliberate obfuscation of the type of goods – the parties structure a trans-QQ

action in such a way as to avoid alerting the suspicion of the authorities, fi-nancial institutions or third parties which become involved . This may simply involve omitting information from the relevant documentation or deliber-ately disguising or falsifying it . This activity may involve a degree of collusion between the parties involvedPhantom shipping – no goods are shipped and all documentation is com-QQ

pletely falsified

Kamba highlights the challenges that are currently faced by the region in com-bating trade-based money laundering . After an analysis of the institutional framework in some countries, he comes up with a gloomy evaluation of exist-ing capacity . He argues for the intervention of the Southern Africa Development Community (SADC) and the Eastern and Southern African Anti-Money Laundering Group (ESAAMLG) in developing regional strategies in the area of trade malpractices . In chapter five Humphrey Moshi looks at the challenges emanating from trading transactions that use the growing influx and market-ing of counterfeit commodities, which are prevalent in virtually all Eastern and Southern African countries . He argues that the industry has escalated so dra-matically that it has affected the money-laundering risk in the region and beyond it . Counterfeit commodities range from consumables to luxury items to spare parts for vehicles . The bulk of counterfeit commodities originate from the Far East, but some can be traced to Western Europe . In the last five years, several countries have noticed local production of counterfeit commodities of various kinds .

The volume of proceeds being made from trafficking in counterfeits has not yet been determined with any accuracy . Neither have the destinations of proceeds of successful laundering been discovered . At this stage, one can only presume

8

Introduction

that the sources of commodities are also the destinations of the laundered funds . Empirical research to test the theory is imperative .

In chapter six Leon Kukkuk discusses an episode in the history of Angola, characterised by money laundering, that has hitherto not been fully documented . It was an era in which

the state became privatised, shifting from being the main organisation for the regulation of society towards being an instrument for the extraction of resources by various privileged networks, access to state power became simply a matter of inclusion in or exclusion from access to the wealth of the nation . It is clear that arms dealers who once could only operate with the knowledge and the sponsorship of superpowers had become freelance . Since the international community had not anticipated the rise of such an industry, there were few laws to monitor them . The arms dealers could slip through national jurisdictions for years or decades . In the new world order, there was no restraint on business . No government would pursue them . In fact, although officially unprotected by any government, insofar as they could still rely on governments, it was only to turn a blind eye .

Angola is expected soon to establish a financial intelligence unit, around which an AML regime will be constructed . It will be important for lessons to be learnt from the country’s immediate past for the AML system to be credible and effective .

Kukkuk also documents money laundering in the eastern region of the DRC that plays a key role in funding arms dealers and resource plunderers .

Writing in a different context, Kabemba stressed the importance of state ca-pacity to the implementation of any initiatives against economic crime, especially crime which exploits the effectiveness of systems in the legitimate economy .4 In AML, state capacity includes cognitive insight to determine the essence of the problems arising from money laundering . Only if the most influential organs of state are convinced of the adverse local effect of money laundering can we expect the state to mobilise an organised, integrated response . There is no shortage of ideas on what constitutes an organised response to money laundering . But, as the report by the ESAAMLG on the corruption–money laundering nexus observed,5 commitment to implement AML measures across Eastern and Southern Africa is hesitant and uneven . Joras Ferwerda explores this concern in his chapter on political will as a prerequisite to controlling money laundering .

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Charles Goredema

If one were to pick out a single lingering theme that is implicit in this book, it would be that, if AML is to be more effective, informed constituencies beyond the elite corridors should be built . The process should begin with an analysis of recurrent money-laundering cycles in Eastern and Southern Africa to identify the weakest points from the perspective of the money launderer . These are the stages at which it is easiest to connect the criminal and the proceeds of unlawful conduct . In the argument posited earlier, there are three such stages:

Just after the commission of the crimeQQ

When the criminal comes into contact with the prospective seller of a money-QQ

making venture that the criminal intends to use as a buffer between the crime and the bankWhen the criminal accesses funds from the bank after they have been QQ

‘cleaned’

The third stage is probably the weakest of the three, because of the intercession of stage 2 . Conversely, stage 2 is probably the strongest stage, provided that the seller has the cognitive capacity to detect the link between the funds offered and a crime . In addition, the seller must have an incentive to report the use of ‘dirty’ funds by the criminal in purchasing a commodity or service . Recent initiatives against money laundering have targeted the contact points where criminals and prospective sellers of commodities and services may interact, and imposed reporting obligations on the latter . The range of contact points is apparently broader in cash-dominated economies, and the regulatory net should therefore be cast more broadly .

To create an incentive for vigilance, current AML authorities must analyse and demonstrate the impact of money laundering on local economies . The adverse effect of money laundering on the fortunes of the individuals and businesses that may come into contact with it has yet to be adequately demonstrated .

10

Introduction

NoTeS

1 There are a few illustrations of conduct that is unlawful but not criminal – for example, in the sphere of matrimonial disputes, dealings with deceased estates and insolvency .

2 Brigitte Unger, The scale and impacts of money laundering, Cheltenham: Edward Elgar Publishing, 2007 .

3 H P Moshi, Fighting money laundering: the challenges in Africa, ISS Paper 152, Pretoria: Institute for Security Studies, 2007 .

4 C Kabemba, The Kimberley Process and the Chiadzwa Diamonds in Zimbabwe, June 2010, http://www .boell .org .za/web/114-572 .html (accessed 24 November 2010) .

5 The ESAAMLG report on the implications of corruption for the implementation of AML meas-ures, 2009, http://www .esaamlg .org/userfiles/Corruption_and_AML_Systems .pdf (accessed 8 November 2010) .

11

Chapter 2

Risk-based approaches to money laundering and the financing of terrorism in a

dynamic environmentA critical assessment

Charles Goredema

INTRoduCTIoNApart from documenting the current state of affairs, this chapter seeks to con-tribute to building integrated responses to economic crime, money laundering and the financing of terrorism . All these phenomena have moved swiftly up the list of priorities in many countries since the turn of the century, stretching the vigilance, regulatory and law enforcement capacities of all of them .1

In its ‘Guidance on the Risk-Based Approach to Combating Money Laundering and Terrorist Financing’, issued in 2007, the Financial Action Task Force (FATF) observed that:

By adopting a risk-based approach, competent authorities and financial institutions are able to ensure that measures to prevent or mitigate money laundering and terrorist financing are commensurate to the risks identi-fied . This will allow resources to be allocated in the most efficient ways . The principle is that resources should be directed in accordance with priorities so that the greatest risks receive the highest attention .2

Risk is generally defined as the probability that some event that is considered to be undesirable exists, has happened or will happen .3 In the context of money laundering, risk primarily means the probability that the activity or underlying source from which funds or assets were produced was criminal, corrupt or at least unlawful .4 Risk in terrorist financing entails the probability that the funds

12

Risk-based approaches to money laundering and the financing of terrorism in a dynamic environment

or assets in question will in some way be used to support terrorist activities . Adopting a risk-based approach to detecting or preventing money laundering and terrorist financing implies both the awareness of and cognitive competence to use empirical information to determine the statistical probability about the nature, origins or intended use of assets . Risk can also be understood in a sec-ondary sense as the probability that the integrity of the gatekeepers on whose vigilance the suppression of money laundering and terrorist financing depends may be compromised by greed, corruption or pressure .

Risk assessment is important in devising appropriate, realistic and effective measures to detect and suppress the laundering of proceeds of crime or the avail-ing of material support to terrorist activity . These measures include policy in-novations, enactment of laws, adoption of strategies and guidelines for detecting and suppressing money laundering and terrorist financing . They usually impose responsibilities on selected sectors in the economy to be diligent when establish-ing and managing relationships with clients and, in some cases, with their peers . These sectors have ostensibly been selected as being susceptible to abuse for money laundering . The selection of regulated sectors should ideally be preceded by a comprehensive national risk assessment . A national risk assessment

is an organised and systematic effort to identify and evaluate the sources and methods of money laundering and terrorist financing and weakness in the AML/CFT systems and other vulnerabilities that have an impact, either direct or indirect, on the country conducting the assessment . Such an assessment may involve multiple public sector offices working together with or without the private sector, or it may involve one or more individual agencies working independently to assess specific aspects of the country’s ML/TF situation … . [A] risk management process for dealing with money laundering and terrorist financing … encompasses recognizing the exist-ence of the risk(s), undertaking an assessment of the risk(s) and developing strategies to manage and mitigate the identified risks .5

It follows that risk assessment involves three levels of stakeholders in the economy, namely the state, regulatory bodies (including bodies outside the state institu-tions), and the regulated institutions themselves, such as financial service pro-viders . At various stages, they will be required to define and determine the risks pertinent to their sphere and determine appropriate responses . The position of the state, or government within the state, accords it a prominent role in assessing

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Charles Goredema

the conditions in which risk exists or may arise . Its comparative advantage can be attributed to its presumed access to information on local and cross-border crime that is reliable and up to date . Regulatory bodies, whether established as an extension of the state or as industry-specific structures, can equip themselves to determine risk partly through accessing information from the state . In addition, and this applies particularly to the industry-specific regulators, their knowledge of the context in which their sector functions gives them superior capacity to assess risk . The regulated institutions, such as banks and other financial service providers, have a greater incentive to be aware of the risks emanating from busi-ness transactions and the surrounding environment, since they run the risk of ‘guilt by association’ if they are reckless in their choice of clients .6

In contrast to a risk-based approach, a rule-based approach to risk is woven around predetermined indicators . It requires that ‘professionals apply a set of rules in every context and all cases, meaning that if the characteristics of a finan-cial transaction meet the conditions specified in the rule, then the action, also specified in the rule, is taken’ .7

A rule-based approach is arguably risk-based, but only in an indirect sense, in that it assigns the role of assessing risk largely to the state, which may delegate some of it to the regulatory bodies it works with . The conditions which prompt the perception of risk are predetermined, stipulated and easily enforceable . One of the most common conditions is the cash threshold on transactions . Once the predetermined threshold in a cash transaction has been reached, the transaction should be reported, regardless of the circumstances .8 In the risk-based as well as the rule-based approaches, it is clear that the risk targeted is that of contamina-tion by proceeds of crime or corruption, or by funds intended to support ter-rorist activity . It may therefore be referred to as the risk of money-laundering contamination .

This chapter evaluates the content of risk-based approaches to money laun-dering and the financing of terrorism, and discusses the practical implications of implementing them at various levels of the emerging anti-money laundering structures, against the background of an environment replete with multiple sources and methods of money laundering and giving support to terrorism . The focus is on experiences in certain African countries . The study examines the possibilities of using some sector-specific, crime-detecting structures currently being developed to build capacity to avert money-laundering contamination risk . The objective is to suggest prudent, inexpensive ways to improve capacity

14


to assess and factor in risk in implementing measures against money laundering and the financing of terrorism .

MethodologyThe discussion benefited from a theoretical analysis of money laundering and terrorist-financing risks encountered in Eastern and Southern African countries . It is based on a survey of literature and case studies, discussions and interviews with industry experts, researchers and regulators, complemented by a study of some of the legal instruments to combat money laundering that exist in various countries .

This chapter overviews the general factors pertinent to risk, and focuses on factors predominantly attributable to developments and experiences in the last five to ten years in the political and economic landscape of the region . Some de-velopments are connected to global developments .

RISK IN CoNTexTAlthough money laundering has for some time been classified as a distinct crime, its derivative character means that detecting and identifying the sources of what is laundered often involves tracking predicate activities, some of which are neither self-evidently criminal nor committed in the underworld . The more sophisticated forms of economic and financial crime, which substantially contribute to, and are funded by money laundering, have to use institutions and mechanisms intended to serve the lawful economy . With some exceptions, money laundering is usually clan-destine and its typologies change inevitably as the economic environment changes . For this reason, contemporary money laundering research places much store on the prevailing ‘centres of gravity’ of the relevant economy . As Unger observes:9

The archetypical image of money launderers as comprised of ‘tattooed gang-sters’ dealing in drugs, prostitution, people trafficking and racketeering is largely a myth . Money laundering also involves ‘white-collar’ crime . It in-cludes well-dressed bankers, lawyers, notary publics, financial advisors, real estate agents, businessmen, and construction magnates; these are the actors engaged in the huge transactions needed to clean criminal money .

Information on the nature, geographical incidence and value of the main predi-cate activities that feed money-laundering processes is important in identifying

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Charles Goredema

and profiling money laundering risk . Its scarcity or availability will have a bearing on the enormity of the challenge .

In appreciating money-laundering risk in transitional environments the history and nature of the transition within a given country is also important . Political and social transitions tend to have an impact on the incidence of finan-cial crime and corruption by opening up opportunities for such activities while minimising the risk of detection, investigation and prosecution . Gitz and Jonsson observe that, in the case of the former Soviet Republic of Georgia,

as elsewhere in post-communist Eurasia, many problems with financial crime have their roots in the transition process of the early 1990s . The challenge of simultaneously building new political and economic institu-tions amidst the massive redistribution of state-owned property provided fertile ground for corruption, profiteering and money laundering . To put it more systemically, crony capitalism and murky dealings have been facilitated by at least three broad factors: first, the rewriting of an unprec-edented number of laws and regulations; second, the virtual non-existence of institutions either within or external to the public sector that could ef-fectively oversee and control the early stages of transition; and third, the extraordinary transfer of wealth from the state to the private sector .10

Postcolonial transition in the Eastern and Southern Africa can be traced back to the mid 1960s, with the advent of independence – initially in the East African ter-ritories (Kenya, Uganda and Tanzania), followed by Zambia, Botswana, Malawi, Lesotho and Swaziland . Angola, Mozambique, Zimbabwe and Namibia followed in the 1970s and 1980s, and South Africa achieved democratic rule in 1994 . To a greater or lesser extent, in each case, the transition unleashed new dynamics that affected financial crime and fuelled money laundering . Some of the major drivers of money laundering that could be linked to postcolonial transition include:

The stampede by the former colonial elites to relocate funds and other assets QQ

from decolonising countries, initially to other territories such as Rhodesia (which became Zimbabwe in 1980), then to South Africa and to certain coun-tries in Western EuropeThe failure, as a result of factional conflict, to establish professional institu-QQ

tions to manage the new states, which precipitated the uncontrolled looting of funds and other resources to other parts of the world

16


Corruption of the new elites, who took advantage of inherited regimes of QQ

secrecy to forge alliances with former colonialists and join in the looting The exploits of organised crime, taking advantage of inexperience and capac-QQ

ity inadequacies of the new political leadershipAs with Georgia, the redistribution of the means of production from state insti-QQ

tutions, ostensibly to improve efficiency and broaden economic participation .

Ellis and others have extensively analysed how the immediate successors to colonial regimes in Africa either criminalised the inherited state systems or en-trenched systems for the accumulation of resources by elites .11 In her celebrated work It’s Our Turn to Eat12 Michaela Wrong painstakingly chronicled the way elites within a certain dominant ethnic community have plundered resources and opportunities in Kenya since the advent of independence from Britain in 1963 . Without exception, predatory elites and their circle of associates rank among Africa’s significant money launderers . They have also tended to engage in cross-border money laundering .

These elites comprise a key risk factor in two distinct, but related senses . First, their status and mobility enable them to be elusive, resilient money launder-ers . Second, and more significantly, their positioning enables them to impede the enforcement of anti-money laundering (AML) measures that may affect them . The reality was fairly accurately observed in the 2009 report by the Inter-Governmental Group against Money Laundering in West Africa (GIABA):13

Where and when the two top-most players in the design and implemen-tation of anti-graft policies are the most exposed to corruption, and are evidently also material to esteem seeking, institutions, structures and processes are more likely (than not) to get compromised . Where and when the enforcement agencies and the judiciary that carry the execution-responsibility for law enforcement and justice administration are also as (exposed) to corruption as perceived by the respondents, the statutory/legislative provisions aimed at countering corruption and money laun-dering are more likely (than not) to be fairly ‘toothless’ . And where and when high level private sector officials are also as ‘most exposed’ to cor-ruption as perceived by the respondents in this study, it follows that they are more likely (than not) to find it more profitable to collude with political office holders and government officials in sharing and laundering gains

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Charles Goredema

of corruption than in effectively observing and enforcing FATF-derived provisions .

Corruption, which may initially have been a by-product of the transition in African countries, has become a key factor prolonging the state of transition in which many of them remain entangled . As the GIABA report stresses, corrup-tion in political elites is directly responsible for weakening potential pillars of professionalism to render them ineffective . In some instances no such bodies to manage the emerging states and hold political elites accountable were ever formed .14 As the Eastern and Southern African Anti-Money Laundering Group (ESAAMLG) report argues, large-volume financial dealings involving such elites should be considered at least potentially suspect, requiring enhanced scrutiny (the so-called enhanced due diligence) .15 Most AML systems do not stipulate such scrutiny for financial transactions linked to political elites, thereby impoverish-ing risk-based approaches to which they may have committed themselves .

RISK oF GATeKeePeR CoNTAMINATIoN The international AML regime spawned by the United Nations Convention Against Transnational Organized Crime (alternatively referred to in this chapter as the Palermo Convention) requires the active participation of a range of gate-keeping institutions, especially banks and non-bank financial service providers, in deterring and detecting money laundering and terrorist financing . Classic money laundering theory regards these institutions as being both susceptible to money laundering, and insufficiently motivated to resist the overtures of money launderers . As the ESAAMLG report notes, concerns of collusion are not un-founded in view of what has been experienced in some countries, within the ESAAMLG and elsewhere .16 Some risk factors in financial intermediation have been observed . On the list of factors identified by the FATF, are three which pre-dispose gatekeepers in the region to contamination by money launderers:

The composition of the financial services industryQQ

Ownership structure of financial institutionsQQ

Corporate governance arrangements in financial institutions and in the wider QQ

economy

All of them are related, and may therefore be treated as three sides of a triangle .

18


CoMPoSITIoN ANd owNeRSHIP oF INSTITuTIoNS wITHIN THe FINANCIAL SeRvICeS INduSTRy One cannot assume that the would-be money launderer who attempts to launder proceeds of crime through a financial intermediary will always do so from a position of independence from the intermediary . The more intractable instances of money laundering have involved active participation of financial intermedi-aries . The economic history of East and Southern Africa is replete with examples of banks established by entrepreneurs active in other spheres of the economy – particularly the exploitation of natural resources – who operate the banks as extensions of their other businesses . Just as the Anglo-American Corporation is closely linked to the First Rand Limited (a banking group in which it has a controlling interest) in South Africa, so is Nakumatt Holdings in Kenya linked to the suspended Charterhouse Bank in Kenya . There were likewise strong links between the defunct Boka Holdings and the liquidated United Merchant Bank in Zimbabwe and between the infamous Goldenberg Holdings and the equally infamous Exchange Bank in Kenya . The financial intermediary could be used to support legitimate investment activities of the entrepreneurial enterprise, but, as has quite often been demonstrated, could just as easily be ‘primed to be a vehicle for money laundering, [making] … its use to launder proceeds of crime … inevitable’ .17 A Parliamentary Committee on Finance, Trade and Planning in Kenya that investigated the affairs of the Charterhouse Bank, especially the forms of assistance that the bank rendered to Nakumatt Holdings, found that:

Nakumatt Holdings owned 25 per cent of the bank, but was also a principal QQ

client of the bankThe bank had, over a six-year period, assisted Nakumatt to evade paying an QQ

estimated KSh18 billion ($250 million) in corporate tax, by various devicesNakumatt used the bank to run the affairs of related companies as wellQQ

Some fund transfers to foreign destinations appeared to involved proceeds of QQ

business salesThe bank’s record keeping was poor, which made investigations difficultQQ

Kegoro notes that the adverse publicity stemming from the parliamentary inves-tigation prompted Charterhouse Bank’s foreign correspondent banks, American Express Bank and the Amalgamated Banks of South Africa (ABSA) to terminate their relationships with Charterhouse .18 In an illuminating exposé, Fundira

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Charles Goredema

chronicles the role that financial institutions played in money-laundering activi-ties in Zimbabwe between 2004 and 2006 .19 He concluded that ‘financial institu-tions [were] at the very core of activities conducive to money laundering’ .20

None of the cases discussed by Kegoro and Fundira resulted in prosecutions of the banks concerned or the clients on whose behalf money laundering was ap-parently committed,21 even though the banks were virtually the alter egos of the money launderers . With the exception of the termination of correspondent rela-tionships with American Express and ABSA, there was no indication of measures taken in relevant foreign countries affected by proceeds from these cases to avert the risk of money-laundering contamination .

The tendency of Anglo-American executives to entrust their investments to First Rand is well known . Recent litigation between First Rand and the International Law & Tax Institute has thrown light on some investments of funds whose origin is alleged to be questionable .22 At the centre of the allegations is the Ansbacher Trust Company, registered in the Cayman islands and allegedly used by political and financial elites to launder proceeds of corruption and tax evasion .

It is not always the case that the financial intermediary is a vehicle for money laundering from the outset . Contamination can occur subsequent to its es-tablishment, usually as a result of a change of management or ownership . The ESAAMLG report points out that ‘although not at first intended to be a vehicle for money laundering, [the financial intermediary may] eventually drift in that direction’, having been ‘corrupted by subsequent changes in ownership, manage-ment or in the operating environment’ .23 The possibilities are diverse, but the critical factor which links them is probably the manner in which corporate gov-ernance assists the intermediary to harmonise the (sometimes) conflicting inter-ests of shareholders and other stakeholders . The overriding shareholder interest is to maximise returns on investment . By implication, profits should be acquired lawfully . It is however not unknown that the profit maximisation imperative may lead to sabotage of the AML system .

It is not easy to acquire and activate the capacity to detect changes of owner-ship that raise the risk of money laundering contamination . Undoubtedly it is outside the competence of any financial intelligence unit (FIU) to probe the po-tentially corrupting impact of such changes, even in respect only of listed finan-cial intermediaries . The mandate to do so has to repose elsewhere, in some other regulatory or supervisory agency whose mandate is sector-specific . Hence it is important to build the capacity of institutions beyond the FIUs . Their whistle-

20


blowing competence in turn depends on the stages at which they oversee or regu-late the affairs of financial intermediaries . A comprehensive, vigilant external audit might offer a useful opportunity in this respect, but only if required to probe indicators of money laundering . It would appear that sector-specific regulatory or supervisory agencies need the mandate and capacity to conduct periodic and ad hoc audits for AML compliance . The latter will probably be prompted by risk assessment, in turn informed by regular scanning of the operating environment .

A survey of various countries in the region shows that the mandate to be vigi-lant to the incidence of risk from financial intermediaries is fragmented – being shared by a number of agencies, including Ministries of Finance, companies reg-istries, central banks, financial services boards/authorities, pension fund regula-tors, law societies and medical aid fund regulators . Changes in the management or ownership of intermediary institutions are not necessarily perceived by all of these as influencing the money laundering contamination risk . The two ques-tions that require to be addressed are whether it is prudent to maintain this kind of fragmentation, and whether ownership changes should not be treated as risk altering to the extent of triggering a report to the FIUs in the same way that cash threshold reporting does . While these questions remain unanswered, money-laundering contamination risk assessment of intermediary institutions cannot be comprehensively conducted .24

RISKS eMANATING FRoM oRGANISed CRIMe The original motivation for paying serious attention to money laundering was to strike at the profits derived from organised criminal markets, initially drug traf-ficking markets . Global consensus against the use of proceeds of trans-national organised crime is now traced to the adoption of the Palermo Convention at the end of 2000, even though the Convention took effect only three years later . This was followed by consensus on interdicting proceeds of corruption, represented in the United Nations Convention against Corruption (UNCAC) in 2003 . The two instruments are predicated on state parties acquiring, sharing and exchanging information on trends of cross-border organised crime and corruption in real time, and, when necessary, jointly acting on such information to retrieve the pro-ceeds of such crime and corruption .

The ideal state envisaged by Palermo and the UNCAC has yet to be attained, partly because of lingering gaps and loopholes within domestic spheres of many state parties . In many cases, the concepts of organised crime, money laundering

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Charles Goredema

and corruption are either not defined at all, or defined so narrowly as to leave out some practices more harmful to economies than what is explicitly impugned .

Money laundering that is concealed in fraudulent trade transactions is a case in point . According to the FATF,25 trade-based money laundering generally takes either one of two forms: the movement of proceeds of crime through trade transactions to legitimise their illicit origin; or conversion of large quantities of illicit or dirty cash into less conspicuous and marketable commodities through international trade .

Value can also be moved between or among a number of countries through the use of undisclosed subsidiary companies, especially subsidiaries domiciled in low-tax countries . Indeed, some of the subsidiaries may be shell companies, ex-isting only on paper, but facilitating profit-shifting from jurisdictions where tax is higher . Trade-based money-laundering transactions involve crossing national borders . Foreign branches of intermediaries can be used to channel illegitimately acquired funds from countries that have effective AML systems to those with weaker systems . This risk, emanating from the activities of what is in essence white-collar organised crime, is pertinent to regions where AML systems are of uneven strength .26

This is not to suggest that the more overt forms of cross-border organised crime are better known in the affected countries . Criminal markets tend to es-tablish themselves and grow secretively, away from the public glare . Outside the circles of crime intelligence, law enforcement and revenue collection, the exist-ence, nature and size of criminal markets is often a matter of speculation . Their value, and the points at which they intersect with the legitimate financial systems, is a matter for debate even within the knowledgeable circles referred to above . This is partly attributable to their secretiveness, and their capacity to overlap and integrate with non-criminal sectors .

Corruption enables organised crime to influence the public sector . Alternative methods, such as violence and blackmail, are used only if corruption is too risky, not cost effective or unsuccessful . In a previous contribution, the author articu-lated a typology of linkages between organised crime, corruption and the public sector,27 which moves through five stages . The first (Level 1) consists of simple bribery on an isolated basis; Level 2 consists of repeated acts of bribery, where the corrupted person is virtually on the payroll of the corrupter; at the third level (Level 3), organised crime infiltrates government institutions . Level 4 consists of the infiltration of the higher levels of government, beyond the bureaucrats, while

22


at the fifth level (Level 5) organised crime infiltrates the political arena, or key components of the political system .

Limited knowledge of organised crime types and their scale is reflected in the under-development of institutions to study and deal with such crime . It may even be that, in the absence of convincing surveys, there is no consensus within certain countries on the need and justification for measures dedicated to track-ing and combating organised crime . The result is that there is very little relevant information to be shared among countries affected by common cross-border crimes . In Eastern and Southern Africa, these crimes tend to be of high value, and include:

Smuggling of drugs and counterfeit commodities – of which the trafficking QQ

of counterfeit pharmaceuticals appears to be growing in intensity across both sub-regionsCyber crime – which is affecting most of the economic hubs in the bigger QQ

economies of the sub-regionsFraud on investors, occasionally facilitated by corruption and cyber crime QQ

Theft and smuggling of high-value minerals, such as diamonds, platinum QQ

and gold, which connect Africa to the polishing and refining centres beyond Africa Kidnapping of high-profile or wealthy corporate bureaucrats, which is a par-QQ

ticular concern in South Africa, Nigeria and Somalia Production and circulation of counterfeit currency, which affects all coun-QQ

tries, but is pernicious in the Southern African Common Monetary AreaIllegal human migrationQQ

Theft of livestock, which affects all countries and spawns other non-financial QQ

crimes Theft of computers and computer equipmentQQ

These activities continue to generate value, an indeterminate volume of which feeds into the socio-economic regimes of the two sub-regions under discussion . Fraud, particularly that which is facilitated by cyber crime, is a prominent predi-cate source of laundered money . It revolves around the theft of corporate identity particulars or business transactions data, followed by their use in diverting pay-ments from legitimate debtors to corporate clones . In 2010, criminals have been so daring as to infiltrate the Companies and Intellectual Property Registration Office (CIPRO) in South Africa, alter official records to substitute legitimate

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directors with fictitious ones, and subsequently alter corporate banking accounts, replacing them with their own accounts . Large payments, such as value-added tax refunds have then been diverted to the bogus corporate accounts .28 Fraud on investors through pyramid schemes of various descriptions has become a recur-rent challenge in the region in the last few years .

Some of the transactions connected to commodity smuggling take place in foreign countries, with the result that not all the proceeds end up in the region . Whatever the case, the risk of regional institutions getting entangled at the finan-cial end of some of the transactions is high . In the absence of periodic analyses ex-posing the indicators of the extensive range of activities above, no single institution can understand the underlying environment enough to implement an effective risk assessment regime . The risk is magnified in cash-dominated economies .29

One of the enduring shortcomings of the stampede to design appropri-ate AML regimes, inspired by the FATF and supported by FATF-style regional bodies such as ESAAMLG and GIABA, is the exaggeration of the importance of reactive measures at the expense of proactive ones . Both the ESAAMLG and the GIABA reports highlight the limitations of this approach . An introspection of the institutional, social and economic vulnerabilities affecting the various countries might deepen an appreciation of the decisive factors . It appears that comprehensive risk assessment requires such an exercise . The outcome could even unlock the development potential of AML measures .

The growth in sectors of the economy with minimal levels of transparency of the sources of capital and of beneficial ownership, should alert regulatory insti-tutions in these sectors to the risk of increased money laundering . These sectors include capital markets, stock exchange sectors, the motor vehicle market and, in many countries, real estate, Risk management requires that these institutions have access to a common, comprehensive database that is up to date on relevant devel-opments in the environment affecting these sectors . In this regard, developments in the real estate sector in Kenya in the last few years have been described as raising the money-laundering contamination risk . Mirugi-Mukundi noted recently:30

In the last five years, Nairobi and other major Kenyan cities have witnessed significant increases in property prices, against the backdrop of a global and national economic downturn, and increased unemployment . As property prices and rental rates in Kenya skyrocket, way above industry projections, speculation is rife, that some of the unexplained capital being injected into real estate is laundered money . Media reports have suggested

24


that the sudden hike in property prices, even beyond the reach of the middle class, is being caused by ‘piracy money’ .

It is alleged that proceeds from piracy along the shores of Somalia are finding their way into the Kenyan real estate market, distorting the property market . A Kenya government spokesperson conceded that the country is an attractive destination for pirates to launder their money – being the largest economy in East Africa with vast investment opportunities and close to Somalia, with which it shares a 500-mile (800-kilometer) porous border . While there is no empirical evidence yet linking piracy to the property boom in Kenya, the government launched an investigation into property owned by foreigners in January 2010 . However, as with most government appointed investigations in Kenya, the findings remain under lock and key to this day .

Mirugi-Mukundi’s lament highlights a recurrent theme: that it is for the state to set the tone in the assessment of risk of money-laundering contamination . The fact that the coalface institutions and other repositories of critical information on which such an assessment can be made are located outside the state makes no difference, hence the importance of the political will discussed by Ferwerda in his chapter in this book .

FINdINGSIn its strategic objectives for the period 2009-2012, ESAAMLG commits itself, among other aspirations, to:

Undertake research and analysis exercises to better understand money laundering and terrorist financing risks and vulnerabilities in the region and effectively contribute to regional and international AML/CFT policy formulation .31 [Own emphasis .]

The awareness of major money laundering situations, which is the primary feature in risk assessment, is yet to permeate most of the relevant sectors in ESAAMLG’s constituency . In certain respects, where there is such awareness, that has not nec-essarily resulted in proactive aversion of money-laundering contamination risk, or compliance with laws designed to combat money laundering .

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Charles Goredema

The study behind this chapter also found that the main means of enhanc-ing the risk determination capacity of the structures currently mandated to combat money laundering and the financing of terrorism is to improve access to relevant, comprehensive and up-to-date information . This includes informa-tion on the local and the relevant foreign environments . Existing legislation, and the infrastructure on which it depends, do not adequately open up avenues by which to uncover the relevant information . Even in countries that have adopted ‘unexplained wealth’ provisions, one senses a reluctance to fully articulate and implement the essence of these provisions . An ‘unexplained wealth’ provision – which is supposed to be invoked as a basis for acting against suspected assets that are disproportionate to lawful income – enables the state to extract information on sources of income from the suspect . As a concept, it is a confession of the state’s inability to establish sources of funds independently of the suspect . The provision’s value in profiling economic crime and corruption has been argued elsewhere .32 One of its abiding merits is that it can be invoked at one of the most strategic stages of the money laundering cycles, when the principal culprit can be linked to the proceeds of the predicate crime and the money laundering . It is also a stage at which the culprit is likely to inculpate themselves in trying to account for the suspicious endowment .

All sectors involved in AML need to explore the most effective policies to build the capacity to access information relevant to risk assessment .

TAKING RISKS ANd vuLNeRABILITIeS SeRIouSLy: PRACTICAL IMPLICATIoNSThe approaches to money laundering and terrorist financing that have permeated criminal justice systems since the turn of the century have affected more than just criminal law and procedure . Economists concede that the notion that capital is neutral – that lawful and tainted money cannot be distinguished – has been blown out of the water .33 It is now accepted that, even if illicit proceeds commin-gle with lawful assets, ‘dirty value’ can, and should, be distilled . With this para-digm shift has come a greater responsibility on mandated institutions to develop capacity to detect and distinguish dirty value from lawful value . Responses to money laundering at the regional level need to be more comprehensive than has been the case . They should include regular, comprehensive surveys of the evolv-ing money-laundering terrain in each country .

26


In the assessment of risk, regional and national institutions need to take a bird’s-eye view of the terrain . An assessment of regional institutional, economic and social vulnerabilities offers the prospect of exposing the dimensions of risk . In other words, in addition to profiling trends of crime, it is necessary to profile the vulnerabilities of the structures on which the implementation of AML meas-ures depends . The question is whether the necessary information to enable this kind of profiling is available . A related issue is who should undertake such com-prehensive profiling . The answer to the first question is that information is avail-able to enable comprehensive profiling of risk at both the national and regional levels; in fact there is an excessive amount of relevant material . It is to be found in corruption reviews, company registry records, details of banking accounts, audit reports, crime intelligence analyses, court records and the findings of various commissions of inquiry .

The challenge might be how to make sense of a voluminous, mixed mass of potentially usable information to construct a risk profile . All credible intelligence agencies have to contend with this challenge frequently . This suggests that the role of risk profiling should be imposed on FIUs . In my view, such a course of action is unavoidable, but invites a note of caution . The available information indicates that training and capacity building is required to enable fledgling FIUs to achieve the shift from being predominantly reactive, suspicious transaction-dependent repositories to more proactive crime intelligence-driven agencies . It appears that one way of achieving the shift is to enlist the support of sectors beyond those currently perceived to be at the core of AML .

Over the last few years, business has become more active in soliciting and analysing information on crime trends . This has yielded structures such as the South Africa Insurance Crime Bureau, the Consumer Goods Council of South Africa, the Anti-Piracy Organization of Zimbabwe, and the Business against Crime (South Africa) . Each structure is in a position to gather data relevant to mapping out the criminal environment, and to provide information that can be used in determining the incidence and evolution of money laundering risk con-tamination . It is conceivable that they could also be sources of feedback in evalu-ating the general impact of implementing measures against money laundering on criminal markets . These structures are not yet perceived as having a potential role in combating money laundering and the financing of terrorist activities .

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NoTeS

1 Lucia Dalla Pellegrina and Donato Masciandaro, The risk-based approach in the new European anti-money laundering legislation: a law and economics view, Working Paper 3, http://ssrn .com/abstract=1182245 (accessed 1 November 2010); also in the Review of Law &Economics 5(2) (2009), 25.

2 Para 2 .23 ff .

3 Wikipedia, Risk, http://en .wikipedia .org/wiki/risk (accessed 18 October 2010) .

4 A broad definition of money laundering accepts that the funds could be dirty not only because they are derived from criminal acts . In the most commonly cited example, assets connected to an insolvent corporate body that are unlawfully salted away from the reach of creditors can also be laundered; so may assets removed from the matrimonial community to make them inacces-sible to a former spouse .

5 FATF Money Laundering and Terrorist Risk Assessment Strategies, 2008, 6 para 28 . See also generally the FATF Guidance on Risk-Based Approach to Money Laundering, 2007 .

6 The recent report by Global Witness on British banks that handled funds linked to corrupt Nigerian politicians illustrates the possible reputational risk . See Global Witness, International thief thief: how British banks are complicit in Nigerian corruption, October 2010, http://www .globalwitness .org/media_library_detail .php/1054/en/british_banks_complicit_in_nigerian_corruption_cou (accessed 19 October 2010) .

7 Pellegrina and Masciandaro, The risk-based approach in the new European anti-money launder-ing legislation, 5 .

8 South Africa’s Financial Intelligence Centre (FIC) imposed a Cash Transaction Reporting (CTR) requirement on attorneys and motor vehicle dealers, effective from 4 October 2010, in terms of which any transaction of R25 000 or more should be reported to the FIC .

9 Brigitte Unger, The scale and impacts of money laundering, Edward Elgar Publishing, 2007, 188 .

10 Elias Gotz and Michael Jonsson, Political factors affecting efforts in post-communist Eurasia: the case of Georgia, Journal of Money Laundering Control 12(1) (2009), 59–73, 61 .

11 Jean-François Bayart, Stephen Ellis and Béatrice Hibou, Criminalization of the state in Africa, African Issues, 2001 .

12 Michaela Wrong, It’s our turn to eat: the story of a Kenyan whistle blower, London: Fourth Estate, 2009 .

13 Inter-Governmental Group against Money Laundering in West Africa (GIABA), The corrup-tionmoney laundering nexus: an analysis of risks and control measures in West Africa, para 116 .

14 Leon Kukkuk in a separate chapter in this book .

28


15 See the Eastern and Southern African Anti-Money Laundering Group (ESAAMLG) report, An assessment of the links between corruption and the implementation of anti-money launder-ing strategies and measures in the ESAAMLG region, 2009, referred to in these notes as the ESAAMLG 2009 Report .

16 See case study 3 in para 100 in the ESAAMLG 2009 Report .

17 ESAAMLG 2009 Report, para 84 .

18 George Kegoro, The Nakumatt Holdings & Charterhouse Bank affair, ICJ, (Kenya Chapter, 2010), unpublished paper kindly made available to the author by George Kegoro .

19 Bothwell Fundira, Money laundering in Zimbabwe, in C Goredema (ed), Confronting the pro-ceeds of crime in Southern Africa: an introspection, ISS Monograph Series, number 132, May 2007, 47–72 .

20 Fundira, Money laundering in Zimbabwe, 50 .

21 Admittedly, at the time that the illicit assistance of Nakumatt by Charterhouse came to light, money laundering of the kind exposed had not been criminalised in Kenya . It is submitted that it would still have been possible to charge the bank as an accomplice to tax evasion .

22 See http://www .timeslive .co .za/business/article591034 .ece/FirstRand-still-haunted-by-Spitzand- Ansbacher-woes (accessed 18 October 2010) . The case involves First Rand Bank and Barry Spitz, a tax consultant . The main case precipitated other litigation between First Rand Bank and Noseweek magazine, in which the bank unsuccessfully sought to interdict the maga-zine from publishing the identities of one hundred high-value clients for which the bank had managed a loop offshore-investment scheme .

23 See Table 3 in the ESAAMLG 2009 Report, and the notes in para 83 .

24 David Chaikin (2008) found that the risk arising from commercial corruption manifests itself at the placement stage of the money laundering cycle . At that stage ‘private sector entities may be bribed to actively collude in money laundering, refrain from lodging suspicious transaction reports, or tip off clients that may be subject to a government investigation’ . See D Chaikin, Commercial corruption and money laundering: a preliminary analysis, Journal of Financial Crime 15 (2008), 269–281.

25 FATF Report on Trade-Based Money Laundering, November 2006 .

26 This analysis is based on the ESAAMLG 2009 and FATF reports .

27 See Charles Goredema, Zimbabe, in Gastrow (ed), Penetrating state and business organised crime in Southern Africa, ISS Monograph Series, number 89, 2003 .

28 Fraud in the South Africa Revenue Service, preceded by corporate cloning, has been reported extensively in the media . See the case involving Kalahari Resources, http://www . miningmx .com/news/markets/Outcry-as-kalahari-resources-is-hijacked .htm (accessed 13 October 2010) .

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29 Moshi explores the incidence of money-laundering risk in cash-dominated economies in greater detail . See H P B Moshi, Fighting money laundering: the challenges in Africa, ISS Paper 152, October 2007 .

30 Gladys Mirugi-Mukundi, Money laundering control in Kenya – new dawn or false promise? ISS Today, the african .org, 12 July 2010, http://www .issafrica .org (accessed 7 November 2010) .

31 ESAAMLG Tenth Anniversary Report titled Arusha to Maseru, 12, http://www . esaamlg .org/userfiles/ESAAMLG_10_Year_Report .pdf (accessed 13 October 2010) .

32 The general argument is articulated in the ESAAMLG 2009 Report .

33 Unger, The scale and impacts of money laundering .

31

Chapter 3

Money laundering and the global financial

crisis of 2008Bothwell Fundira

INTRoduCTIoNThis chapter discusses the links between money laundering and the global finan-cial crisis of 2008 . It attempts to prove that the global financial crisis was the result of what would otherwise be considered illegal activity were it not for lax laws and regulations, and non-enforcement of same, by the responsible authori-ties in various countries .

The chapter illustrates the iniquities of money laundering by showing how it has affected selected African countries, namely South Africa, Cameroon, Zimbabwe, Zambia, Botswana, Democratic Republic of Congo, Kenya, Uganda, Rwanda, Ghana, Senegal, Tanzania, Mozambique and Somalia .

Money laundering involves the commission of an illegal activity, followed by concealment of and probable use of the proceeds in the formal system of legiti-mate transactions .

It often has a corrosive effect on economies and can compound the risk of financial system failures by distorting the information used in making deci-sions . Launderers may amass sufficient power to enable them to take control of economic policy-making away from governments . This may be done through or result in terrorist activity . Money laundering increases the exposure of societies to serious criminal activities such as drug trafficking, smuggling, corruption and fraud by increasing the incentive for these activities . In turn, the worldwide fi-nancial crisis has led to a loss of productivity, jobs and wealth . In many cases, life savings have been devoured by the crisis and families have been torn apart .

32

Money laundering and the global financial crisis of 2008

BACKGRouNdThe current financial crisis began in July 2007 when investors lost confidence in the value of securities mortgages in the USA . This led to a liquidity crisis, which came to epitomise the financial crisis . Between 1997 and 2006, the average American mortgage increased by 124 per cent . In 2005, the median down payment for first-time buyers was 2 per cent, with 43 per cent of first-time buyers not making any down payment . Special instruments such as mortgage-backed securities (MBSs) and collateral debt obligations (CDOs) were introduced and given safe ratings by the credit rating agencies . The riskier option was ‘no income, no job and no assets’ loans (‘ninja’ loans) . In some cases, interest-only, adjustable-rate mortgages were introduced, which required payment of interest only (and no capital repayment) during the initial period of the loan .

The American housing crisis became the immediate cause of the global finan-cial crisis . Prior to the crisis, banks had found themselves with too much money that they could not put to productive use . As a result, they lent money – to indi-viduals that did not have the ability to pay back . Elaborate schemes were devised: in some cases, borrowers were given extended moratoria on paying back loans . In most cases, there were insignificant repayment requirements in the first few years of the loan . The scheme worked, and fed on itself: house prices would always go up, so the bank’s equity in the asset financed would be maintained .

According to the Financial Times, world stocks halved since the onset of the global recession, to $3 trillion,1 indicating that there was ‘near destruction of the world’s banking system’ .2

As a result of the financial crisis, the IMF predicts generalised recession in the developing world and more than 20 million job losses . The 2008 crisis has wit-nessed the largest bankruptcies and bailouts in the history of finance . Globally, governments have used about $8 trillion to shore up the world’s banks . As of October 2008, the Bank of England indicated that the world’s financial firms had lost $2,8 trillion as a result of the credit crisis .

National Public Radio (NPR)3 in the USA described the situation as follows:

The problem was that even though housing prices were going through the roof, people were not making any more money . From 2000 to 2007, the median household income stayed flat . And so the more prices rose, the more tenuous the whole thing became . No matter how lax lending stand-ards got, no matter how exotic mortgage products were created to shoe-

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horn people into homes they couldn’t possibly afford, no matter what the mortgage machine tried, the people just couldn’t swing it . By late 2006, the average home cost nearly four times what the average family made . Historically it was between two and three times . And mortgage lenders noticed something that they’d almost never seen before . People would close on a house, sign all the mortgage papers, and then default on their very first payment . No loss of a job, no medical emergency, they were underwater before they even started . And although no-one could really hear it that was probably the moment when one of the biggest speculative bubbles in American history popped .

The Financial Action Task Force (FATF) has agreed to a Dutch proposal to study how the financial crisis is affecting the fight against money laundering . Linda Davies graphically describes money laundering . She illustrates how funds are transmitted through electronic transfers, and in the process cover the audit trail .

The world financial crisis had far-reaching effects on the stock markets . For instance, between 1 January and 11 October 2008 owners of stocks in US corpo-rations suffered losses of about $8 trillion as holdings declined from $20 trillion to $12 trillion . In March 2007, USA sub-prime mortgages amounted to about $1,3 trillion .

The governments of the USA and the UK and the Central Bank of the USA, the Bank of England and the European Central Bank were forced to react by pouring money into the market, creating liquidity .

Wall Street is credited with ensuring the availability of funds to the property market . This stimulation of the market resulted in enormous fees accruing to the mortgage supply chain, which included the mortgage brokers selling loans and the small banks that funded the brokers, all the way to the giant investment banks in the background .

Under the traditional banking system, banks are regulated by a central bank . The central bank also acts as lender of last resort and will inject funds into the economy as and when the need arises .

Because of increased liquidity in the financial markets, investment banks and hedge funds started a system of shadow banking using their (largely unregulat-ed) institutions . Essentially, they took over the role of commercial banks without being hindered by bank regulations . They developed financial products that distributed risk and obscured problems; grand schemes and creative account-ing that hid massive risks . Financial instruments have made bank transactions

34


less transparent and more accessible to wrongdoing . But over time, the problems multiplied until they could no longer be hidden .

Current trends have seen the emergence of shadow banks, which are inter-mediaries between savers and borrowers . For example, an insurance company may want to save money while another organisation may need to borrow . The shadow banking system will channel funds from lenders to borrowers, making its money from fees or interest differentials . Because shadow banks do not accept deposits, they are not subject to the same regulations as banks . Some of the in-stitutions falling under the shadow banking system are hedge funds, conduits, money funds and investment banks .

In the few years prior to the crisis, the top four US depository banks moved about $5,2 trillion in assets and liabilities off their balance sheets to other special-purpose vehicles in the shadow banking system which enabled them to bypass existing regulations relating to capital ratios and the like . The regulations introduced in 2009 require the banks to move the assets back onto their books (an increase of between $500 billion and $1 trillion) . Significantly, Martin Wolf, associate editor and chief economcs commentator of the Financial Times, com-mented in 2009 that the shadow banking system was set up in order to circum-vent regulations . In the long run, it is the investing public who are prejudiced .

In the environment that led to the global financial crisis, the amount of money in circulation in various economies (liquidity) was a function of the speculative behaviour of the players in the market . The central banks that should have con-trolled the money supply in these economies were rendered virtually ineffective . Individuals and organisations that wanted to save put money into hedge funds, which in turn used the money to make risky investments .

Brett Kebble had business interests both in South Africa and offshore . Apart from politics, he had interests in mining, fishing, art and property development . Being a white person in South Africa, he was not entitled to make investments under the Black Economic Empowerment (BEE) umbrella . In order to ensure that he would not miss out on opportunities arising from the empowerment initiative, he teamed up with eligible black investors so that he could co-invest with them in his personal capacity . There were more than 100 shelf companies over which Kebble had direct control . He operated hedge funds and used clients’ investments fraudulently in order to support his lavish lifestyle, which cost him R5 million every month . He was able to conceal hundreds of millions of rands in corporate debt from the auditors, the authorities and the investing public .

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Bothwell Fundira

Kebble had political connections in the ruling African National Congress (ANC) and made considerable donations to the party . Through his companies Randgold and Exploration and by misappropriation of funds, using forged documents and imprudent dealing, he prejudiced investors to the tune of about R2 billion . Kebble was shot and killed in his car on 27 September 2005 in Johannesburg and so was not able to stand trial .

The curators of Corporate Money Managers (CMM) unravelled a massive South African ponzi scheme in November 2009 . About R140 million of CMM investors’ capital was used to pay interest to investors . The major beneficiary of the fraud was Johan Hendrick Bakkes, who diverted investors’ funds for his own use . Bakkes set up a string of companies that received Global Credit Ratings . He received short-term deposits and used the funds to finance long-term projects . He pretended to be advancing money to borrowers during the time they applied for mortgage finance and actually received it . Bakkes’ companies issued fraudu-lent promissory notes in order to cover the financing shortfall . The promissory notes were given to ABSA in return for investor funds . Bakkes’ companies also took fees for services that were never rendered, and on one occasion, CMM paid a R31 million dividend from false profits .

Shadow banking institutions are vulnerable to failure because typically they borrow short to lend long, and have illiquid and risky assets . An institution that borrows short in order to lend long runs the risk of failure because depositors can withdraw all their deposits, which leaves the institution with no funds to support the liabilities . This became the essence of the financial crisis of 2008 . These insti-tutions will survive only as long as market conditions continue to move in their favour . Traditional banks are levered, because they have assets to support their liabilities, have deposit insurance cover and increase their liquidity as necessary through the Federal Reserve’s discount window, in the case of the USA . The ideal banking conditions – from both the point of view of the banks and the invest-ing public – are found in USA . In the USA, shadow banks deal in hedge funds, structured investments, real estate investment trusts (REITs), collateralised loan obligations (CLOs) and collateralised debt obligations (CDOs) . When risk increases in the market, investors take money out of shadow banks since they are considered risky . In the absence of central bank funding, shadow banks use reverse repos and asset-backed commercial paper to fund their investments .

When a market is performing well, the investing public tends to believe in the laws of inertia – that the market will continue to do well . The assumption is that the market will continue to do well until there is a reversal of fortunes, which

36


leads to a catastrophe . During the period of optimism, a lot of investors get onto the bandwagon and simply invest without question .

Derivative instruments are sophisticated instruments that are employed in the financial markets to manage risk . They provide an opportunity for launder-ers to undertake criminal activities but the fact that unscrupulous investors have used derivative instruments to defraud the investing public does not make them bad instruments . With adequate regulation, derivatives play a pivotal and posi-tive role in the financial markets .

Derivative instruments are financial products that are bought and sold for settlement at some future date . They can be of various types but the major ones are related to interest, debt and foreign currency obligations . Debt instruments are credited with causing the 2008 global financial crisis, as illustrated elsewhere in this report .

The causes of the crisis must be examined from two different angles . On one hand there are situations in which executives took speculative positions in the genuine belief that the market would move in their favour . On the other, there are those executives who took advantage of secretive instruments in order to defraud the investing public . This amounts to money laundering . The Kebble and Madoff cases cited elsewhere in this chapter are cases in point .

Interest swaps are best illustrated by way of example . Company A could have a debt amounting to $1 million, repayable at 7 per cent per annum . The interest rate on the pound sterling could also be 7 per cent per annum, but company A could feel that pound sterling interest rates will be reduced – say to 3 per cent . Company A could make a conscious decision to swap its interest obligations with that of another company that has pound sterling obligations, say company B . Unlike Company A, Company B may feel that US dollar interest rates will be lower in the future, and see merit in holding US dollar as opposed to pound sterling interest obligations . Company A and Company B may then agree to swap part of each of their obligation as a way of managing risk .

Interest rate swaps may also be transacted within one territorial jurisdiction . For instance, a company can exchange with another variable for fixed rate obliga-tions . In other words, company A can have a loan that is repayable at a fixed rate of interest that it can swap with company B whose interest rate is variable depend-ing on some key economic indicator like the central bank lending rate to other banks . The transactions are motivated by the respective companies’ perception of future interest rates . This is a gamble, and is therefore risky . Unfortunately, the

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Bothwell Fundira

financial institutions’ executives make the risky decisions and the uninformed investors bear the risk .

Like interest rate swaps, foreign currency swaps work in a similar fashion except that instead of swapping interest obligations, companies can swap debt capital obligations . Therefore, it is possible that there may be both foreign cur-rency and interest rate swaps in one transaction .

Individuals or companies can enter into forward contracts, which means they buy the right to execute a transaction at a future date, but at a price that is de-termined now . Transactions on the stock exchange provide an obvious example . Company X shares that are trading on the stock exchange for $1 can be pre-sold for $3, two years in advance . The buyer may feel that the share will be worth $5 at that time; if this comes to be, they will make $2 per share on the date that the option is exercisable .

There are various other derivative instruments apart from those described so far . The majority are sophisticated and therefore difficult for the average person to understand . But using them is recognised as a good way of managing risk, so most investors employ managers to do this for them . However, derivative instru-ments have been used to the disadvantage of an unsuspecting investing public lured in by the promise of large returns . They are largely unregulated, which ex-plains why they have been pivotal in causing the global financial crisis . As already indicated, derivative instruments can be beneficial to both the investor and the intermediary . However, in an attempt to maximise profits, some intermediaries take excessive risks; but the risk of loss lies ultimately with the unsuspecting in-vestor . The intermediary is not required to ensure that a position taken in the de-rivatives market is supported by sufficient assets to act as a cushion against losses from subsequent activities . Banks are regulated because they handle depositors’ funds . Logically, anything that acts as a bank should also be regulated .

The Obama administration in the US has seen the negative effects of non-regulation in the derivatives market, and has developed a plan to bring transpar-ency to derivatives markets .

Credit default swaps with a face value of $38,6 billion, essentially an insur-ance against loan defaults, are also credited with contributing to the world fi-nancial crisis . Credit default swaps that were sold by AIG led to a $180-billion government bailout . The proposed legislation will address this type of problem by requiring large investment banks that deal in derivatives to hold sufficient capital reserves against risk . A new set of clearing houses will be set up to bring transparency to trades in credit default swaps and other derivative trades .

38


The US administration will require the majority of over-the-counter (OTC) derivatives to be traded in centralised warehouses so that adverse trends can be detected and stopped early, before there is a catastrophe . All derivative traders will be required to keep records, report data to regulators and have enough capital to limit any adverse impact of their activities on the whole economy . All derivative instruments will be processed through clearing houses using standard derivative contracts .

The Commodity Futures Modernisation Act (2000) (USA) was enacted to control dealings in the financial markets . However, the legislation was not robust enough to prevent the 2008 global financial crisis . It excluded certain OTC de-rivatives from the jurisdiction of the Commodity Futures Trading Commission (CFTC) and the Securities Exchange Commission . This exclusion meant that intermediaries could do transactions in the derivatives markets that were not subject to regulation .

Basel Bank of International Settlements have indicated that the global out-standing OTC derivatives market reached $592 trillion at the end of 2008 . They also calculated that by 2008, the face value of derivatives around the world had reached $1,14 quadrillion .

On 19 July 2010, the Obama administration passed far-reaching legislation to prevent the recurrence of the world financial crisis . The legislation, the 2 400-page Dodd-Frank Act, is now a benchmark for the rest of the world and ushered in tight constraints on financial institutions that trade in complex securities and deal in speculative transactions .

The main function of banks is financial intermediation and risk transforma-tion . By receiving deposits from savers and lending to borrowers, banks play an intermediary role between two groups that have contrasting and opposite requirements . After a deposit transaction, the depositor is owed by the bank and exposed to less risk . Banks have fiduciary oversight over depositors’ funds . They use infrastructure and expertise to identify, attract and lend directly to borrowers .

Most individuals and organisations outside the banking sector do not have this capacity to manage risk on their own and therefore invest with the banks . By investing with banks, their motivation will be to ensure both return and safety of investment . They entrust their money to ‘banks’ run by chief executives whose credentials should in theory be approved by a central bank . These should be people of integrity . The chief executives are supported by finance directors, who are usually chartered accountants . Chief executives and finance directors

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of banks know that shadow accounting is hot air; phantom assets are reflected in the books in such a way as to deny investors the opportunity to protect their funds by investing with financially sound intermediaries . The chief executives are motivated by high incomes that maximize shareholder value at the expense of everything else, including depositors’ money . Given their expertise, knowledge and experience, it is inconceivable how financial executives end up creating what are effectively pyramid schemes under a myriad of banking arrangements . By and large, current legislation all over the world does not make this activity illegal, because it can be argued that the executives would be trying to maximise the return on their clients’ investments . There is a need to give the executives more responsibility in this area . Given the expertise and knowledge that the bank ex-ecutives have, there should be laws and regulations to criminalise this kind of behaviour on the part of the executives .

Most financial institutions faced with a highly competitive environment rely on Treasury operations to make money . In reality, the treasurers tend to have full autonomy to operate and achieve high profitability for their institutions . Corporate treasurers use various instruments, some of them rather esoteric, in order to achieve value . More often than not the chief executives and finance di-rectors are not aware of the goings-on in treasury . This should not be an excuse for them to go scot-free when things go wrong . One of the prime responsibilities of finance directors who are accountants is to ensure that the corporation they are running can survive as a going concern indefinitely . They have a responsibil-ity to manage the assets and liabilities of their institutions . They are required to manage the contingent liabilities that are brought about by their activities in the derivatives market . This is why auditors are required – to report on whether the organisation they are auditing can survive into the future . In theory, Chief Executives have overall responsibility for all the activities of the organisation for which they work . In practice, top executives are not made personally responsible for loss of depositors’ money .

THe NATuRe oF THe CRISISIn the years preceding 2008 there was a proliferation of securitisation,5 and balance sheets became complicated because of the use of off-balance sheet in-struments . According to the IMF, the global financial crisis – like other crises before it – was preceded by unsustainable surging of asset prices, prolonged credit

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expansion that led to the accumulation of debt, the emergence of new financial instruments, and inadequate regulatory oversight .

The American context is rich with examples of pyramid schemes . The ponzi scheme that was run by Bernard Madoff typifies pyramid schemes used to defraud investors . Madoff promised his clients above-market returns of between 8 and 13 per cent per annum . He used his extensive network to accumulate de-posits and paid out older investors from new funds . As funds under his manage-ment were not earning the returns that he was paying out, loss of value on the part of investors was inevitable; but for as long as there was enough liquidity to make payments, the fraud continued . Madoff advised the police of his fraudulent scheme in December 2008 when it became difficult for him to meet claims from clients . Despite various hints and tip-offs, the Securities Exchange Commission6

could not detect or take action on the fraud . As a result of Madoff’s activities, investors across the globe lost an estimated $65 billion .

Madoff was found guilty on 11 criminal charges including falsification of client statements indicating that he held about $65 billion, when in actual fact the balance was insignificant .

The global financial crisis has precipitated further illegal activity, including money laundering . Antonio Maria Costa of the UN office on drugs and crime said of the world financial crisis: ‘Consultations I’ve had with prosecutors and law-enforcement officials around the world show there is ample evidence that the banking system’s illiquidity is providing a unique opportunity for organized crime to launder their money .’

While acknowledging the achievements of the Financial Action Task Force (FATF, formed in 1989) in driving dirty money out of banks, he noted that these achievements were being undermined by the world financial crisis .

Money launderers have devised schemes to move funds from innocent ci-vilians and companies into the formal system, and ultimately into their own pockets .

IMPACT oF THe CRISIS IN SouTHeRN AFRICAThe global financial crisis has had a direct impact on developing countries, in-cluding those in Southern Africa . The economies in Southern Africa are largely dependent on commodities, the prices of which have nosedived because of the financial crisis . Their reliance on export and transport increases their exposure to the global recession . This has a knock-on effect on the banking sector, which

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relies on companies operating in these sectors for business . There are also cross-border financial linkages through capital flows, stock market investments and exchange rates . The forecasts of economic growth have been downgraded in the developing world, including in Africa . This will lead to a loss of tax revenues and the negative effects will be profound, especially on the poor, because of the lack of social safety nets .

Prior to the global financial crisis, sub-Saharan Africa was experiencing phenomenal growth against a background of sound economic policies and good external factors . Though the food and fuel crisis of 2007 weakened the balance sheets of many Southern African countries, there was still considerable growth projected . Harsh economic conditions have been known to lead to public unrest . This has been the case in Burkina Faso, Cameroon, Mozambique and Niger . In February 2009, there were food riots in Cameroon; 24 people were killed and more than 1 600 were arrested . In Mozambique, in clashes with the police in late 2008, 4 people died and 100 sustained serious injuries .

The rise in maritime piracy in the Horn of Africa can be traced to high poverty levels linked to the high cost of living in an environment where remit-tances had virtually ground to a halt . (The global financial crisis, therefore, has promoted terrorist activity .) The demand for wages led to clashes between labour and government in Cameroon and Zimbabwe . Across Africa, the reduction of remittances from the African diaspora has led to reduced ability on the part of government to pay the civil service, including the armed forces .

Sifelani Tsiko points out the closing of mines in African countries, includ-ing Zimbabwe, as a consequence of the global financial crisis . Botswana, South Africa, Zambia, the Democratic Republic of Congo and Zimbabwe were all hit hard by the commodity problem . Botswana’s mineral revenue has accounted for between 35 and 50 per cent of total revenue in the five years to 2009 . Africa is endowed with 30 per cent of the world’s total mineral resources, including gold (40 per cent), cobalt (60 per cent), platinum (90 per cent), chromium (72 per cent) and diamonds (65 per cent) . Platinum prices fell from $2 200 per ounce in mid-July 2008 to about $800 towards the end of 2008 . As a result, Zimbabwe Platinum Mines closed its open-cast mine . The third quarter earnings for Zimplats, Zimbabwe’s largest platinum producer, fell 83 per cent from the previous quarter in 2008 . In Zambia the fall in copper prices saw a sustained fall in the kwacha in relation to other currencies . Mining feeds into other industries; adversity for the mining industry means more adversity elsewhere .

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The collapse of investment banks in both the developed and the developing world has led to a reduction in funds available for investment and reduced growth in domestic products . In the less developed countries, the global financial crisis affects growth and trade and therefore has an adverse impact on GDP . Luckily, not all countries in Southern Africa were deeply exposed to the sophisticated financial instruments that have been the main cause of the global financial crisis; hence, the negative effects have been somewhat mitigated . Financial institutions in Southern Africa are sound largely because they are not integrated globally, as the institutions in America, Europe and the rest of the developed world are .

In times of crisis, banks tend to avoid lending to less developed countries where the risk of default is high . Emerging markets with well-developed finan-cial systems are more susceptible to the negative effects of a systematic banking crisis . In times of financial crisis, the capital adequacy ratios of development institutions are forced to bear considerable pressure . Private capital tends to shun regions like Southern Africa because of the perception of high risk .

As liquidity dries up there are low inflows into the developing world, where the risk of investment is higher than in the developed world . This puts pressure on exchange rates and inflation of developing countries, which reduces dispos-able income and degrades the standard of living of the population . A decline in world economic growth of one percentage point leads to half a percentage point drop in Africa’s GDP .7 As a result, any negative effect is made more profound through the adverse impact on trade, foreign direct investment and aid . Africa generally has low reserves; hence, the effect of any downturn acutely affects the general population . The terms of trade shock8 are exaggerated in small importing countries . Financial contagion9 spills over into stock markets in regions such as Southern Africa .

It must be noted that Southern African economies are predominantly cash-based, which mitigates the effect of the global financial crisis on their economies . However, cash economies are prone to money laundering in ways not necessarily attributable to the financial crisis .

Money laundering is more prevalent in developed countries than in develop-ing countries because dirty money tends to look for destinations that are safe, and these can be found in the developed world . However, the financial sectors of developed countries are more intertwined with the global markets .

The South African Chamber of Commerce and Industry (SACCI) has indicat-ed that the business confidence index in South Africa dipped in 2009 due to the global financial crisis . Growth in demand for credit slowed 1,75 per cent from the

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beginning of 2009 to 27 February 2009 . This included a drop in credit extended to the private sector, which is the engine for economic growth .

It is not surprising that the 2009 budget in South Africa extended tax relief and savings incentives in order to rejuvenate the economy . Because of reduced resources, less money was provided for spending on infrastructure . Because of South Africa’s pivotal importance to the region, effects on the South African economy influence the whole region . As a result, a lot of Southern African com-panies have retrenched staff and streamlined their operations, dealing a severe blow to aggregate demand . Southern African countries have to rely more on aid at a time when there are more competing requirements than ever .

In a way, countries in Southern Africa have been cushioned from what happens in other parts of the world by stringent exchange control regimes, which tend to limit the movement of capital to and from Southern Africa . A top execu-tive with the World Bank commented that Africa is not directly affected by the global financial crisis; but the region is likely to see a decrease in private invest-ment flows, which will affect the financing of many infrastructural projects . He pointed out that financial systems in Africa are relatively simple, with no sub-prime loans or credit default swaps . As of 30 January 2009, a considerable proportion of South Africa’s exports were destined for the US, the EU and Japan . South Africa’s economic fortunes are therefore dependent on the fortunes of her trading partners .

The global financial crisis has negatively impacted social programmes in Africa . In May 2009, Tanzania announced a 25 per cent cut in its health budget, blaming the world economic downturn for lack of funding . In the year to September 2009, sisal, cotton and tea exports declined 30 per cent, 20 per cent and 22 per cent respectively in Tanzania . Tourism arrivals dropped 15 per cent and the national currency depreciated by the same percentage .11

In Uganda, at least 17 people on HIV treatment died due to stock shortages in June 2009 . Uganda has high remittance dependency and is therefore exposed to the current crisis, which has clearly had an adverse effect on stock exchange turnover .

The global recession has hit the stock markets in other African countries, such as South Africa and Kenya; portfolio investment flows have reversed and bad loans have increased . It is significant that Anglo American and Old Mutual shifted their primary listings to the London Stock Exchange, partly in order to raise the price of their shares by becoming part of the Financial Times Stock Exchange (FTSE) 100, in which international tracker funds automatically invest .

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Some of the big companies borrowed large amounts in order to inflate their share prices on the stock exchange . Manufacturing companies even restructured, so that some of their operations went into investment vehicles; and borrowed money, in order to invest in financial markets and real estate . For instance, General Motors started to provide loans to their customers through financialisation .14

Speculative behaviour was largely driven by excessive remuneration for corpo-rate executives, which required them to maximise profits at the expense of other requirements . In South Africa, financialisation required the reckless issuing of credit cards, hire purchase schemes and sub-prime loans . This gave rise to col-lateralised loans . Old Mutual in South Africa lost $1,4 billion after discovering that its shares in Bear Sterns were almost worthless because of financialisation . Standard Bank was involved in speculating on the global derivatives market, which had a negative impact on its worldwide operations, including in Africa . Many American and European corporations have shares in South African companies and a lot own shares on the Johannesburg Stock Exchange (JSE) . It is significant that the biggest traders on the JSE are JP Morgan, Merrill Lynch, Morgan Stanley, the Deutsche Bank, Citibank and Northern Trust Company . At the global level, companies like AIG offered credit derivatives which were essen-tially insurance against non-payment of the debt that backed the derivatives .

The world financial crisis has had a negative impact on the funding of projects in Mozambique, since they have been pushed further back on the priority list . At the same time, the Mozambican economy is suffering because of the reduced demand for aluminium . In February 2009, Mozal retrenched 80 workers (a sign of the dipping fortunes of the corporation), the result of declining global demand because of poor global economic performance . Demand for electricity has come down, dealing a severe blow to the Mozambican economy . A fall in demand because of low economic activity is a bad sign for current and future economic growth . In addition, an increase in unemployment levels tends to increase the incidence of crime, as individuals resort to illegal means to ensure survival . In Mozambique, Ghana, Kenya, Mali, Rwanda, Senegal and Tanzania there are many foreign banks, which increases the vulnerability and reliance on foreign direct investment of these countries .

In Kenya in December 2008, because of the crisis, remittances went down 40 per cent, tourism 30 per cent, and stock prices 40 per cent .12 There has been a slowdown in tourism arrivals and construction, and stock markets have suffered as they rely to a large extent on Kenyans living abroad and institutions such as

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hedge funds . Exports were also adversely affected, especially in the horticulture sector .

The negative effect of the crisis was even more profound in Ghana, because the country has a large current account and fiscal deficit and the level of its reserves was below three months’ worth of imports of goods and services .

The South African situation illustrates what appropriate regulations can do to ensure that there is order in the financial markets and that the interests of all stakeholders are protected . In South Africa, the National Credit Act (NCA) was introduced and came into effect on 1 June 2007 . The Act gave credit providers the responsibility of denying would-be borrowers who could not afford to repay their debt . This initiative illustrates how regulations can promote stability in the financial markets and ensure that depositors’ funds are not abused .

The NCA’s main aims are:

To ensure that credit providers lend in a responsible mannerQQ

To prevent consumers from borrowing more than they can repayQQ

To protect the consumer through the creation of a National Credit regulator, QQ

a National Consumer Tribunal, and a debt-counselling serviceTo educate South African consumers and help them to make informed finan-QQ

cial choices, which they were unable to do previously due to ignorance and a lack of financial literacy

The NCA replaced the Usury Act (which had governed money-lending transac-tions prior to the NCA), the Credit Agreements Act (which had governed instal-ment or hire purchase agreements) and the Exemption to the Usury Act, under which micro-lenders had been making loans and which had exempted micro-lenders from the interest rate cap imposed on banks .

The effect of the introduction of the NCA was to slow down credit creation . The housing boom collapsed and house prices fell . The regulations of the Act reduced the financing of phantom assets .

It is instructive that capital tends to go where regulations are scanty or inad-equate . Half of the world’s money supply is funnelled to tax havens . In 1979, 75 offshore funds existed; currently there are 3 000 . $5,5 trillion (18 per cent of the world’s GDP) is held in offshore funds, where it is sheltered from central bank supervision . Tax havens tend to institutionalise tax evasion .

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CoNCLuSIoNIn conclusion, money laundering has played a large part in causing the global financial crisis . However, speculation by executives of institutions was also to blame . Speculative actions are not money laundering, and may not necessar-ily be illegal . There is a need to ensure that central banks enact regulations to ensure that executives cannot take excessive risks . For instance, the maximum amount available for speculation could be limited to 10 per cent of the balance sheet value . Ideally, these regulations should be created at international level and become a Bible of international best practice .

NoTeS

1 All references to ‘$’ refer to United States dollars unless otherwise indicated .

2 Financial Times, 28 October 2008 .

3 NPR is a privately and publicly funded organisation that serves as national syndicator to 797 public radio stations in the USA . NPR produces and distributes news mainly to the American public .

4 Linda Davies, Nest of vipers, London: Orion, 1995 .

5 According to Wikipedia, securitisation is a structured finance process that distributes risk by aggregating debt instruments in a pool, then issues new securities backed by the pool, http://en .wikipedia .org/wiki/Securitization (accessed 3 November 2010) .

6 The regulatory authority in the USA .

7 IMF, World economic report, April 2008, Washington: IMF, 2008 .

8 The adverse effect on trade .

9 The effect of financial trends on related markets .

10 Shanajanan Davarajan, Chief Economist World Bank (Africa region) .

11 ‘Financialisation’ refers to the provision of specialised financial instruments in order to achieve superior returns .

12 Isabella Massa and Dirk Te Velde, The global financial crisis: financial flow to developing coun-tries set to fall by one quarter, December 2008 .

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Chapter 4

The control of money laundering

Foreign exchange bureaus in Kenya, Uganda and Malawi

George Kegoro

INTRoduCTIoNForeign exchange (forex) bureaus in Africa emerged in the early 1990s as part of World Bank-instituted reforms of the financial sectors, when African gov-ernments began the liberalisation of exchange controls after decades of state control . They were licensed as alternative sources of foreign exchange additional to commercial banks; their operations were intended to increase the number of sources of foreign exchange, and to make trade in such exchange competitive . For example, in Kenya there has been a policy of licensing independent foreign exchange dealers other than commercial banks since 1995 . Forex bureaus are the result of this policy .

This study looks at the arrangements that have been put in place, and the challenges that have been met, in addressing the problem of money laundering in forex bureaus in Kenya, Malawi and Uganda .

MethodologyThe research relied mainly on primary data collected from forex bureau opera-tors in Kenya . A questionnaire was developed as a tool for the collection of the data . It included open-ended questions, which gave informants the opportunity to provide as much experience as possible .

The questionnaire was designed to explore three critical relationships in which forex bureaus are bound to engage: with the Central Bank, being the regulatory

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The control of money laundering in foreign exchange bureaus

body; with commercial banks, as forex bureaus are required to deal with them; and with the public, who use the services of the forex bureaus .

An attempt was made to collect data from officials at the Central Bank . As they declined to comment, their views have not been captured . Some of the find-ings of the study are based on secondary data, collected from official sources in the governments of Kenya, Malawi and Uganda, as well as from court records, media reports and academic analyses of forex bureaus .

LimitationsOne limitation was the refusal of Central Bank officials to provide information for the purposes of the study . Another was the extreme reluctance by forex bureaus to answer questions . The majority of those that were approached declined to participate, and those that participated declined to provide detailed information; most answered questions in a perfunctory manner .

Organisation of the studyFollowing the introduction, this chapter analyses the legal provisions that govern the management of forex bureaus in each of the countries studied, with specific attempts to identify provisions relating to the control of money laundering . The chapter then offers a comparative discussion of these provisions before discuss-ing a select number of experiences from the three countries studied, representa-tive of typical forex bureau experiences in the control of money laundering in these countries .

THe LeGAL ReGIMe GoveRNING FoRex BuReAuS IN uGANdA, KeNyA ANd MALAwI

Uganda Uganda has 122 forex bureaus, the largest number out of the three countries covered by this study, and probably also displaying the most robust participation by this segment of business in the financial sector of the respective countries . Official esti-mates by the bank of Uganda indicate that forex bureaus handle up to 30 per cent of Uganda’s foreign exchange transactions .1 The control of forex bureaus in Uganda is regulated by several legal instruments, including the Foreign Exchange Act, 2004;

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the Foreign Exchange (Forex Bureaus and Money Remittance) Regulations, 2006; and the Exchange Control (Forex Bureau) Order, 1991 .

The Exchange Control Act declares the Bank of Uganda to be the regulatory authority with regard to exchange controls .2 The Act prohibits dealing in foreign exchange except on the basis of a licence issued under any applicable law .3 It stipulates that a licence for dealing in foreign exchange may be issued with such conditions as may be required by the law .4 The Act’s subsidiary legislation – the Foreign Exchange (Forex Bureaus and Money Remittance) Regulations, 2006 – allows the Bank of Uganda to create regulations under the Foreign Exchange Act . These regulations serve various purposes: to specify conditions for licens-ing and supervising persons licensed to transact business as forex bureaus or money-remittance businesses; to guide forex bureaus and persons licensed to conduct money-remittance business in the observance of the provisions of the Act; to encourage the increased use of formal funds-transfer systems through the facilitation of foreign exchange transfers and remittances that are timely, accessible, cost-effective, reliable and transparent; and to increase the transpar-ency of remittance and payment flows in and outside Uganda by ensuring that anti-money-laundering (AML) measures and the combating of the financing of terrorism are observed in forex bureau and money-remittance businesses .5

Only a limited-liability company may transact business as a forex bureau, and it cannot do so without a valid licence issued by the Bank of Uganda . The ap-plication procedure is stringent; for example, the applicant must have an identifi-able physical place of business, and should propose persons of good repute and integrity – with the necessary qualifications and competence required to run a forex bureau – as management, directors and owners .

The regulations also provide a regime for the control of money-remittance businesses similar to that provided for forex bureaus . Money-remittance busi-ness is defined as the business of foreign exchange transfers consisting of the acceptance of monies for the purpose of transmitting them to persons resident in Uganda or another country . A person wishing to conduct business as a money remitter must be locally registered in Uganda as a business, and must obtain a licence from the Bank of Uganda . The regulations stipulate four categories of money remitters, and require a different type of licence for each: an international money transfer agency licence; a money-remittance and forex bureau licence; a direct entrant’s licence; and a sub-agency licence .

None of these categories of licensees are actually defined under the regula-tions, but a description of what the holders of the different categories of licence

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may do provides a sense of the nature of the licence itself . For example, a person wishing to conduct business as an international money-transfer agency must receive a recommendation from the regulatory authority in the country where the business is licensed . A requirement that all money-transfer licensees must meet is the ability to comply with all applicable AML measures, and with stand-ards aimed at combating the financing of terrorism . In addition, the applicant must ensure that there are no factors (such as lack of transparency) which may hinder the conduct of investigations by the Bank of Uganda after the submission of its application, or inhibit the effective supervision of the licensee by the Bank of Uganda after the issuance of a money-remittance licence . Before the commence-ment of business, the proprietor of a licence must provide the Bank of Uganda with the name, address, designation, resume and a passport-sized photograph of each of the members of staff . Every licensee who carries on money-remittance business must maintain a foreign currency client account in the name of the licensee at a commercial bank in Uganda .

The regulations restrict forex bureaus to dealing only in spot transactions .6 A person who wishes to sell foreign exchange to a forex bureau must be issued with an official receipt of the Bank of Uganda, or such other receipt as the Bank may approve, indicating the source of funds .7 Similarly, a person purchasing foreign exchange must obtain an official receipt and must indicate the purposes for which the foreign exchange is needed .8 A forex bureau must maintain com-plete records of all the transactions into which it enters for the sale and purchase of foreign exchange, and must maintain those records for a minimum period of five years .9 A forex bureau must submit daily, weekly and monthly summaries of its transactions to the Bank . Receipts and payments in excess of $5 00010 must be reported to the Bank immediately, and in any event not later than the day after the transaction takes place . The regulations confer on the Bank of Uganda the power to inspect the records and books of account of a forex bureau, and to issue directives to a bureau .11 They permit the maintenance of a branch of a forex bureau, but the permission to open such a branch must be obtained from the Bank of Uganda .12

The regulations provide a number of instances in which the Bank of Uganda may take remedial measures against a forex bureau . Such measures include warn-ings, the imposition of cash penalties, and the suspension and/or revocation of a licence . The circumstances under which these measures may be imposed include when a bureau is involved in money laundering or fraud .13

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Kenya A foreign exchange bureau is a limited company, licensed by the Central Bank of Kenya, which has as its sole activity the conduct of foreign exchange trans-actions, including the sale and purchase of currencies, travellers’ cheques and similar instruments approved by the Central Bank .

There are 82 forex bureaus in Kenya, spread across several towns, with Nairobi hosting the largest number (65), Mombasa coming second (11), then Nakuru (2) and Eldoret, Malindi, Narok and Kisumu (one each) . In August 2007 the Central Bank lifted a longstanding embargo on the licensing of new forex bureaus . The Bank explained that the market was vibrant enough to accommodate more players at that time, and observed that the curb on additional bureaus had im-pacted negatively on the industry . The number of bureaus was expected to rise to 130 .

The Central Bank of Kenya Act empowers the Central Bank of Kenya to issue directions for the maintenance of a stable and efficient banking and financial system .

The Central Bank issued the Regulation on Money Laundering, 2000, on the basis of its authority under the Act .14 The regulation applies to banks, financial institutions and mortgage companies licensed under the Act . The purpose of the regulation is to provide guidance regarding the prevention, detection and control of money-laundering activities . It is noteworthy that, as it stands, the regulation is not applicable to forex bureaus . It must be concluded that forex bureaus are outside the AML concerns that the regulation seeks to address . However, even if the regulation applied to forex bureaus, this would not ameliorate the difficulties that its design invites; including the doubtful legal basis of the regulation, and the lack of specificity in several material particulars .

The management of forex bureaus is provided for under a separate set of regu-lations – the Forex Bureau Guidelines, 2007 . The guidelines prohibit engaging in the business of a forex bureau without a licence and require a deposit of $30 000 to be made at the Central Bank as security for compliance with their provisions . A forex bureau is required to open and maintain an account (or accounts) – des-ignated ‘Forex Bureau Foreign Currency Account’ – with a commercial bank . A person applying for a licence must satisfy the Central Bank that he or she is a fit and proper person for conducting the business of a forex bureau . It is implied that a person may only use one company to conduct the business of a forex bureau .

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A bureau is required to pay all foreign exchange remittances it receives into the designated account without delay . Bureaus may engage only in spot transac-tions and may not engage in transactions involving forward cover . The guidelines authorise forex bureaus to deal in travellers’ cheques, personal cheques and bank drafts . However, specific authority is required before the bureau may deal in these particular instruments . A threshold amount of $10 000 or its equivalent per transaction has been stipulated, for several purposes . The guidelines require forex bureaus to ensure that funds have not been deliberately split below this amount to avoid questions as to the source of the funds . In addition, for purchases and sales of forex to the value of this amount or higher, the purchaser must be identi-fied . Furthermore, this is the maximum amount allowed for a transaction by tel-egraphic transfer . There is also a ceiling, equivalent to this amount, on purchases that a customer may make on any one day without it having to be established that the funds are from a legitimate source . The purchase of an amount higher than this triggers an obligation on the part of the forex bureau to inquire into the source of the funds . A report is to be prepared and submitted to the Central Bank for any purchase or sale in excess of $10 000 .

For a sale of foreign exchange or travellers’ cheques amounting to $10 000 or more, a dealer must maintain a record showing the purpose of the purchase . The guidelines also require that the sale of foreign currency to a non-resident must be accompanied by evidence that his Kenyan shillings are from a legitimate source .

Every forex bureau is obliged to take measures to detect money laundering and prevent its employees from engaging in the practice . The board of the forex bureau has the responsibility of risk management with regard to money launder-ing . This includes staff training, maintenance of identification records, obtaining records to enable the determination of sources of funds in order to detect unusual or suspicious transactions, and reporting to the Central Bank . The guidelines require bureaus to establish and maintain a ‘know-your-customer’ regime . For all transactions involving bank drafts, travellers’ cheques and personal cheques, dealers must obtain and keep a copy of the identification card or passport of the purchaser .

The guidelines provide minimum requirements for establishing the identifi-cation of a customer . They also describe examples of suspicious activity .

The guidelines prohibit ‘tipping off’ customers . Penalties are stipulated for breach of the guidelines: fines of up to Ksh 500 000 for both the bureau and the individuals involved in wrongdoing and imprisonment for up to three years .

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The guidelines in existence at the time of writing are an improvement on an earlier version, which was no more than a tool for enabling the Central Bank to keep track of foreign exchange transactions .

MalawiMalawi has 23 licensed forex bureaus, spread across the main cities, with Lilongwe hosting the largest number (10), followed by Blantyre (4), Limbe (4), and Mzuzu and Zomba (2 each) . Mwanza has one .

The legal basis for the management of forex bureaus in Malawi – the Exchange Control (Forex and Bureaux and Foreign Exchange Fixing Sessions) Regulations, 1994 – has been thrown into disarray by ongoing legal suits, between forex bureaus on one side and the Reserve Bank and the Minister for Finance on the other .

The Exchange Control (Foreign Exchange Bureaus) Regulations, 2007 at-tempted to replace the 1994 regulations but was met with opposition from forex bureau operators . The main point of diversion from the 1994 regulations is that the 2007 version required all forex bureaus to seek a strategic partnership with a commercial bank as a pre-condition to continuing in business . Those bureaus unable to meet the requirements of the new regulatory regime were to be closed .

A number of forex bureaus mounted legal challenges, seeking to prevent the enforcement of the new regulations . The cases have not yet been resolved . Consequently, the courts issued orders preventing the Reserve Bank from carry-ing out measures to close bureaus that have not complied with the new regula-tions with the result that these bureaus continue to trade, but are not obliged to obtain a licence issued by the Reserve Bank . Given this uncertainty, it is not clear what regulatory regime is applicable in Malawi; for this reason, the provisions of the 1994 regulations are discussed here since the enforcement of the 2007 regula-tions remains under legal challenge .

The 1994 regulations require that all foreign exchange accrued abroad by Malawian residents is repatriated to Malawi . Except with the permission of the Minister, no Malawian resident who is abroad may hold any foreign exchange received as payment for the export of goods or services from Malawi for more than three working days . Exporters are required to transfer any foreign exchange received to the account of an authorised dealer bank in Malawi, or to maintain a foreign currency account with an authorised dealer bank in Malawi, to which the foreign exchange may be credited .

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Residents of Malawi needing foreign exchange to make payments abroad for imports of goods or services may buy foreign exchange from forex bureaus, among other sources . However, any remittances abroad must be arranged through an authorised dealer bank, except where the regulations provide for alternative transfer mechanisms .

The regulations authorise the Reserve Bank to issue guidelines for establish-ing and operating forex bureaus and brokers, and for fixing for sessions, with the purpose of facilitating the development of the foreign exchange market . They also provide for the management of forex bureaus in terms of their role in conducting the business of buying and selling foreign currency .

The business of a forex bureau must be carried out through a limited-liability company . Such a business must apply to the Reserve Bank for a licence . A person issued with a licence must have identifiable employees for the forex bureau and must not permit any other person (other than those employees who have been registered with the Reserve Bank) to transact any business on behalf of the forex bureau . A bureau must open a foreign currency account with a bank for its daily operations .

Each forex bureau is to be treated as autonomous for the purposes of registra-tion and operations . A forex bureau licence is neither transferable nor assignable and no forex bureau may operate as an agent of another forex bureau .

A forex bureau licence authorises the holder to engage only in spot transac-tions . A bureau may deal only in convertible currencies, in cash or travellers’ cheques . A bureau (whether owned by a bank or not) may not operate or be re-garded as a bank, and may not open accounts for any customer, establish a letter of credit, or perform any other banking business .

All transactions conducted by a forex bureau must be carried out and main-tained in the strictest confidence, and a bureau is not entitled to demand or seek an explanation from a customer as to the source of the funds involved in any transaction . Every bureau must maintain a register of purchases of foreign cur-rency in cash, and of purchases and sales of travellers’ cheques . A bureau must also maintain adequate accounting records to enable it to prepare its final ac-counts . All registers and other bureau records must be available for inspection by authorised officials of the Reserve Bank . The Bank is obliged to examine the operations of a forex bureau at least once in each licence year .

The regulations stipulate ceilings on the amounts of foreign exchange that may be purchased from forex bureaus for foreign travel . A person, firm or other organisation may purchase any amount of foreign currency from a bureau for the

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purpose of importing goods into Malawi, but remittance of the foreign currency purchased may only be made through an authorised dealer bank . An international organisation, a diplomatic mission, or the employees of either may sell foreign cur-rency to a bureau, but are not allowed to buy foreign currency from any bureau .

A forex bureau must not use its foreign currency account to transfer money outside Malawi, except in accordance with these Regulations .

Every forex bureau must submit certain returns to the Reserve Bank: a weekly return of its foreign exchange position, a monthly return of total purchases and sales of foreign currency, and a monthly report . The Reserve Bank may inspect an office of any bureau and its books of accounts at any time . It is the duty of every employee of a bureau to produce all relevant records of the bureau to the officer making an inspection, as required .

The regulations list a number of punishable offences, as a means of enforcing the various obligations that they impose . If a forex bureau fails to maintain a foreign currency account; transfers or assigns a bureau licence; deals in foreign currency; transfers foreign currency out of Malawi; fails to credit the account of a bureau upon receiving remittances from outside Malawi on behalf of the bureau; or fails to submit a weekly or monthly return – all of which are con-trary to the regulations – it is guilty of an offence, which may attract a fine and imprisonment .

THe CoNTRoL oF FoRex BuReAuS IN KeNyA, MALAwI ANd uGANdAUganda’s regulatory system for the management of forex bureaus was estab-lished in 2004, with the enactment of the Foreign Exchange Act . The relevant arrangements were originally designed to respond to the need for managing foreign exchange, and had nothing to do with the control of money laundering . The Act prohibits the conducting of business as a forex bureau without a licence, and gives the Bank of Uganda the power to issue such licences and to establish (through subsidiary legislation) a framework for the control of forex bureaus . As the Act is mainly concerned with the management of foreign exchange, it has no provisions for the control of money laundering . Money-laundering controls were brought in with the enactment of the Foreign Exchange (Forex Bureaus and Money Remittance) Regulations, in 2006 .

The control framework for forex bureaus in Kenya has a similar history . Kenya abolished exchange controls in the early 1990s, as part of the country’s economic

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liberalisation process, and forex bureaus were first licensed and came into being in 1995 . However, these operated outside of any written legal controls – although the Central Bank of Kenya had issued the Regulation on Money Laundering, 2000, this applied only to commercial banks, financial institutions and mortgage companies; but not to forex bureaus .

The control of forex bureaus was also conceived as an extension of Malawi’s exchange control regime . The Exchange Control Act, similarly, prohibits transac-tions in foreign exchange without a licence, and the Exchange Control (Forex and Bureaux and Foreign Exchange Fixing Sessions) Regulations, 1994 provide the substance of the control over forex bureaus in Malawi in terms of the Act .

A review of the management of forex bureaus in the three countries reveals many similarities, but also a number of important differences . The similarities include the centrality of the Reserve Bank in the arrangements that constitute the supervision of forex bureaus in each of the countries . The Reserve Bank is responsible for licensing forex bureaus in each of the countries, and for the en-forcement of the rules with which forex bureaus are required to comply .

The content of the regulatory regime in each of the countries is also similar . The regulations in each country require the incorporation of a company as a vehicle through which the forex business is to be carried out, and which then becomes the subject of the controls that are put in place . The regulations also look beyond the company, and require that those behind the company must be fit and proper for the purpose . A demonstration of personal fitness for the business is required . The company is also required to demonstrate financial soundness, and must deposit money as security for good behaviour .

However, there are also a number of important differences in the regulatory regimes of the three countries . One of these is the requirement in Kenya that a person can only conduct business under the auspices of one company . This regu-lation also prohibits branch offices of the same company . There is no equivalent requirement in Uganda or Malawi, and as a result, there are a number of forex bureaus which have branch offices .

Another important difference is the prohibition – in Malawi – of stand-alone forex bureaus and the requirement that a bureau must be attached to a com-mercial bank . This requirement does not apply in either Uganda or Kenya . In Malawi, it was not a part of the original framework for the control of bureaus, but was imposed as a result of reforms undertaken by the country’s Reserve Bank . The bureaus which operated independently before this rule came into force, and which are now (at the time of writing) required to close down or merge with

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existing commercial banks, have since challenged the rule in court, and a deci-sion is awaited .

There is an important difference in how Kenya, Malawi and Uganda have at-tempted to address the remittance of money in the management of their respec-tive forex bureaus . Kenya and Uganda have brought money remittance into the scope of supervision established for bureaus . Uganda’s regulations require the in-dependent licensing of money remitters in the same way as bureaus are licensed, and also permit bureaus to conduct business as money remitters . Although money-remittance business can be carried out on the same premises, and by a person already conducting the business of a forex bureau, it is clear (in the case of Uganda) that money remittance is a separate business, for which a separate set of licences must be obtained . As a result, in Uganda it is permissible to conduct the business of money remittance as a stand alone operation, though a licence is still required .

Uganda’s provisions with regard to money remitters take several categories of such remitters into account, and provide for different types of licences for each . In Kenya, on the other hand, money remittance is virtually indistinguishable from forex bureau business . There is no provision (or requirement) for additional licensing . Kenya’s regulations identify two of the big international money remit-ters (Money Gram and Western Union) and stipulate that a forex bureau seeking to conduct business as an agent of either (or of any other international agency) must register that relationship with the Central Bank of Kenya, and submit a copy of the agreement between the bureau and the agency .

Malawi’s regulations imply that it is permissible for forex bureaus to receive transfers of money from outside of Malawi in their accounts, and to transfer money outside of Malawi on behalf of their customers . However, such deal-ings must comply with the provisions of the country’s exchange control laws . Unlike in Uganda, there is no mechanism in place anywhere in the Kenyan and Malawian regulations that requires the licensing of remitters (including international remitters) . Malawi does not deal with money remitters at all in its regulations, and does not appear to have an alternative regulatory system for this category of actors . In Uganda – in addition to the regulations regarding money remitters – there is substantive primary legislation in place that is the basis for the management of money remitters . Uganda is one of the few countries to have made such provision .

In Malawi and Kenya, the regulations specifically forbid forex bureaus to open accounts for customers, take deposits, lend money or set up letters of credit . In

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all three countries, bureaus may only engage in spot transactions . However, the regulations fail to state specifically whether spot transactions using cheques or bearer instruments are permissible or not . In Kenya, it is permissible for a bureau to deal in telegraphic transfers, bank drafts and third-party cheques on behalf of their customers . Kenyan bureaus may also accept personal foreign currency-designated cheques . However, a bureau may not deal in any of these instruments if their value is greater than or equal to $10 000 or its equivalent . The regula-tions provide room for the addition of further financial products to this list, if approved by the Central Bank of Kenya .

Kenya’s regulatory framework includes elaborate AML mechanisms, com-plete with a definition of the offence of money laundering, and the requirement that forex bureaus must establish and enforce a ‘know-your-customer’ regime . Due diligence requirements are also imposed on commercial banks that agree to open accounts for forex bureaus . There is no equivalent set of provisions in the Malawian and Ugandan regulations . Malawi – unlike Kenya and Uganda – has enacted separate AML legislation, and does not need elaborate AML provisions in its plan for the control of forex bureaus . It is possible that Kenya has used the opportunity provided by the need for forex bureau management to address the general inadequacies that it has in the control of money laundering, and which it has not managed to overcome, despite every effort .

MoNey LAuNdeRING IN KeNyA, MALAwI ANd uGANdAThis section discusses some of the experiences that these three countries have had with regard to the management of forex bureaus from a money-laundering point of view . The purpose of this review is first, to provide a basis for assessing the effectiveness of forex bureau-based money-laundering controls in each country; and second, to demonstrate some of the challenges that must be overcome if the countries are to achieve the levels of control that they desire .

The study established that the Central Bank in each country has organised itself in departments and the bank supervision department is responsible for the inspection of the operations of forex bureaus . It is this department that receives and analyses the reports from bureaus . One of the questions asked was how forex bureaus outside of the major centres, or in remote areas, managed to comply with the reporting requirements of the Central Bank – particularly the requirement to furnish daily reports – and whether any hardship was experienced as a result

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of having to comply . This question was not answered satisfactorily; informants merely replied that since the reports were required by regulations, they were re-quired to comply somehow .

Another question had to do with the capacity of the Central Bank to provide competent supervision of forex bureaus, and particularly whether (in the opinion of bureau operators) Bank officials possessed the requisite technical skills to be effective in their oversight functions . All the informants were very complimen-tary of the Bank officials, whom they view as competent and highly skilled with regard to their responsibilities . A number of informants reported that oversight methods include undercover operations, such as officials being disguised as ordi-nary customers in order to verify that bureaus are operating within the rules .

Forex bureaus were asked whether the Central Bank provides any feedback to them regarding reports of suspicious activity that they make to the Central Bank . While some informants indicated that no feedback was received, others said that the Bank would usually provide them with feedback .

Informants did not appear to regard complying with either daily or weekly re-porting requirements to the Central Bank as an unreasonable burden . However, frequent amendment of the regulations was a challenge .

Forex bureaus reported cordial relationships with officials of the Central Bank, and also that the Central Bank itself was their customer as it frequently bought foreign exchange from them . Their relationships with commercial banks were described as satisfactory .

Informants were asked to give a sense of their relationship with customers . All answered that they regarded customers as friends since they provide bureaus with business . However, they reported that there is little opportunity to interact with customers as they only deal with them over the counter .

Most customers buy and sell amounts well below the $10 000 threshold that triggers reporting requirements to the Bank . Typically, no more than three customers per week transact more than $10 000 . Informants said they do report these transactions to the Bank, as required by the regulations . When asked to comment on the enforcement of the duty to establish a customer’s identity, some informants said that they experienced difficulty in asking customers to identify themselves .

Informants were also asked how they meet the requirement to provide train-ing for their staff . Most answered that staff training is conducted in-house . Others replied that approved trainers from the private sector provide the requi-site training .

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Of the three countries, only Malawi has AML legislation in place – the Money Laundering, Proceeds of Serious Crime and Terrorist Financing Act was passed in 2006 . Kenya has been attempting to enact the Proceeds of Crime and Anti-Money Laundering Bill (its proposed AML legislation) since 2003 . At the time of writing, the bill was pending before the National Assembly and had gone through its second reading, the furthest it has ever progressed . Uganda also lacks AML legislation and it is unclear what steps are contemplated towards enacting such legislation .

The lack of specific legislation on money laundering in Kenya and Uganda means there is no supporting framework for enforcing AML provisions for forex bureaus . Without a structure for the control of money laundering, it is difficult to put effective AML controls in place for bureaus . As argued above, Kenya has tried to compensate for its lack of AML legislation by packing its forex bureau guidelines with AML objectives . It is submitted that whether or not effective AML controls over forex bureaus are achieved will depend largely on the ef-fectiveness of similar controls over other types of financial service providers; in the absence of sector-wide controls, effective governance over forex bureaus will remain illusory . Furthermore, the absence of an AML framework means that the institutional capacity to implement the regulations remains weak and implemen-tation is unlikely to succeed .

A number of forex bureaus in Malawi, aggrieved by the Reserve Bank at-tempting to enhance its regulatory hold over them, have mounted legal challenges against the Reserve Bank and the Minister for Finance . The circumstances leading up to (and surrounding) the court cases represents the full spectrum of issues that face this sector in Malawi . According to the Minister for Finance, Malawi’s forex bureau scheme has encountered several problems since its introduction in 1994 . There has been poor compliance (on the part of the forex bureaus) with the exchange control regulations and the operating guidelines for forex bureaus . Examples include failure to report exchanges rates daily as required, and failure to submit reconciliations of foreign exchange transactions to the Reserve Bank . In addition, some forex bureaus have not installed the equipment necessary for efficient functioning and compliance with the regulations . Such equipment in-cludes counterfeit-note detectors . According to the Minister there has been a rise in reports of the involvement of forex bureaus in money laundering and other financial crimes .

In response to the discovery of fraudulent transactions, the Reserve Bank of Malawi has revoked the licences of at least three forex bureaus over the years . In

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one case, in 2003, a bureau’s licence was suspended when it was discovered that the bureau was involved in fraudulent credit card transactions using the names of customers; and further, that it was processing foreign exchange sales using fic-titious customer names and forged signatures . In another case, an investigation carried out by the Anti-Corruption Bureau revealed that the branch manager of a forex bureau had assisted a non-resident customer (who was subsequently convicted of a criminal offence) in illegal attempts to externalise a sum of $17 876 from Malawi . As part of this fraud, the bureau in question had purchased travel-lers’ cheques which had not been signed at the point of encashment, as required, from a customer . Furthermore, a number of other travellers’ cheques which the bureau claimed to have bought from identified customers were in fact not bought from those customers .

According to the Minister, Malawian forex bureaus have also been assisting customers to breach the exchange controls of other countries, specifically South Africa . In one case, in 2007, a Malawian bureau sold a customer who was travel-ling to South Africa an amount in South African rands that was in excess of the maximum amount that a visitor to South Africa may bring in to the country in cash . The excess cash was confiscated on the customer’s arrival in South Africa . It appears that occurrences of this type of infringement are widespread . This has led to the South African authorities requesting the government of Malawi to assist in curbing the problem . In turn, the Reserve Bank of Malawi ordered all forex bureaus to advise customers travelling to South Africa to observe ap-plicable cash limits .

In the view of the Minister, forex bureaus lack the institutional capacity to undertake prudential measures with respect to foreign exchange dealings . To address this problem, it was decided to require all forex bureaus in the country to enter into relationships with authorised dealer banks or financial institutions in order to achieve compliance with a new framework that would strengthen the management of forex bureaus . The new framework was formalised in the Exchange Control (Foreign Exchange Bureaus) Regulations, 2007 . Bureaus unable to meet the requirements of the new regulatory regime were to be closed .

As discussed above, legal challenges mounted by aggrieved forex bureaus to prevent the new regulations coming into force have not yet been resolved and in the interim, the courts have issued orders preventing the Reserve Bank from closing bureaus that have not complied with the new regulations . Those bureaus affected therefore continue to operate, without the need to apply for a licence from the Reserve Bank .

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Forex bureaus in Uganda appear to operate in a much more peaceful envi-ronment than those in Malawi . They have organised themselves into a voluntary organisation, the Uganda Forex Bureaus and Money Remittance Association . In consultation with the Bank of Uganda, the Ugandan operators have established a code of conduct, the purpose of which is to ensure professionalism, ethical standards and fair play among forex bureaus . The code outlines the basic rules and guidelines for the operation of forex bureaus and money transfer operators . The code is complementary to (and is not a replacement or amendment of) provi-sions of the laws currently in force relating to these operators .15

The provisions of the code of conduct are materially similar to those of the guidelines . However, one important addition to the regulatory regime is that the code obliges all the members of the association to share information that is rel-evant to their daily operations . This includes information on fraudulent activities committed by the staff of a forex bureau, or by a customer . The code also obliges members to comply with AML policies and guidelines, and to report cases of money laundering to the Bank of Uganda . The sanctions for non-compliance with the code include that the association may recommend that the bank of Uganda suspend or withdraw the licence of the operator concerned .

However, the Bank of Uganda has expressed the view that compliance with the regulatory regime governing forex bureaus is poor . Over 90 per cent fail to establish or record the sources of or purpose for the foreign exchange in which they deal . Bureaus do not comply with the requirement to establish the identity of customers; a situation, the Bank has noted, that exposes the financial sector to acts of money laundering, and to the possibility of financial support for terrorism .

Uganda and Kenya are attempting a coordinated approach to the manage-ment of forex bureaus; officials from the Central Bank of Kenya requested a visit to Uganda in May 2009 . This was a familiarisation tour, for studying the regula-tion of forex bureaus in Uganda . In return, it was arranged that Ugandan officials would visit Kenya to study forex bureau operations and management there .

The Ugandan association has expressed its deep concern over the return of black market trading in foreign exchange (known as kibanda in Uganda), which was thought to have died out when foreign exchange dealings were liberalised . In response to this problem, the association has called on its members to offer com-petitive rates when trading in foreign exchange, and to remain open for longer hours, as a means of countering black market operations .

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As noted above, the Kenyan regulations incorporate an elaborate AML ar-rangement; but ultimately, implementation of the guidelines depends on the ca-pacity of the Central Bank to take action against those named by the bureaus in their suspicious-transaction reports (STRs) The Bank has threatened to impose criminal sanctions, including jail terms, for non-compliance with the regula-tions . It is submitted that the Bank does not have the legal authority to create criminal offence statutes on the basis of its regulatory mandate; such statutes would have to be established by Parliament, under primary legislation . Given these circumstances, the regulations are of doubtful legal force . And, since the powers of the Bank are uncertain in this regard, the control of forex bureaus is undermined .

Furthermore, there is no provision for (or mechanism to promote) debriefing by and feedback from the Central Bank regarding STRs filed by forex bureaus . The ‘know-your-customer’ burden imposed on forex bureaus is difficult for them to discharge, given the fact that they have a fleeting relationship with most of their customers and have little opportunity to get to know them . There is no pro-vision stipulating the standard of training that would be required to meet the requirements of the guidelines .

Some forex bureau operators have certainly been involved in attempts at money-laundering activities . For example, an incident in which a Pakistani couple was arrested at Nairobi airport with KSh 50 million, which they were planning to smuggle out of Kenya, indicates that the risk of cash smuggling for forex bureaus does exist . There is no regime in place in Kenya for regulating money remitters, but existing regulations do seek to regulate the relationship between named re-mitters and forex bureaus . Again, the success of this arrangement depends on the capacity of the Bank to play its supervisory role in the functioning of the regulations .

An essential requirement for controlling money laundering is the duty imposed on regulated institutions to establish the identity of their customers . There are varying levels of difficulty in achieving reliable customer identification in Kenya, Uganda and Malawi . Of the three countries, only Kenya has a state-backed national identification system in place . Since 1979, Kenya has maintained a registration system under the Registration of Persons Act, which compels the registration of all adult Kenyan citizens . The system has achieved high levels of success and as a result, virtually all adult citizens hold an identity card issued by the government, following a rigorous process to verify identification .

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Malawi’s struggle with identification problems was recently demonstrated in the country’s attempts to provide a food subsidy for the poor . The government is concerned that only Malawian citizens should benefit from the subsidy . In the absence of a national identification system, it is not always possible to establish citizenship . The use of voter registration cards as proof of citizenship has proven controversial, since those without such cards are not necessarily foreigners .

After much struggle, and having enacted the Uganda Citizenship and Immigration Control Act, Uganda may put in place a registration system of its own as the legal basis for an identification system .

In the absence of state-backed registration systems in both Malawi and Uganda, institutions required by AML regimes to identify their customers have a much more onerous responsibility . It follows that the obligation imposed on forex bureaus to establish the identity of their customers is that much more dif-ficult to discharge in these two countries .

A report on the identification difficulties prepared by the Victims Participation and Reparations Section of the International Criminal Court in 2007 noted that:

since there is no requirement to obtain any of these documents unless they are needed for a specific purpose, and the procedures for obtaining most of the documents are lengthy, expensive and difficult, many Ugandans simply do not take the steps that are required to obtain [identity cards] . . .The lack of proper identification documents was mentioned by many informants as a major problem in Uganda .16

CoNCLuSIoNSOf the countries studied, only Malawi has enacted AML legislation . Oddly, however, Malawi faces the greatest challenges in the governance of forex bureaus for purposes of money laundering . Attempts by its regulatory authorities to stamp their authority on this sector have left Malawi in disarray; as the parties struggle in court, the sector remains a free-for-all, as the mandate of the Reserve Bank has been curtailed by the courts .

In Kenya, the management of the sector is in relatively good order, although the refusal of the Central Bank to participate in the study prevented a complete assessment . Uganda’s foreign exchange markets have, perhaps, the greatest amount of sophistication of the three countries, with comprehensive legislation on both money remittance and forex bureaus . However, the country still lacks

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AML legislation . The regulatory authorities in Uganda have expressed disquiet that the boom in the forex market may just be providing much-needed cover for money laundering and terrorist financing . However, more research is needed in order to provide reliable evidence of the truth of these claims .

NOTES

1 Martin Luther Okech, Funding terror? The flip side of forex boom, The East African 11 May 2009 (citing Justine Bagyenda, Director of Bank Supervision at the Bank of Uganda) .

2 Foreign Exchange Act 2004, Section 4 .




6 Spot transactions are a type of foreign exchange transaction in which each party promises to pay a certain amount of currency to the other on the same day, or within one or two days .

7 The Foreign Exchange (Forex Bureaus and Money Remittance) Regulations, para 22(1) .

8 The Foreign Exchange (Forex Bureaus and Money Remittance) Regulations, para 22(2) .

9 The Foreign Exchange (Forex Bureaus and Money Remittance) Regulations, para 25 .

10 All references to dollars (‘$’) are to US dollars, unless otherwise indicated .

11 The Foreign Exchange (Forex Bureaus and Money Remittance) Regulations, paras 30 and 31 .

12 The Foreign Exchange (Forex Bureaus and Money Remittance) Regulations, para 36 .

13 The Foreign Exchange (Forex Bureaus and Money Remittance) Regulations, paras 40 and 41 .

14 Central Bank of Kenya Act section 3 .

15 See introduction to the Uganda Forex Bureau & Money Remittance Association, Code of Conduct, July 2008 (unpublished) .

16 International Criminal Court, Report on the identity documents available in the Ugandan legal and administrative system and other supporting documentation for applications for participa-tion in proceedings in Uganda, http://www .icc-cpi .int/iccdocs/doc/doc454998 .PDF (accessed15 January 2010) .

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Chapter 5

Trade-based money laundering

Counterfeit goods in the Eastern and Southern African region

Humphrey P B Moshi

INTRoduCTIoNThe trade in counterfeit commodities is a worldwide phenomenon, cutting across continents and countries . Empirical evidence shows that international trade in counterfeit and pirated products totalled a possible $200 billion in 2005 .1 This figure does not include domestically produced and consumed counterfeit and pirated products or the significant volume of pirated products being distributed via the Internet . If these items were added, the extent of counterfeiting and piracy worldwide could well be several billion dollars more .2

Counterfeiting is an illicit business run by criminal networks . The criminal aspect, as well as the intent of criminals to disguise the quality or the authenticity of products and to hide the proceeds of the crime, establishes a strong linkage between counterfeit products and money laundering . Indeed, it is this linkage which categorises trade in counterfeit products as trade-based money laundering . In this regard, the impact of counterfeit products on the economy of a country is similar to that of the results of other trade-based money laundering, except for the fact that it has an additional negative impact of posing health and safety risks ranging from mild to life-threatening . This is because counterfeiters produce and distribute commodities that are often substandard and may even be dangerous .

The motivation for writing this chapter is that the extent and the effects of counterfeiting are of such significance that sustained action is needed from gov-ernments, business and consumers . However, such sustained and effective en-forcement cannot be achieved without being informed by research-based analysis

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and information . This chapter aims to provide such an analysis . After this intro-duction the rest of the chapter is organised as follows: the second section provides the conceptual framework for the study, the third presents a picture of the global and regional magnitude of trade in counterfeit goods, and traces the source and destination countries of such goods and the fourth section assesses the impact of counterfeit goods on sample countries in the region . The fifth section focuses not only on measures for fighting counterfeiting that are currently in place, but also on their effectiveness . The final section charts the way forward, in terms of making recommendations concerning the need for effective policy and legal and institutional frameworks for combating counterfeiting .

CoNCePTuAL FRAMewoRK

DefinitionThe concept of a ‘counterfeit commodity’ has been defined differently by insti-tutions and individuals . For example, the World Health Organization (WHO) defines counterfeit drugs as ‘drugs which are deliberately and fraudulently misla-belled with respect to their source and/or identity’ .3 In this regard, counterfeiting may apply to both branded and generic products . Such products may include those with the correct ingredients; that is, without active ingredients, with insuf-ficient active ingredients or with fake packaging . Thus, counterfeiting includes products bearing a non-authentic but ‘substantially indistinguishable’4 trademark as well as goods which infringe on patents or copyrights .

According to Ringo, counterfeiting covers manufacturing, producing, pack-aging and repackaging .5 It entails the making of goods by imitating protected or genuine goods to the extent that the counterfeits are identical or substantially similar copies of the protected goods . Thus, counterfeit products are unauthor-ised imitations of branded goods intended to be passed off as originals, with the purpose of defrauding or deceiving the consumers of said products into believing that they are the originals .

For the purpose of this study, we will adopt the OECD’s definition of counter-feiting as ‘any manufacturing (and sale) of a product which so closely imitates the appearance of the product of another to mislead a consumer that it is the product of another’ .6 Hence counterfeiting may include trademark-infringing goods as well as copyright infringements . The concept also encompasses the copying of packaging, labelling and any other significant features of the product .

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it is thus a predicate crime for money laundering . Therefore it is important to know how the laundering of the proceeds takes place . Not all counterfeiting processes and activities are proceeds of crime . This means there is no one-to-one relationship between the two activities .

In order to get a clear picture of how money laundering takes place, one has to distinguish between three levels of penetration of counterfeits into a country’s economy . The first level occurs at the time of manufacturing or production of the product . If the manufacturer or producer is aware that the product being pro-duced is counterfeit, is able to produce it and the product penetrates the market and is therefore sold, then the proceeds of crime will have been integrated into the economy . The second level concerns the period when the products are imported . If the products are able to enter the domestic market ‘successfully’ – that is, by circumventing the requisite institutions (revenue authorities, standards bureaus, fair-competition institutions and the like) – and are sold to both wholesale and retail networks, then money laundering would have taken place . This is because the importer has full information concerning the true nature of the products, and this information is not revealed to either the wholesalers or retailers in the value chain .

At the third level, the wholesalers and retailers would sell the commodities to buyers, who assume that they are genuine because, after all, they have been imported ‘legally’ . This being the case, the proceeds of sales by this category of sellers cannot be associated with a crime . However, if during the sales process the sellers realise that the products are counterfeits and this information is not

pharmaceuticals and medical equipment, clothing and apparel, plastic pro-ducts, building materials and foodstuffs . The wide range of products that may be counterfeited suggests that such products may have wide-ranging effects on the economy as well as on people’s lives, making it necessary that action be taken against the counterfeiting phenomenon .

The link between counterfeiting and money launderingThe definition of counterfeiting clearly implies that the act of producing or selling of counterfeits amounts to the commission of a crime, because of the in-fringement of trademarks and copyrights and because the would-be buyer of the product is being deceived . As counterfeiting is an illegal and clandestine activity,

The list of counterfeit products ranges from industrial equipment and raw materials to motor vehicle parts, electronic equipment and appliances,

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communicated to the buyer, the proceeds from the sale of such products become criminalised . On the other hand, if such information were to be communicated to the buyer, but the buyer chooses willingly to continue with the purchase, the criminalisation of the proceeds is averted .

The explanation above illustrates the difficulties of establishing linkages between counterfeiting and money laundering in an environment where there are various players in the value chain and a clearly defined legal and institutional framework is lacking . Accordingly, measures for effectively fighting counter-feiting must focus on strengthening these frameworks if they are to curb the manufacturing and importation of such commodities . Figure 1 below represents a market chain for the counterfeit industry .

Figure 1: Counterfeit goods: the market chain

Manufacturer

Importers or traders

Regulatory bodies

End users and/or consumers

SCoPe ANd MAGNITude oF CouNTeRFeITINGTrade in counterfeit products is a billion-dollar industry which is widespread and thriving throughout the world, but more so in low-income economies . This is due to a number of factors, including lack of effective legislation and enforce-ment mechanisms, low purchasing power arising from widespread poverty, cor-ruption, under-supply of original products, consumer ignorance, globalisation and trade liberalisation .

It must be remembered that globalisation and the attendant trade liberalisa-tion policies adopted in the 1980s by many developing countries, including those of Eastern and Southern Africa, have made it possible for counterfeit products to reach hitherto unknown markets .

Digital technology has contributed immensely to the proliferation of pirated software, audio and audiovisual products which perform as well or almost as well as the original, genuine products but sell at a fraction of the cost . Their

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circulation channels are also more widespread among the low-income segments of the population, where the genuine products do not reach – and if they do, they are normally too expensive . This is the affordability constraint .

These factors have thus encouraged the production, importation and sale of counterfeit and pirated products in the Eastern and Southern Africa (ESA) region . The range of cheap and substandard products supplied through foreign and local traders and manufacturers is broad and continues to expand . Almost all types of products have fallen prey to counterfeiting: dry-cell batteries, alco-holic beverages and fruit juices, shoe polish, toothpaste, toothbrushes, soaps and detergents, ballpoint pens, books, electrical and electronic items, perfumes, clothing, footwear, cosmetics, pharmaceuticals, automotive spare parts, com-puter software and hardware, audio hardware, audio- and videotapes, CDs and many others .

The unchecked trade in counterfeit and pirated products in the ESA region is attributed to several factors, including the following:

the lack of specific anti-counterfeiting and piracy rational legislationQQ

the lack of a national or regional policy and strategy on combating counter-QQ

feiting and piracyconsumer ignorance on the risks involved in the use and consumption of QQ

counterfeit or pirated productswidespread poverty resulting in low purchasing power, and thus the quest for QQ

cheap but low-quality productscorruption, particularly at entry pointsQQ

limited (or a total lack of) cooperation and coordination between institutions, QQ

both public and privatea lack of appreciation by the judiciary of the enormity of the problem and its QQ

negative impact, leading to lacklustre and half-hearted enforcement of exist-ing lawsneglect by brand owners to protect their brands by registrationQQ

a trade-liberalisation regime which encouraged the elimination of import QQ

restrictions and controls7

There are many reasons why there are many counterfeit products in the region . For example, some importers, traders, consumers, and political leaders took ‘market-based economy’ to mean ‘free economy’ . As a result, some leaders thought it would not be prudent to act on counterfeits because they would appear

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to be interfering with the market economy . The appropriate legal framework and enforcement to support the market economy was absent at the initial stages, es-pecially in the early 1980s . As a result, trade liberalisation and even privatisation appeared to bring chaos .

Second, people who trade in counterfeits are more or less organised criminals, who make huge profits which they use to interfere with the effective enforcement of anti-counterfeit laws and regulations . The problem of counterfeiting has been reinforced by weak legislation that has not been properly enforced, weak national drug regulation enforcement and inadequate and generally unknown reporting systems for cases of suspected counterfeit goods .

Third, the region has highly porous borders with little surveillance . Given this phenomenon, it is no surprise that unofficial routes do exist alongside official ones . The ability of state institutions to police or regulate the conduct of persons living in such areas or using such routes is very limited . Furthermore, any goods actually impounded may still enter the market due to large-scale corruption .

Fourth, poverty and a lack of consumer awareness of the effects of counter-feits are also responsible for rampant trade in counterfeit goods . Consumers are unable to distinguish between counterfeit and genuine goods . Some of the fakes are so well made that even with training or conducting an analysis, it is impos-sible to distinguish them from the real thing . It is common for a shopkeeper to ask customers whether they want a genuine (original) item or the ‘ordinary’ one – which could be a counterfeit or substandard good . Unfortunately there is a price difference – the original usually sells at twice or three times the price of the counterfeit . The preference for such products is driven by poverty, which is rife in the region .

The geographical spread of counterfeit products is very wide, encompassing most of the countries in the world . However, though the destination for coun-terfeit products is worldwide, the source of most counterfeit products is con-centrated in a few countries . For example, the source countries for counterfeit products destined for the European Union (EU) are Poland, Turkey, Thailand and the Czech Republic . In the case of those earmarked for the USA, the sources are China and South Korea .8

In the case of the ESA region, the most frequent sources of counterfeit prod-ucts are: China, India, the UAE, Indonesia, Singapore, Pakistan, Hong Kong, Korea, Thailand, Bahrain, Taiwan, Malaysia, Burma, Kenya, South Africa, Tanzania, Mozambique, Malawi, Zambia and Chile . The dominance of Asian

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countries in the list is a reflection of their strong industrial base, coupled with their worldwide trade links .

In terms of magnitude, it is estimated that counterfeiting represents between 12 and 15 per cent of world trade . Total value has increased rapidly, as a general trend; from $5 .5 billion in 1982 to $200 billion in 1995, $450 billion in 2006 and $750 billion in 2007 .9

This global trend seems to be reflected in the ESA region . For example, in the case of East Africa it is estimated that 15 to 25 per cent of the current total domestic revenue is lost through counterfeiting . It is further claimed that ‘coun-terfeiting/piracy is endemic in the East African Community (EAC) region and only rivals corruption in scale, magnitude and socio-economic impact’ .10

The above global and regional statistics not only illustrate the extent of the counterfeiting problem, but also emphasise why countries need to take action to fight this crime .

THe IMPACT oF CouNTeRFeITING

The broad pictureIn analysing the impact of counterfeiting on an economy, four categories of costs have been identified . These costs impact on victim countries in a number of dif-ferent ways . The first set of costs is to the right-holder, who suffers a direct loss in sales because of being in direct competition with counterfeiters . The right-holder also incurs loss of goodwill, as consumers are deceived into believing that they have bought a genuine product .

The second set of costs is to the countries where counterfeiting takes place . These costs are both tangible and intangible . The producer of genuine and repu-table products might become reluctant to invest in countries where counterfeit-ing is rife, resulting in reduced direct foreign investment (DFI), missing out on foreign technology, job losses, loss of foreign exchange, tax losses and hampered inventiveness .

The third set of costs is to countries where counterfeits are sold . Such costs range from job losses to missed sales opportunities, lost tax revenue, foregone investment opportunities and increased outlays for investigation, enforcement and litigation .

The fourth set of costs focuses on the consumer, who not only pays an exces-sive price for an inferior product, but also suffers the costs of health and safety

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associated with the purchase and consumption of poor-quality products . Another social cost to society is the money laundering of the proceeds of counterfeiting, which often goes towards financing other crimes, becoming a source of social insecurity and instability .

ExamplesBelow are some examples from the region to illustrate the impact of counterfeiting .

Nice House of PlasticsQQ , a Kampala-based manufacturer of toothbrushes, among various other products, recorded a loss of business to the equivalent of two million toothbrushes to counterfeits in 2001 . This nearly led to the closure of the factory .Eveready (EA) Company LimitedQQ , a dry-cell manufacturer based in Nairobi, has been forced to undertake prohibitive costly anti-counterfeit measures in the last five years to reduce the very high incidence of fake dry cells prevalent in the market .DIMAC PVCQQ , a manufacturer of PVC pipes in Burundi, is facing collapse due to the proliferation of both counterfeit and substandard pipes being imported into the country, allegedly from Uganda, Tanzania and Kenya . According to the Chairman for Burundi’s Association of Manufacturers, to date the company has lost 70 per cent of the market share to counterfeiters and im-porters of substandard products, despite investing $200 million in 2008 .The Kenyan music and film industriesQQ are almost collapsing due to piracy, which is estimated to be above 90 per cent for every kind of copyrighted work .Microsoft Corporation (East Africa) QQ estimates that 80 per cent of all software installations in the EAC region are pirated, resulting in an estimated loss of $100 million annually . According to a study conducted by the International Development Corporation (IDC) research group, reducing software piracy on personal computers over the next four years in Kenya could create a stronger information technology sector, generating an additional 1 600 new high-paying jobs and contributing $134 million to the economies of the EAC partner states .A number of manufacturing companies in the regionQQ have closed down due to the proliferation of counterfeits . Examples include GlaxoSmithKline, the global pharmaceutical giant, which closed its production line in Nairobi and opened a sales office instead . Sara Lee, the manufacturer of Kiwi shoe polish,

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reduced its production capacity to below 40 per cent due to unfair competi-tion from counterfeits .HACO IndustriesQQ , a Nairobi-based manufacturer of the well-known BIC ball-point pens, estimates that it loses over $1,4 million per annum to counterfeits on this product line . The company estimates that it has lost 80 per cent of its market revenue in Tanzania due to counterfeiting and 25 per cent in other parts of the region .

The above concrete examples of the negative effects of the counterfeiting, con-tained in the EAC Report (2009), have raised concerns from policymakers, business communities and civil society and have thus triggered efforts to scale up awareness and lobbying . In this context, the Confederation of Tanzanian Industries (CTI) estimates that the Government of Tanzania is losing $500 yto $800 million per year from tax evasion related to counterfeiting . Likewise, the Standards and Regulatory Committee of the Kenya Association of Manufacturers (KAM) estimates that counterfeit and substandard products cost the East African region over $500 million in lost government tax revenue annually .11

eFFoRTS To CoMBAT CouNTeRFeITING ANd PIRACyIn this section we take stock of the policy, legal and institutional frameworks and related efforts which have been undertaken by governments, in collaboration with the private sector, to combat counterfeiting and piracy in the region . All the countries in the region belong to one or more regional economic arrange-ments, namely the EAC, the Southern Africa Development Community (SADC), the South African Customs Union (SACU) and the Common Market for Eastern and Southern Africa (COMESA) . The member countries of these regional blocs are parties to the World Trade Organization’s (WTO) Trade-Related Aspects of Intellectual Property Rights (TRIPS) Agreement . Part III of this Agreement requires the domestic laws of all WTO members to be compliant with the Agreement .

Part III of the Agreement establishes the following minimum standard in respect of national measures and procedures for the enforcement of intellectual property rights (IPRs):

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Civil proceedings such as injunctions, damages, evidence, right of informa-QQ

tion and provisional measures must be available to right-holdersCriminal proceedings for commercial-scale trademark and copyright in-QQ

fringements must be availableBorder measures should be taken to prevent the commercialisation of prod-QQ

ucts that infringe trademarks and copyright

The TRIPS Agreement establishes only the minimum standards to be implement-ed according to the mechanism determined by each member country . However, it does not attempt to harmonise procedural rules for the enforcement of IPRs, though it does leave countries to use inbuilt flexibilities to achieve the stated ob-jective . The outcome of these flexibilities is the variety of legal and institutional frameworks that may be observed in the ESA countries .

On the policy front, neither on the regional nor on a country level is there a clear policy on counterfeiting and piracy . However, currently the EAC is making an effort to craft a regional policy on anti-counterfeiting, anti-piracy and other property rights violations . The process has just begun and is far from completion; but once completed, it should be able to inform the enactment of an EAC-wide legislation to address the problem, as well as the creation of a uniform or harmo-nised institutional enforcement framework .

Most of the countries in the region have a variety of pieces of legislation aimed at protection of IPRs as well as for combating substandard products . These include copyright laws, trademark laws, industrial design and patent laws, industrial property Acts, trade descriptions Acts, weights and measures Acts, merchandise marks Acts, patent Acts and regulations, fair trade and consumer protection Acts, and others . Of the sample countries, only Kenya has in place a comprehensive anti-counterfeit Act, the Anti-counterfeit Act of 2008 . One of the key features of the Act is the establishment of an independent anti-counterfeiting agency, the principal functions of which include the following:

To enlighten and inform the public on matters relating to counterfeitingQQ

To combat counterfeiting, trade and other dealings in counterfeit goods in QQ

Kenya in accordance with this ActTo devise and promote training programmes on combating counterfeiting; andQQ

To coordinate with national, regional and international organisations in-QQ

volved in combating counterfeiting12

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The existence of this legal and regulatory framework provides the necessary parameters within which enforcement can be pursued . However, enforcement has been the weakest link in the chain, because of a number of factors ranging from outdated laws and poor coordination across institutions to lack of critical resources, both financial and human .

In terms of institutional framework, there are a number of institutions active in this area of counterfeiting . They include revenue authorities, copyright boards, bureaus of standards, industrial protection institutions, commercial courts, ministries of industry and trade, business registration and licensing agencies, food and drug authorities, fair competition commissions and tribunals, councils for science and technology, and ministries of the interior . Despite these institu-tions (for both regulation and enforcement), effective enforcement still does not happen because of a lack of coordination and resources and a low level of aware-ness . Table 1 displays institutional frameworks in a sample of countries .

Table 1: Institutional framework for counterfeit products in sample countries

Country Institutions

Kenya Kenya Industrial Property Institute (KIPI)Weights and Measures DepartmentKenya Copyright BoardPharmacy and Poisons BoardKenya Bureau of Standards

Rwanda Rwanda Revenue AuthorityRwanda Bureau of StandardsCommercial CourtsMinistry of Trade and Industry

Tanzania Business Registrations and Licensing Agency (BRELA)Tanzania Food and Drugs Authority (TFDA)Fair Competition Commission (FCC)Commercial CourtTanzania Revenue Authority (TRA)Tanzania Bureau of Standards (TBS)

Uganda Uganda National Bureau of Standards (UNBS)Uganda Council for Science and Technology (UNCST)

Source: Compiled by author

What appears to be conspicuously absent in the above legal and regulatory framework, as well as in the institutional framework, is an emphasis on the money-laundering aspect of counterfeiting and piracy . This omission seems to be informed by the low level of awareness on money-laundering issues in the region

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and points to a need to scale up awareness efforts on this aspect to at least those accorded to counterfeiting and piracy .

CoNCLudING ReMARKSThe socio-economic policies adopted by the countries of ESA since the 1980s have allowed an unprecedented influx of counterfeit commodities to the regional economy . The scope of counterfeit products is broad and continues to widen, ranging from software and clothing to sportswear, perfumes, toys, spare parts and pharmaceuticals .

Counterfeiting is intricately linked to money laundering in the sense that it is a predicate crime . The manufacturers, importers and wholesalers of counterfeit products can easily launder the proceeds of crime through the financial system – but more so outside the system, due to the dominance of cash transactions in the ESA economies . It is no wonder that counterfeiting has attracted both organised and petty criminals, who have not only derived huge profits from this trade but also used it both as a means of investing the proceeds of crime and to finance other crimes .

The costs of counterfeiting are huge and have serious adverse socio-economic effects on the ESA economies . They range from those affecting the rights-holder, the countries where counterfeiting takes place and the countries where counter-feits are sold, to those affecting the consumer who pays the cost of unfair com-petition, with its attendant health and safety risks .

Cognisant of the fact that counterfeiting is a serious problem with wide-ranging social and economic effects, governments in the ESA region have put in place a number of legal and institutional arrangements to protect their econo-mies against counterfeiting . However, these arrangements or measures have not been effective, for a number of reasons . First, most of the countries in the region lack a clearly defined national policy on counterfeiting and piracy to inform both the strategy and the legal framework for fighting counterfeiting . It is thus im-portant to formulate such a policy; not necessarily from a national perspective, but certainly from a regional one . In this regard, the EAC experience should be emulated by SACU, SADC and COMESA .

Second, the existing legal framework appears to be either inadequate in terms of scope, or outdated . It is essential for enforcement that the legal regime is com-prehensive and the laws are updated to respond adequately to the demands of time .

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Third, the anti-counterfeiting organisations, currently in place are faced with the problem of coordination with other domestic organisations working in this area . The result of this is that organisations do not complement each other or synergise their actions, resulting in poor planning and enforcement .

Fourth, cooperation between key stakeholders has been weak – domestically, regionally and globally . There is a need to promote collaboration between the public and private sectors by working more closely with manufacturing and trade associations to train and raise the awareness of stakeholders, promote adequate legislation and enforcement, and establish a credible data base for providing in-sights into the scope and impact of counterfeiting .

As counterfeiting and piracy are global problems, international cooperation is imperative . There is a need to interact actively with international and regional institutions such as the WTO, the World Intellectual Property Organisation (WIPO), Interpol and the World Customs Organization (WCO) . Collaborative and cooperative efforts in terms of sharing information, resources and experi-ence should enhance enforcement and ultimately discourage the production, sale and consumption of counterfeited and pirated products .

NoTeS

1 All references to ‘$’ are to US dollars unless otherwise indicated .

2 OECD, The economic impact of counterfeiting and piracy, Paris: OECD, 2007 .

3 WHO, 2005 . Report of WIPO/OECD expert meeting on measurement and statistical issues, WIPO/OECD, 5 .

4 Ibid, 5 .

5 F S Ringo, The trade-related aspects of intellectual property rights agreement in the GATT and legal implications for sub-Saharan Africa: perspective policy issues for the World Trade Organization, Journal of World Trade 28(6) (1994), 25–37 .

6 OECD, The economic impact of counterfeiting, Paris: OECD, 1998, 3 .

7 East African Community, Draft EAC policy on anti-counterfeiting, anti-piracy and other intel-lectual property rights violations, Arusha: EAC, 2009 .

8 OECD, The economic impact of counterfeiting, 1998 .

9 OECD, The economic impact of counterfeiting and piracy, 2007 .

10 EAC, Draft EAC policy, 17 .

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11 Ibid, 22 .

12 Ibid, p 24 .

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Chapter 6

Laundering the proceeds of privatised violenceAngolan and DRC experiences

Leon Kukkuk

BACKGRouNdThe fall of the Berlin Wall in 1989 meant the end of superpower patronage to client governments and movements worldwide, creating a power vacuum whose inevitable results included the spread of violence and the emergence of disparate groups, ostensibly fighting in the name of nationalism, ideology, religion or eth-nicity, but now seeking their finance through local taxes, plunder and pillage . The language and forms of an earlier period may still have been used, but they were now mobilised for a new populist form of ideology, a way to maintain or capture power for economic benefit . New wars1 could almost be described as the model for the contemporary informal economy, in which privatised violence and unregulated economic and social relations feed on each other .

Economic agendas have underpinned wars throughout history, but Clausewitz, in his work On War in 1832, viewed war as a rational instrument of national policy; something to be pursued with a well-defined set of political objectives, which included the strengthening of governance and the building of national institutions . Wars were expensive, which led governing authorities to create professional armies, then centralise and expand institutions to raise the revenue required to wage war . War thus led to the transformation of governing institutions, the expansion and clear delineation of territory, and the absorption, subordination or defeat of all overlapping authorities – economic (for example, crime groups) and political (for example, warlords) .2 Even as war became more extreme and terrible, the social contract was extended, reaching its logical

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conclusion during the Cold War . Essentially, during this period, there were un-precedented gains in economic and social rights, even as the risks were dramati-cally extended .

Since the end of the Cold War, however, the political and economic certain-ties of previous decades have disappeared or been undermined . In spite of this, there was initially an underlying current of optimism, of an ‘unabashed victory of economic and political liberalism’, as expressed in Francis Fukuyama’s quasi-satirical essay, The End of History? . Here ‘[t]he state that emerges … is liberal insofar as it recognizes and protects through a system of law man’s universal right to freedom, and democratic insofar as it exists only with the consent of the governed .’3

ANGoLAIt was in this context that the first signs of an end to the protracted Angolan war appeared . The Bicesse Peace Accord, signed on 31 May 1991, put forth a peace process that led to the holding of presidential elections in 1992 . It appeared as though a new era of peace was beginning . For nearly thirty years Angola had been in a state of almost continuous war . On 4 February 1961 an armed struggle against Portuguese colonial rule began . On 25 April 1974 the fascist government in Portugal was overthrown in a coup d’état by the military . Portugal’s colonies were more or less abandoned to their independence . Even before the former colonial power had withdrawn from its colony, however, war broke out among the various liberation movements: the Popular Movement for the Liberation of Angola (MPLA), the National Front for the Liberation of Angola (FNLA), and the National Union for the Total Liberation of Angola (UNITA) . More than 50 000 people died in the fighting . An estimated 300 000 Portuguese, from a population of perhaps 500 000, fled Angola taking much needed skills . In addition tens of thousands of Angolan refugees fled into neighbouring countries .

Angolans gained their freedom with large parts of their territory occupied by two foreign armies, from South Africa and the then Zaire, and with external support fuelling a bitter internal conflict between the MPLA, FNLA and UNITA . Nevertheless, despite the continued flow of arms, mercenaries and funds to the armed opposition groups, most countries – except for the United States and South Africa – soon recognised the MPLA government . Angola’s political situ-ation was further complicated during the Cold War, when all world affairs were seen through the lens of the struggle between the capitalist United States and

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the communist Soviet Union . The internationalisation of the Angolan conflict witnessed the Marxist MPLA of President José Eduardo Dos Santos receiving assistance from Moscow and Havana while Jonas Savimbi’s formerly Maoist UNITA, which was now portrayed as pro-Western, received support from the United States and South Africa .

By the end of 1993, things were going badly for the Angolan government . Although the ruling MPLA had won the elections of September 1992, Jonas Savimbi, the leader of the losing party, UNITA, had cried foul and returned to war . In a short few months UNITA had taken control of 80 per cent of the country, including, for the first time in their history, major provincial cities .

Under the 1991 Bicesse Peace Agreements both belligerents were required to disarm to comply with an arms embargo in place against all parties . Nevertheless, UNITA was well armed and prepared, having hidden, rather than demobilised, its best troops . The government found itself badly wrong-footed – unarmed and ill prepared – after having complied with its part of the bargain according to the peace agreement . It had neither the arms, nor the financing, to fight back .

Funding the warAs UNITA lost formal support from its traditional patrons, the United States and South Africa, it resorted to diamond mining as its major source of income . A UN sanctions committee estimated that Savimbi made $3 to $4 billion in diamond sales between 1992 and 1999 . Furthermore, UNITA then made even more money by investing most of the proceeds in a bull market .

The UNITA diamonds-for-arms trade was focused on Europe and the Southern African Development Community (SADC) region . It was believed that, while the majority of arms bought by UNITA came from the Ukraine, compa-nies based in Europe and Southern Africa often made the shipments . In Zambia, Uganda, Rwanda, Burkina Faso, Zaire (during the Mobutu era) and Côte d’Ivoire people in high positions provided protection to UNITA . In exchange for dia-monds, Togo was used as a base for smuggling arms and fuel into Angola and diamonds out of the country .4 From 1992 to 1994, UNITA embarked on a ‘war of the cities’, displacing several million people and killing an estimated 100 000, about the same number as were killed during the preceding 16 years of conflict .

The only, somewhat belated, change in favour of the government was the eventual diplomatic recognition of the MPLA government by the Clinton ad-ministration, which subsequently, in October 1992, also partially lifted the arms

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embargo against Angola . It was also lifted by Russia and the United Kingdom . France continued to prohibit the sale of arms to both sides .

Angolan President dos Santos nevertheless requested assistance from French President Mitterrand . Although the call was made by the Angolans in the inter-est of their own survival, to the French it provided a potential solution to their increasing paranoia about likely United States domination of Angola’s oil sector . However, there was a major barrier to official French help for the Angolan gov-ernment, because President Mitterrand was going through his second period of power sharing with the centre-right government of Prime Minister Edouard Balladur . Any official military assistance from the French government to Angola would require the support of the French Minister of Defence, who at that time was one of the strongest supporters of UNITA in Paris . Official channels of support were thus closed .5

Jean-Christophe Mitterrand, the French president’s son, allegedly then asked businessman Pierre Falcone to provide a solution to Angola’s weapons and finance requirements which would ensure that supplies did not come directly from France . Falcone headed a group of companies under the umbrella Brenco International . He formed a partnership with Russian émigré, businessman and arms dealer, Arcadi Gaydamak . Thus was set in motion the scandal that became known as Angolagate .

Both men travelled to Angola where they were provided with Angolan dip-lomatic passports, after which they operated as de facto Angolan officials . The purpose of their cooperation related to the provision of oil-backed loans to Angola, and the supply of weapons . Over the years, Falcone and Gaydamak re-portedly put together a series of complex arrangements to supply arms to Angola, through transactions worth at least $633 million . The deal was worth one third of the 1994 Angolan national budget . In order to finance these supplies, they were involved in a deal to renegotiate Angola’s $5,5 billion debt to Russia . According to a February 2002 article in the Geneva publication Le Temps, ‘in 1996, the pair [Gaydamak and Falcone] negotiated the re-purchase of Angola’s debt to Russia: the latter was intended to receive US$1,5 billion instead of the US$5 billion [sic]owed by Luanda’s Government .’ The paper continued, ‘the Angolans agreed to reimburse this amount, thanks to the country’s oil revenues’ . It also reported on several Swiss-based companies taking part in the operation: Glencore in Zug (owned by Mark Rich, an American) traded the oil, while Paribas, among a number of other banks, advanced the money promised by Angola .6 The UN and Global Witness had both launched a much publicised campaign against conflict-

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diamonds . They completely ignored, until years later, the role of oil in financing the Angolan military campaign .

Thus, what was intended as an official request by a legitimate government exercising the right to self-defence against a threat by rebel insurgents was in essence privatised . The deal entered into with Gaydamak and Falcone resulted in the full-scale appropriation and laundering of state assets through paral-lel budgets and over-priced arms deals – a process of deliberate indebtedness through mortgaging of future oil production . As the war became privatised, it also became simply a struggle to gain access to or control of the state . In other words, as the state became privatised, shifting from being the main organisation for the regulation of society towards being an instrument for the extraction of resources by various privileged networks, access to state power became simply a matter of inclusion in or exclusion from access to the wealth of the nation . It is clear that arms dealers who once could only operate with the knowledge and the sponsorship of superpowers had become freelance . Since the international community had not anticipated the rise of such an industry, there were few laws to monitor it . The arms dealers could slip through national jurisdictions for years or decades . In the new world order, there was no restraint on business . No government would pursue them . In fact, although officially unprotected by any government, insofar as they could still rely on governments, it was only to turn a blind eye . What is extraordinary is that much arms trading is not illegal . It may be considered immoral to arm certain rebel groups or governments, but there are not many legal impediments to doing so .

Over the years the arrangement became what Global Witness would describe as a clear ‘case of political and economic disorder brought about by the civil war [that] has been deliberately exploited to enrich the ruling elite’ .7 Rafael Marques de Morais considers that

France has been an important international stage for the corruption of the highest ranking officers in Angola [and] Western commercial diplomacy has been playing an important and aggressive role in legitimising the lack of distinction between public duties and private interests, in the country, which have resulted in the de facto privatisation of the sovereign tasks of the State .8

Going further than simply the Angolan state, Global Witness conclude that:

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France and others have treated Angola as a ‘judicial no-man’s land which, in the name of mutual political interests, was to stay for eternity a land of unpunished crimes’ . As a result … Angola [was taken] to the cleaners – a third of the state budget for 2001 appears to be missing, and may perhaps be located in offshore laundromats .9

In December 2000 Pierre Falcone was arrested on charges of arms trafficking and an international arrest warrant was issued for Arcadi Gaydamak, who disap-peared to Israel . Falcone is a French citizen and his efforts to facilitate the pur-chase of arms for Angola were made with the financial support of a French bank, Paribas . He was thus required to ask permission from the French Defence and Foreign Affairs Ministries before going ahead with the deals . Since he had not done so the French ordered his arrest .

The French prosecution had uncovered influence peddling, money launder-ing and illegal arms-for-oil deals . It implicated the Angolan government and members of the French political establishment, as well as prominent interna-tional arms dealers . Furthermore, the whole saga seemed to involve, in some way or another, a veritable who’s who in world politics – former US President Bill Clinton and his wife Hillary were linked to the deal by the press, and Mark Rich, the rogue investor, who was on the wanted list in America before being pardoned by Bill Clinton, struggled to break free from accusations . The French accused included Francois Mitterrand’s son, Jean-Christophe, his former advisor Jacques Attali, former Home Secretary, Charles Pasqua, former magistrate and UMP representative, Georges Fenech, and renowned author, Paul-Loup Sulitzer .

In September 2008, after more than ten years of investigation, the case finally came to trial, based on a 486-page indictment prepared by prosecutors over seven years . It describes a scheme organised by the two central suspects who proceeded to draw in dozens of other people, especially prominent French civil servants and politicians, to facilitate the deals . In return, it is alleged, they received kickbacks, bonuses or bribes . Although the court case can be seen largely as a settling of scores by the French political elite, there are also claims that French officials set up a network of parallel diplomacy to try to tap into Angola’s vast oil reserves . A verdict was initially expected by March 2009 . This was subsequently postponed to October 2009 .

From the start the whole process suffered from high level interference . French President Nicolas Sarkozy, in an attempt to improve strained relations with Angola and pursue business opportunities for French companies and a larger role

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in the oil industry, worked hard to scuttle the trial . The French Defence Minister, Hervé Morin, wrote to Falcone’s lawyers to say that the arms deal did not infringe French laws since the weapons did not cross French territory .10 The French justice system found his argument erroneous, concluding that, since the signing of the contracts occurred in France, French jurisdiction applied . A lawyer representing Angola, Francis Teitgen, argued on the first day of the trial that it was violating his country’s defence secrets and was interfering in matters that are within the Angolan state’s exclusive sovereignty .11

What is at stake here must be seen in the current global context – it is crucial to understanding this new political economy of war . Globalised and privatised arms markets, convoluted transnational interests, loyalties and internationalised interventions are all integral to new wars . They result in the development of a transnational civil society that erodes the old distinctions between public and private, military and civil, internal and external as well as legal and illegal, even the very concept of war and peace:

[W]hat one could call the ‘them’ and ‘us’ components of this new security terrain – that is, those systems of resistance and their opposing forces of regulation and intervention – have to varying degrees both assumed a networked and non-territorial appearance . While states and their security apparatuses remain pivotal, in both camps they situate themselves within and operate through complex governance networks composed of non-state and private actors .12

Global Witness believes that the ‘real story of the financing of Angola’s war effort goes far beyond 1993 and 1994, and for that matter, beyond simply French and Angolan national interests; perhaps even to the heart of international policy of oil interests’ .13

THe deMoCRATIC RePuBLIC oF THe CoNGoAngola does not fit neatly into the stereotype of the weak state exploited by outside interests, and in this case the political ideology behind the extended war eventually dominated . With the death of Jonas Savimbi on 22 February 2002, the country embarked on a process of political and economic integration into the international mainstream . Angolagate slipped into the past . Although it has been reported on extensively in the French press for more than a decade, much less

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reported on is what is in fact but an extension of the same underlying dynamics into the Democratic Republic of the Congo (DRC), an extension, not only at the heart of the international policy of oil interests, but of resource extraction as a whole .

Business interests – some of them rather dubious – stand in for what should be government-government dealings between sovereign nation states . This is espe-cially true when countries are under stress, ruled by chaotic and corrupt regimes and when a lack of enforceable international instruments makes official chan-nels closed, slow or controversial . Much international trade exists in unobserved vacuums . In the DRC this seems to have come to full fruition: governments and corporations compete on almost equal terms to plunder the country’s resources . The DRC now conjures an image of unprecedented wealth and opportunity im-plausibly juxtaposed with poverty and the indifference, neglect and opportunism of the host government . It is an image of unparalleled rewards and undreamed of riches, yet suffering, sometimes in an extreme form, from deficiencies common to other African states such as crumbling bureaucracies, decaying infrastructure, irregular administration, and the virtual abandonment of large stretches of na-tional territory .

Civil warWith US and European backing, the kleptocratic Mobutu Sese Seko ruled the DRC (then Zaire) for more than thirty years . During his time Western corpora-tions had cheap and unregulated access to Congolese resources . As allegiances shifted at the end of the Cold War, his existence became an embarrassment . When the Mobutu excesses finally outweighed his strategic importance and with his health failing, he was dispatched in a coup backed by Rwanda and Uganda, led by Laurent-Désiré Kabila, in 1997 . Several countries, including Zimbabwe, Angola, Chad and Namibia fought on the side of the new Kabila government and his rebel allies against rebels in the east and soldiers from Rwanda, Uganda and Burundi . When, in July 1998, Kabila tried to drive out the Rwandan army, it ignited the Second Congo War, as eight African nations (DRC, Uganda, Rwanda, Burundi, Namibia, Zimbabwe, Angola, and Chad) as well as a number of rebel armies (fluctuating between 20 and 25, most of them militarily weak and lacking political legitimacy) engaged in the largest interstate war in modern African history – ‘Africa’s World War’ . Alliances, militias, rebels and zones of conflict were constantly shifting . At the height of the conflict, 60 per cent of the country

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was under foreign control . This is perhaps the first instance of an African war that was not simply an internal anti-regime war . Instead, it was characterised by the complex interaction of regional, national and local dynamics, each of these being influenced by and feeding off connections to global strategic political and economic interests .

Following the assassination of Laurent Kabila in January 2001, his 29-year-old son, Joseph Kabila, took power . He had less than five years of permanent resi-dence in the country . Georges Nzongola-Ntalaja considers that ‘a regime with no legitimacy at home, and itself a veritable insult to the Congolese people, rushed to seek legitimacy abroad’ .14 Disturbingly, Kabila quickly claimed that ‘[he] invited the business community to go into the Congo just like Stanley did way back in the 1800s and … told the business community … that they had to have a spirit of adventurism – go see what is happening look at the opportunities and of course install yourself ’ .15

After four years of fighting and a series of failed mediation attempts, the All Inclusive Peace Agreement (Pretoria II) was signed on 17 December 2002 by the government of Joseph Kabila and all the Congolese rebel groups, leading to the formation of the Transitional National Government (TNG) . Yet there are still sporadic outbreaks of violence, as Western interests and opposition forces battle to exploit Congolese resources . The first democratic elections in four decades were successfully held in 2006, ending the mandate of the transitional govern-ment and heralding the formation of a new government in February 2007 . Even though the war is officially over, the current situation can best be described as a violent peace . Dozens of rebel armies remain fighting in the east, competing – with one another as well as with the Congolese army – for products that are sold largely to the international community . The Mission d’Organisation des Nations Uniées au Congo (MONUC) had adopted a more forceful and proactive approach in early 2005 that helped to improve the security situation in the eastern prov-inces to some extent . Nevertheless, the UN as a result became involved in the very ambitious tasks of peacemaking, peacekeeping and peacebuilding; tasks for which experience shows that positive, lasting results are ambivalent at best .

The rape of the CongoUnlike Angola, where the war included competition for the wealth provided by oil and diamonds, the DRC offers a whole basket of riches including timber, copper, diamonds, cobalt, oil, gold, silver, zinc and coltan . Coltan is especially important,

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as it is used in cell phones, computers, turbine jet engines and Tomahawk cruise missiles . The DRC became an intersection of competing resource extraction networks that were established during the years of conflict, each one focused on Uganda, Rwanda and the Congolese government . Each governing entity provides armed forces . These various armies, militias and other militant factions are almost all backed by the US and various European governments . Rwanda and Uganda are both strongly supported by US interests .

A characteristic of these modern wars is complexity . This is an important new dimension, because in the vast majority of cases there are several and varied factions involved, as well as a number of external parties that may provide con-sultation, funding, technical support, direct military involvement and assistance . The various actors – states, remnants of states, multi-national corporations, local businesses, traders, private security companies, paramilitary groups, liberation movements and rebel groups – all depend on continued violence for both politi-cal and economic reasons .

A number of reports by the Panel of Experts on the Illegal Exploitation of Natural Resources and Other Forms of Wealth in the Congo, appointed by the UN Security Council in 2000, identified the three elite networks that were selling the products of war on the world market through unscrupulous transnational companies . The UN reports describe the actions of rebel forces in the region as acts of ‘plundering, racketeering and criminal cartels with worldwide connec-tions that have become commonplace’ .16 They name 119 companies involved in mining operations and transportation of minerals, including 12 companies based in the United Kingdom, 9 companies from the United States, 21 companies based in Belgium, 12 in South Africa, 4 in Germany, 5 in Canada and 2 in Switzerland .17 Many of the 29 companies that were found in violation of law, though registered in Congo, Rwanda, Uganda and Zimbabwe, were really just front operations for Western companies operating in conjunction with local Ugandan, Rwandan and Congolese government officials .18 In total there are 54 persons for whom the Panel recommended a travel ban and financial restrictions .

The mining sector abounds with players and operators who take advantage of war conditions to stake their claim, often with the consent of state authorities . Both state and non-state armed actors profit through the entire supply chain of resource exploitation, by levying taxes on mineral exports, by selling minerals for their own profit, and by trading mining rights for financial and military support . Artisanal diggers, often under military control, sell ore to Congolese traders who, in turn, sell it to transnational companies or export it mostly to South Africa

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or China . Middlemen (comptoirs) act as intermediaries between Congolese traders (négociants) who enter the mines to do business with the diggers, and international traders who sell the minerals to processing plants in different parts of the world . Due to their intermediate position between the local level and the global level, the comptoirs are generally well informed and can exploit the latest developments on the global commodity market, bypass attempts at regulation, and weave their way around the military, political and economic situation in the DRC . Some comptoirs are directly or indirectly controlled by armed groups hoping to establish a direct link with the global economy .19 As a consequence the Congolese state loses large amounts of revenue from the fraudulent export of its mineral wealth . Perhaps more importantly, as Ricardo Soares de Oliveira writes, ‘the mark of decades-long exploitation is to be found not in easily graspable items but in the more sedimentary, elusive imagination of those who live with its con-sequences’ .20 The main question then, as Georges Nzongola-Ntalaja asks, in the context of Belgian King Leopold’s exploitation of the country, still relevant in the 21st century, ‘is not so much who controls this resource-rich country as who should be excluded from such control’ .21

What is essential in these Congo resource operations is the close participa-tion by a vast assortment of Western business interests, all forming alliances with various governments . The alliances and affiliations form intricate webs within the three resource extraction networks . These operations, that involve several tens of millions of dollars and more, can only succeed with the aid of a sophis-ticated network of Western banks, lawyers, accountants, middlemen, tax havens and gatekeepers . Foreign corporations with financial interests in the country boast market values running into hundreds of millions of dollars, sometimes billions . While the UN Panel of Experts have investigated and reported fairly ex-tensively on certain illegal criminal networks and activities in Congo, they never attend to the top-level deals brokered behind closed doors by executives, diplo-mats and politicians . Georges Nzongola-Ntalaja’s criticism of the Congo Reform Association of the early 20th century can as easily be applied to the current UN reports: ‘They were still dealing more with the symptoms of the Congo problem, the atrocities and a particular form of colonial practice responsible for them, rather than with its root causes, the subjection of a people’s entire social process to foreign domination .’22 The reports also fail to draw any links with global finan-cial markets or regional and international crime syndicates . None of the reports provide answers to a number of important questions:

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What standards of corporate conduct are governments prepared to tolerate in QQ

conflict and post-conflict countries? Are the available implementation procedures of the Organization for QQ

Economic Cooperation and Development (OECD) guidelines being adhered to for monitoring and enforcement, especially with regard to bribery, corrup-tion and money laundering? Can the financial transactions be traced from origin to final destination, in QQ

a manner that clearly identifies the original source of the wealth and ensures that this wealth is not tainted by human rights abuses and violence? Do banks abide by the Wolfsberg PrinciplesQQ 23 that seek to deny the use of banking services for ‘criminal purposes’? Do banks take precautions to accept only those clients whose source of wealth QQ

and funds can be reasonably established to be legitimate?

In September 2009 a consortium of non-governmental organisations suggested that ‘illicit financial flows include illegal tax evasion, abusive transfer mispricing, and the transfer of corruptly-acquired funds into bank accounts abroad, which should be prevented by anti-money laundering regulations’24 as at least part of the solution .

MoNey LAuNdeRINGFaced with an almost complete absence of authoritative information regard-ing money laundering, this chapter employs a qualitative approach . Such an approach may well have analytical strengths, but it should not be accepted as sufficient simply because there is no quantitative alternative . It should be remem-bered that even the little quantitative information that does exist remains the subject of broad speculation . Even statistics for legal economic activity are rarely more than guesses .

Although corruption and inadequate supervision may leave the banking systems in countries such as Angola and the DRC vulnerable to money launder-ing, the overall lack of well developed financial systems limits their usefulness as money-laundering centres . It is more likely that international covert financial networks and the money-laundering infrastructure of known bank secrecy havens are used .

Laundering the proceeds does not necessarily have to pass through the banking systems of small islands and tax havens . Loopholes, gaps and an attitude

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of tolerance make established financial markets and growing economies with good political and social infrastructure just as susceptible as laundromats for funds that have been obtained from resources tainted by gross human rights abuses, violence and exploitation:

From 1997 to 2001, US$774 million of Angolan oil revenues were paid into an account at UBS Geneva belonging to Abalone Investment Limited, a shell company run by businessman Pierre Falcone and his associate Arcadi Gaydamak . This sum was intended to repay Angola’s bilateral debt with Russia, but only US$161 millions were transferred from Abalone to an account marked Russian Ministry of Finance . Around $600 million was transferred to accounts belonging to Falcone, Gaydamak and a series of obscure companies, with millions ending up in the private accounts of high-ranking Angolan officials .25

Mario de Queiroz, reports that of 70 transfers in illegal commissions, 50 appear to have been deposited in Portuguese banks .26 Ana Dias Cordeiro, a journalist for the Portuguese daily Público, reported on 31 October 2005 that ‘more than 21 million dollars received by high-level officials of the regime in Luanda as a result of the illicit sales of arms from Russia to Angola passed through Portuguese banks’ .27 The state-run Caixa Geral de Depósitos (CGD) and the Banco Comercial Português (BCP), the two largest banks in Portugal, apparently received the largest sums . Contained in the Angolagate indictment a number of additional banks are listed: The Nacional de Crédito, Nacional Ultramarino (since absorbed by the CGD), Comercio e Industria, Totta & Açores, Pinto & Sotto Mayor (which forms part of the BCP) banks, the Portuguese branches of Spain’s Banco Bilbao Vizcaya and Britain’s Barclays Bank . ‘All these transfers were allegedly ordered by businessman Pierre Falcone from different bank accounts in his company, Brenco Trading Limited .’28

Bank secrecy havens facilitate illicit financial flows stemming from three overlapping sources: corruption, criminal activity and transfer mispricing, creating a criminal environment in which all sorts of crimes can thrive on the fruits of law-breaking . A number of countries intentionally create regulation for the primary benefit and use of those not resident in that geographical domain . The regulation is designed to undermine the legislation or regulation of another jurisdiction . They also create a deliberate, legally backed veil of secrecy that ensures that those from outside the jurisdiction making use of this regulation

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cannot be identified to be doing so, or alternatively receive official protection in those cases where they can be . On 1 February 2005 Global Witness complained that, although Switzerland reaffirmed its commitment to fighting corruption and money laundering, Geneva’s Public Prosecutor nevertheless inexplicably dropped a long-running corruption investigation against businessman Pierre Falcone, linked to the debt repayments by Angola to Russia . The prosecutor argued that, as the Russian Federation had made no complaint, no fraud could have been committed . Global Witness quotes anti-corruption campaigner Stefan Howald: ‘the case … throws into question Switzerland’s attempts to clean up its banking system, and threatens to turn its commitment to the international fight against corruption and money-laundering into empty rhetoric .’29

Money laundering most likely originates in the DRC in deals that initially involve some form of bartering (arms-for-resources, copper-for-diamonds, etc .) and more than likely involve the smuggling of proceeds, which is very wide-spread . Illicit diamond smuggling is very common and, as a diamond is an easily transportable and convertible commodity, it is likely that illegal proceeds from a number of different resource deals leave the country in the form of diamonds .

Tim Raeymaekers provides an interesting anecdote in an October 2002 report: Nasser Murtada, a Lebanese citizen and a courier in Antwerp’s diamond business, arrived on a Sabena flight on 14 July 2000 at Entebbe airport in Uganda . With him he had a sealed envelope containing $550 000 from an Antwerp diamond company called Nami Gems . Upon his arrival, Nasser was offered a parcel of diamonds in exchange for the money by Ismail Dakhlallah, a Lebanese diamond trader based in Kampala . However, on his way back to Kampala Ismail was stopped by a group of robbers . His money was stolen from him at gunpoint . The subsequent police report then contained vital information regarding the conflict diamond trade from DRC . It describes a complex network of conflict diamond dealers operating from the Ugandan capital to lead their operations in the DRC through the Victoria Group . According to Ismail Dakhlallah, he works through a company called ‘Beccadi Limited’ in Bugolobi (Kampala), along with another partner called Abbas Khazal . Both men used to be based in the DRC ‘to buy diamonds in Buta, Kisangani’ . Uganda officially exported $1,26 million worth of diamonds to Belgium in 2000 . Uganda does not produce its own dia-monds . The diamonds for Nami Gems were probably not declared in Uganda .30

It is also likely that resource plunderers and arms dealers have direct and indi-rect connections to regional criminal networks and money-laundering rings as-sociated with drug trafficking, smuggling operations and corruption . According

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to a team of researchers from the University of Dar es Salaam (UDSM), the Great Lakes region money-laundering cartel is part of a ‘US$500 billion global illegal cash pushing ring whose origins, typically, are concealed . Researchers have iden-tified closely-knit criminal organisations that facilitate deals in smuggling, illegal drugs, currency counterfeit and illegal foreign exchange dealings .’31

The ‘study particularly points out the Democratic Republic of Congo as the most live example of an area where money laundering openly plays a key role in aiding transactions of unscrupulous resource plunderers and gun runners in the region’ .32

Similar researches have established criminal rings have worldwide net-worked through banks and corporate affiliations who are involved in transactions intended to clean dirty money obtained from criminal activi-ties . The objective of their operations, which usually takes places in several stages, consists in making the capital and assets that are illegally gained seem as though they are derived from a legitimate source, and inserting them into economic circulation .33

The funds and profits from money laundering can have significant political and developmental costs through their relationship to legal, political, and campaign financing, luxury consumption, and other criminal activities . Arguably, legal financial activity, by contrast, is quite likely to contribute towards sustainable growth and development . While the bulk of money laundering in many coun-tries still tends to use the formal banking system, money laundering through non-banking financial institutions (NBFIs) appears to be growing in importance – through real estate transactions, security brokers, derivatives, the exchange rate market and leasing insurance companies, among others . Money can also be laundered backwards and forwards by the drug trade, drug cartels, arms trade, the political arena, political funding, grand scale procurement, budgetary cor-ruption, tax evasion and insider trading .

In many countries, especially those surrounding the DRC, informal financial institutions, such as ‘hawalas’, play a very important role . If the focus on enforce-ment, supervision, and institutional development in the formal banking (and non-banking) improves, it is important to consider that there are substitutes to the formal financial institutions for money laundering . Money laundering through the banking system is closely related to the standards of accounting and auditing in the private and financial sectors, and with the quality of the

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overall regulatory and supervisory framework . As important, however, is the nexus between money laundering and the leakage of public funds from national budgets, as well as with other forms of corruption, including ‘grand corruption’ (state capture in other words), the tendency of elite majors (companies and in-ternational corporations) and interests (including oligarchs) to shape the laws, regulations and policies of the state for their private interest through favours and illicit payments to politicians . It is counterproductive to divorce the issues of public and private sector misbehaviour from the problem of money laundering . The available evidence suggests how complex the link between money laundering and corruption is: there is no one-to-one link between the two . A typical, yet one of the more straightforward, marriages of convenience and profit – named by the UN Panel of Experts – is given by Raf Custers, Jeroen Cuvelier and Didier Verbruggen from the International Peace Information Service (IPIS):

Gemico Sprl was created by Aaron Shabani Asumani and Donald R . Bernard in January 2006 . While Asumani is a businessman from the Maniema province who was among the founders of Jean-Pierre Bemba’s Mouvement de Libération du Congo, Bernard is a retired commander of the US Navy Submarine Service, a professor of international law and an at-torney . He combines the chairmanship of Gémico with the chairmanship of the American company Glacial Energy LLC, while living and working both in Montana and the DRC .34

How do these networks operate so as to extract minerals from the Congo ille-gally? In order for such networks to operate clandestinely and on such a large scale, the conflict ensures that observation and investigation become extremely difficult . Unlike normal business environments, where stability and transparency are considered a requirement, illegal operations demand chaos and false front narratives to explain away the underlying profit-taking motive . Then, paradoxi-cally, the very conditions created by conflict make primary resource extraction (as opposed to industry, manufacturing or agriculture) the favoured economic activity, especially of resources where wealth can be conjured out of the ground with little investment, that are cheap and easy to extract, transport and tax, and whose illegal or undesirable origin can easily be disguised . Economic develop-ment, human rights, and national security interests remain far behind the prior-ity assigned to ensuring maximum corporate profits for a tight-knit and secretive international mining fraternity .

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Rwanda, under Paul Kagame’s Rwandan Patriotic Front (RPF), intervened in Zaire (the DRC) in 1996 . The minority Tutsi regime were by all accounts pursu-ing military elements among the approximately two million Hutu refugees that had fled to UN-run camps in the North and South Kivu provinces, situated along the DRC’s eastern border with Uganda, Rwanda, and Burundi . These provinces contain rich deposits of minerals, and have since the pre-colonial era been subject to large waves of migration by people from Rwanda . Small, densely populated and with few natural resources, Rwanda pursued the DRC’s enormous mineral wealth from the start of the conflict .

Initially, the Rwandan Patriotic Front was directly operating mining busi-nesses in Congo, according to UN investigators; more recently, Rwanda has attempted to maintain control of regions of eastern Congo through various proxy armies . Among these, none has been more lethal than the militia led by Laurent Nkunda, Congo’s most notorious warlord, whose record of violence in eastern Congo includes destroying entire villages, committing mass rapes, and causing hundreds of thousands of Congolese to flee their homes .35

‘Rwanda lives economically off Congo’s back now, through a mafia-like exploita-tion of the zones it has occupied,’ the DRC Information Minister Henri Mova claimed, according to a March 2005 article in the Mail & Guardian .36 Minister Mova goes on to state that many Rwandan troops remained in the DRC after the 2003 peace accord . Furthermore, making reference to three books under review in the New York Review of Books,37 Howard French concludes that they all agree that ‘the Kagame regime, and its allies in Central Africa, is portrayed not as heroes but rather as opportunists who use moral arguments to advance eco-nomic interests . And their supporters in the United States and Western Europe emerge as alternately complicit, gullible, or simply confused .’38 He adds that ‘[o]n the question of Rwanda’s principal motive for seeking to control or destabilize eastern Congo . . . Kagame and his government want continued access to the Congo’s economic wealth’ .39

This Rwandan strategy also stands in contrast to the operation mode of the UDPF [Ugandan People’s Defence Forces] in Congo . . . . UDPF commanders such as general James Kazini and Salim Saleh have regarded the war in Congo as a purely private enterprise . Relying on a closed circle of army elements,

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their monopoly on Congolese minerals is being shared with allied rebel leaders from the RCD-ML, the RCD-National and the MLC, who get part of the profit as a reward for their complicity and for which they have not paid any accountability to their governments . An example of this is the Victoria Group and Trinity, two ghost companies that have been set up by Saleh and Kazini to channel the profits from their commercial operations in DRC .40

John Lasker writes that ‘[i]n 2000, the Rwandan military and connected politi-cians made $250 million on shipping DRC coltan to Western mining companies and metal traders’ .41 William Reno suggests that the trade in the DRC’s gold has enabled Uganda to pay off its enormous foreign debt to international institutions such as the IMF and the World Bank .42 It is important to put this in context:

[O]ver the period 1980 to 2006, total cumulative capital flight from the DRC is estimated around US$15,5 billion . If the DRC would have been successful in stemming this capital flight through prudent macroeconomic policies and better governance, not only would the DRC have paid off its entire external debt at end 2006 (US$11,2 billion), another US$4,3 billion would have been left to add to the country’s foreign exchange reserves or used to invest in infrastructure and human capital .43

In the first quarter of 2009 the external debt of the DRC stood at $10 billion . Foreign reserves of over $225 million in April 2008 evaporated, and in March 2009 the IMF’s executive board approved $195,5 million from its Exogenous Shocks Facility, designed to speed financing to countries hurt by the global fi-nancial slump, with an additional $100 million in grants promised by the World Bank to pay teachers’ salaries, electricity and water bills .44

The war is a cover for Western corporate involvement in the pervasive, de-structive corruption that is at the heart of the Congolese conflict . Finally, the profits from these resources are often exchanged for arms . The strong connection between military actors, private companies and arms brokers further consoli-dates the role of the latter in the war economy . It also leads to a deepening priva-tisation of the war effort:

Barrick sub-contracts to Caleb International, who has also partnered with Adastra in the past . Caleb is run by Ugandan President Yoweri Museveni’s half-brother Salim Saleh, the former acting General of the UPDF . When

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Uganda withdrew from the Congo in 2002 following a so-called ‘peace’ agreement, Saleh began training paramilitary groups to act as Ugandan proxies to sustain the flow of minerals into Uganda . Salim Saleh is a share-holder in Catalyst Co . of Canada, who has a 100% interest in Uganda’s Kaabong gold fields . He is a part owner of Saracen, a private military company created by the mercenaries-for-hire firm Executive Outcomes . The UN Panel of Experts on Illegal Exploitation of Congo’s Mineral Resources recommended Salim Saleh be put on a travel ban and have his assets frozen, but nothing was done .45

Here all states, even the big ones, are weak . It is the multinational corporations that are the major players . They dwarf both the national state as well as the efforts of international governments, whether official or covert . Ricardo Soares de Oliveira bluntly states that ‘[f]or the past decade, the continued relevance of the state, particularly but not only in sub-Saharan Africa, has been called into ques-tion . Superseded from above by a merciless international economy, challenged from below by agile social movements, in collapse or in oblivion, the state is often broached in the guise of obituary .’46

Although it is important not to become so engrossed in analysing conflict and informal elites and markets that one neglects the changes in government actors’ state-building projects and state-society relations that shape the state’s presence on the ground, the networks that control this trade are increasingly successful in blurring and dissolving the divisions between various military elements, nation states and governments . The result is a privatised conflict, in which non-state actors have taken complete control of the most lucrative sectors of the regional economy . Even without a military deployment, it is very likely that these net-works will continue to monopolise the regional trade in gold, diamonds, coltan and arms . The various parties finance themselves through loot and plunder and various forms of illegal trading; thus they are closely linked with and help to gen-erate organised crime networks . They also depend on support from neighbour-ing states, diaspora groups, the UN presence and humanitarian assistance . The (often transnational) networks of politicians, security forces, and legal and illegal trading groups constitute a new distorted social formation, which has a tendency to spread through refugees and displaced persons and identity-based networks, often crossing continents . The conflict can hardly be described as a ‘war’ since it has almost no political character . It should be more accurately described as massive violations of human rights (repression against civilians) and organised

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crime (violence for private gain) . Conflict thinking is the dominant method of thinking when it concerns access to resources .

The UN Panel of Experts concluded in November 2001 that profits from the natural resources of the DRC have become a ‘primary motive’ for the warring parties .47 Building on the existing frameworks of the informal economy, the par-ticipants in this conflict economy increasingly consist of privatised networks of non-state actors who work beyond the conventional competence of territorially defined governments . On 10 September 2008, Global Witness communicated in a press release that

[T]here is unspoken complicity between the national army, FARDC, and the predominantly Rwandan Hutu, FDLR . This complicity extends to the exploitation of minerals . Although the FARDC − with the support of the UN peacekeeping force, MONUC, is carrying out military operations to dislodge the FDLR, in practice the FARDC and the FDLR are operating side by side, each controlling their own territories and trading in minerals from ‘their’ respective mines without interfering with the other’s activities . In fact, this mutual support is necessary to continue their trade .48

As in Angolan-French relations that led to the Angolagate, scandal, it is the greed for political power, influence and wealth that fuels the exploitation of people, their resources, and their country . ‘The strategic position of the country in the centre of Africa and its enormous wealth has made it a prime candidate for impe-rial ambitions and the envy of adventurers, mercenaries and looters of all kinds .’49 Rampant globalisation under ‘neo liberal’ laissez-faire capitalism often means the destruction of the democratic principles that should guide the international relations between countries . The situation in eastern DRC today reflects a wider international failure to address the links between armed conflict and the global trade in natural resources, and the consequent exploitation of Africa executed by powerful multilateral financial institutions and the private companies whose interests governments often promote . These networks, which include aviation businesses, mining companies and trading agents, as well as ordinary Congolese − businessmen, traders, miners − have enabled local warlords to forge a shadow economy . By linking up local and global economic networks, the participants in this war economy are increasingly successful in blurring and dissolving the conventional distinctions between ‘us’ and ‘them’ . The war has given birth to a politicised economy, which is violent and socially exclusive .

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In this environment it is not particularly useful to hold on to the rigid dis-tinction between ‘legal’ and ‘illegal’ economic activity . In its second report,50 the UN Panel on the DRC abandoned this rigidity in exchange for the more flexible and practical concept of ‘war financing’ . Most important in this concept is to determine how and by whom the war is being financed . The constant interaction and shifts between various trade networks results in most commodity chains transcending a clearly delineated spectrum of legal and illegal activity . Complex financial arrangements obscure both the origins and final destination of funds, laundering the links between ‘illegally’ obtained goods and ‘legally’ earned profit, and with it a clear understanding of what would constitute money laundering . Very often, activities involve the trafficking of arms, which further add to the cycle of exploitation and murder .

This can be termed an international ‘network war’,51 a shadowy economy which is increasingly monopolised by individual military actors and their com-mercial allies, a vicious circle in which war has become a business, and business is used to wage war . Criminal cartels further contribute to the internationalisation of the conflict through the financial fraud, tax evasion and money laundering of their global operations .

The very complexity of these business dealings and the networks behind them makes it extremely difficult to separate acceptable from unacceptable behaviour . Companies often claim that they have signed valid contracts and agreements, but without taking into account the circumstances under which those contracts were signed . The DRC government announced a mining review process in April 2007, initiating a review of about 60 mining contracts . Most of these contracts were signed during the period of conflict (1996–2002) and the transition period (2003–2006) . It was seen as an opportunity for the Congolese government to stop the systematic looting of the Congo . However, ‘[t]he impact of these news reports was swift and global in scope; publicly traded mining companies with interests in the Congo on the London, Toronto and New York stock exchanges experienced a sudden drop in their stock prices’,52 perhaps demonstrating just how important Congolese minerals are to the global economy . Companies also argue that they are unaware that their activities are contributing to conflict, human rights abuses or to corruption and poor governance . Placing private interests before obligations, companies walk a fine line between non-compliance with (non-binding) norms and outright illegality . Gaps in the public record, corporate silence, avoidance of scrutiny and accusations of bias and conspiracy further complicates matters .

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Rebels, aside from stealing weapons from the Congolese Army, also receive regular shipments of weapons originating in Rwanda and Uganda . Strictly speaking, there are both legal and illegal transfers of arms . Illegal arms transfers are commonly explained as those that occur outside of the control, or against the wishes, of exporting countries, or without the knowledge of the UN Security Council . In this context, it is important to note that most arms transfers to the DRC (in fact the whole Great Lakes region, including Rwanda and Uganda) do not constitute a violation of international law .

Arms brokers are experts at using ‘shell’ companies, shipping agents and dis-tributors to arrange the sale of arms and weapons to conflict zones . Because of the lack of effective controls at international level, brokers, transportation agents, intermediaries and those providing financial services for such third party arms transfers rarely break export laws and can operate with impunity despite the suffering caused by their activities . Many arms transfers fall under agreements that are commonly classified under the concept of international ‘soft law’ . These are merely principles that may or may not develop into an international law and are essentially non-binding . This trade thus involves the whole spectrum which ranges from ‘grey’ deals, where arms are bought legally but are later diverted illegally to the conflict zone, to outright ‘black’ deals, where arms are traded di-rectly with arms dealers for diamonds and other resources . There is a strong con-nection with important arms brokers, which is enforced by the involvement of some middlemen in the minerals trade, who launder the proceeds of arms deals through seemingly legitimate mineral deals . Through the sale of arms to rebel leaders and army officers, these middlemen are assured of their local involve-ment in the exploitation of precious resources . In turn, these resources provide the income for the military actors to secure their power . Armed groups can easily connect to a globalised market for resources that are easily mined and transport-ed, with demand driven by an apparently insatiable appetite for raw materials .

The Lutundula Commission, a special National Assembly commission led by parliamentarian Christophe Lutundula concluded: ‘Too many individuals linked to the political elite and many companies operating in the DRC can do anything including breaking the law to extract its rich mineral resources .’53

On 27 October 2009 a Paris court sentenced Charles Pasqua, the former French interior minister to a year of prison and a $150 000 fine; Pierre Falcone, to six years in prison; Arcadi Gaydamak, to six years (sentenced in absentia); and Jean-Christophe Mitterrand to one year of prison (suspended sentence) and a $550 000 fine . This brought closure to the Angolagate affair and may be seen as

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a first positive step in trying to tackle corruption and improve the level of trans-parency in world affairs relating to resource extraction and its connection to war, violence, arms trafficking and money laundering .

THe wAy FoRwARdThe ongoing situation in the DRC is a wake-up call for international policymak-ers who have failed to understand and come to grips with a pattern of far-reach-ing exploitation that has developed over the last two decades . The international media is silent on virtually every significant issue with respect to the violence in the DRC and the international and criminal networks behind it . There appears to be very little understanding of what drives African conflicts and there is a ten-dency to present them as a mess, unique to the continent, where people are merely fighting for the sake of fighting . Bernard-Henri Lévy, neatly sums up this state of ignorance when he calls these ‘the forgotten wars of the twenty-first century’,54 and claims that ‘great masses of men are caught in wars without aim, without clear ideological stakes, without memory, as the wars last for decades, perhaps without outcome’,55 as opposed to ‘serious wars, which have a meaning’ .56

Certainly a lasting solution to the continued violence, instability and ex-ploitation in the DRC goes beyond simply creating narrow money-laundering rules, laws, and regulations . Such laws would nevertheless contribute to curbing the driving forces behind the violence . There should be greater efforts to hold companies accountable and to redress corporate misconduct . Action must be based on a good understanding of the fundamental causes and sources behind money laundering . The illegal, extralegal, illegitimate, unethical and exploitative activities that generate funds for laundering vary enormously . Types of illegal activity can include insider trading in the stock market, transfer pricing through multinationals, drug trafficking, arms trade, corruption in procurement, and corruption in government and among the political elites . The relative importance of these sources in specific instances varies as well . It is therefore vital to diag-nose what the main sources for funds to be laundered are, and then to study the various links between money laundering and different manifestations of poor governance and corruption in the public and private sectors . This is particularly important, since significant progress against money laundering might develop from preventive activities that reduce the illegal source of the funds intended to be laundered in the first place .

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The ethical principles of the OECD guidelines57 are useful, but they are not binding, nor can they sanction companies or oblige them to offer compensation . Multinationals should be subjected to enforceable regulations .

OECD governments should increase the level of resources available for un-dertaking investigations of bribery and corruption that involve multinational companies which operate abroad, thereby meeting their obligations under the OECD Anti-bribery Convention . A permanent body, perhaps under the UN, such as that proposed by Kofi Annan in 2005, should be established to monitor the role of business in conflict environments . National governments should be more proactive in investigating and prosecuting companies under their jurisdic-tion that contravene existing domestic legislation on money laundering and arms trafficking in particular . The International Criminal Court (ICC) has launched several investigations into the role of business in war crimes . It is imperative that governments cooperate, assist and finance these investigations . A good starting point for governments would be to issue public recommendations on compliance with OECD guidelines and the more focused Extractive Industries Transparency Initiative (EITI) .58 There are some indications that many of the companies that came under the scrutiny of the UN Panel of Experts may be willing to contribute to sustainable solutions with regard to the exploitation of minerals in conflict areas . There is thus an opportunity for all stakeholders to boost transparency and accountability in the mining sector of the DRC . For due diligence efforts to be truly effective, however, there should be a third party verification mechanism based on a credible certification and a mineral origin tracing system with a regu-larly updated database about mining sites that objectively separates ‘clean’ min-erals from ‘blood’ or militarised minerals . In the long term such a mechanism can only be successful if supported by the Congolese government, the United Nations, bi- and multilateral donors, countries whose citizens or companies operate in the DRC, and neighbouring countries through regional cooperation under the umbrella of SADC and EAC .

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NoTeS

1 A term favoured by Mary Kaldor and elaborated on in her book, New and old wars: organised violence in a global era, Padstow: Polity Press, 1999 .

2 This view is presented by Charles Tilly in his book, The formation of national states in Western Europe, Princeton: Princeton University Press, 1975, and in his chapter, War making and state making as organized crime, in Peter B Evans, Dietrich Rueschemeyer and Theda Skocpol (eds) Bringing the state back in, Cambridge: Cambridge University Press, 1985 . An alternative school of thought acknowledges institutional centralisation as a principal element in the development of the modern state, but argues that this was caused by closer relations between governing au-thorities and social groups that enabled greater economies of scale in the generation of revenue and provision of protection as opposed to alternative polities .

3 Francis Fukuyama, The end of history?, 1989, http://www .wesjones .com/eoh .htm (accessed 11 December 2004) .

4 Leon Kukkuk, Letters to Gabriella: Angola’s last war for peace, what the UN did and why, Herndon: Florida Literary Foundation, 2005, 152 .

5 Global Witness, All the presidents’ men, 1 March 2002, http://www .globalwitness .org/media_library_detail .php/85/en/all_the_presidents_men (accessed 5 September 2009) .

6 Global Witness, All the presidents’ men, 14 .


8 Rafael Marques de Morais (e-mail), Angola: Corruption as the pre-requisite for contracts with the government, sent to author on 25 September 2009 at 13:01 .


10 Angolagate: a carta que muda tudo, Jornal de Angola, 20 July 2008 .

11 ‘Angolagate’ trial opens in France, Agence France-Presse, 5 October 2008, http://afp .google .com/article/ALeqM5jW5Ez_Asns57USSDljTlIiOpCQFg (accessed 8 June 2010) .

12 Mark Duffield, War as a network enterprise: the new security terrain and its implications, Cultural Values 6(1 & 2), (2002), 153–165, 153 .


14 Georges Nzongola-Ntalaja, The Congo: from Leopold to Kabila, a people’s history, London: Zed Books, 2002, 246 .

15 Maurice Carney, Congo’s contract review: Its strategic and economic significance, Pambazuka News 337, 17 January 2008, http://www .pambazuka .org/en/category/features/45463 (accessed 8 June 2010) .

16 Nadira Lalji, The resource curse revised: conflict and coltan in the Congo, Harvard International Review 29(3), 2007, http://hir .harvard .edu/index .php?page=article&id=1677 (accessed 8 June 2010) .

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17 Ken Anderson, Imperial clash on the Congo resource front, Global Policy Forum, quoting Hungry for Truth, 17 February 2009, http://www .globalpolicy .org/security/natres/generaldebate/2009/0217clashdrc .htm (accessed 28 February 2009) .

18 Ibid .

19 Raf Custers, Jeroen Cuvelier and Didier Verbruggen, Culprits or scapegoats? Revisiting the role of Belgian mineral traders in eastern DRC, Antwerp: IPIS, 13 May 2009, http://ipisresearch .be/dbpdfs/20090513_IPIS_Culprits_Scapegoats .pdf (accessed 12 June 2009) .

20 Ricardo Soares de Oliveira, Oil and politics in the Gulf of Guinea, London: Hurst and Company, 2007, 13 .

21 Nzongola-Ntalaja, The Congo, 18 .


23 On 30 October 2000, 11 leading international banks and the anti-corruption organisation Transparency International announced that they had agreed to a voluntary set of global anti-money laundering principles, known as the Wolfsberg Principles .

24 A joint briefing paper by Global Witness, Tax Justice Network, Christian Aid, and Global Financial Integrity, The links between tax evasion and corruption: How the G20 should tackle illicit financial flows, 10 September 2009, http://www .globalwitness .org/media_library_detail .php/811/en/how_the_g20_can_stop_money_pouring_out_of_the_worlds_poorest_countries (accessed 15 September 2009) .

25 Berne Declaration, Geneva Prosecutor must revive Angola oil corruption probe, press release, 14 February 2008, http://www .evb .ch/en/p25013711 .html (accessed 9 September 2009) .

26 Mario de Queiroz, ‘Angolagate’ bribes in local banks, Inter Press Service News Agency, 20 November 2008, http://www .ipsnews .net/africa/nota .asp?idnews=44566 (accessed 20 November 2008) .

27 Ibid .

28 Ibid .

29 Global Witness, Switzerland steps back from global fight against corruption and money laun-dering, press release, 1 February 2005, http://www .globalwitness .org/media_library_detail .php/364/en/switzerland_steps_bac (accessed 15 August 2008) .

30 Tim Raeymaekers, Network war: an introduction to Congo’s privatised war economy, Antwerp: IPIS, October 2002, 15–16, http://www .ipisresearch .be/download .php?id=60 (accessed 10 January 2003) .

31 Mgeta Mganga, Money laundering cartel discovered in Great Lakes region, IPP media, 23 April 2008, http://ip-216-69-164-44 .ip .secureserver .net/ipp/guardian/2008/04/23/112967 .html (ac-cessed 5 September 2009) .

32 Ibid .

33 Ibid .

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34 Africa InfoServ (infoserv@africafiles .org), No . 20828: D R Congo: Revisiting the role of Belgian mineral traders in Kivu, sent to author on 15 May 2009 at 21:16 .

35 Howard W French, Kagame’s hidden war in the Congo, The New York Review of Books 56(14), 24 September 2009, http://www .nybooks .com/articles/23054 (accessed 15 September 2009) .

36 Global Policy Forum, quoting Mail & Guardian, Gold keeps war in the DRC on the boil, 7 March 2005, http://www .globalpolicy .org/component/content/article/181/33607 .html (accessed 15 March 2005) .

37 These books are: Africa’s world war: Congo, the Rwandan genocide, and the making of a conti-nental catastrophe by Gérard Prunier, Oxford: Oxford University Press, 2008; The dynamics of violence in central Africa by René Lemarchand, Philadelphia, University of Pennsylvania Press, 2009; and The Congo wars: conflict, myth and reality by Thomas Turner, London: Zed Books, 2007 .

38 French, Kagame’s hidden war .

39 Ibid, quoting René Lemarchand, The dynamics of violence in central Africa .

40 Raeymaekers, Network war, 11 .

41 John Lasker, Looting Africa: Canadian company eyes gold in Democratic Republic of Congo, Toward Freedom, 20 August 2009, http://towardfreedom .com/home/index .php?option=com_content&view=article&id=1643:looting-africa-canadian-company-eyes-gold-in-democratic-republic-of-congo&catid=30:africa&Itemid=63 (accessed 8 September 2009) .

42 William Reno, War, debt and the role of pretending in Uganda’s international relations, Occasional Paper, Center of African Studies, University of Copenhagen, July 2000 .

43 Dev Kar, Ramil Mammadov, Rachel Goodermote and Janak Upadhyhay, Capital flight from the Democratic Republic of Congo, Global Financial Integrity, Center For International Policy, July 2008, http://www .gfip .org/storage/gfip/documents/capital flight from drc .pdf (accessed 8 June 2010) .

44 Joe Bavier, Over IMF objections, DRC moves ahead with $9b Chinese mining/infrastructure program, Mineweb quoting Reuters, 24 March 2009, http://www .mineweb .co .za/mineweb/view/mineweb/en/page72068?oid=80724&sn=Detail (accessed 26 March 2009) .

45 Keith Harmon Snow and David Barouski, Behind the numbers: untold suffering in the Congo, Third World Traveler, 1 March 2006, http://www .thirdworldtraveler .com/Africa/Congo_BehindNumbers .html (accessed 6 September 2009) .

46 Soares de Oliveira, Oil and Politics in the Gulf of Guinea, 19 .

47 United Nations Security Council, S/2001/1072, Addendum to the report of the Panel of Experts on the Illegal Exploitation of Natural Resources and Other Forms of Wealth of the Democratic Republic of the Congo, 13 November 2001, http://www .unhchr .ch/Huridocda/Huridoca .nsf/e06a5300f90fa0238025668700518ca4/cef0454ec269e555c1256b110052003c/$FILE/N0163001 .pdf (accessed 30 June 2003) .

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48 Africa InfoServ (infoserv@africafiles .org) No . 18987: D R Congo: Control of mines by warring parties threatens peace efforts in East, sent to author on 17 September 2008 at 03:30 .


50 United Nations Security Council, S/2003/566, Second special report of the Secretary-General on the United Nations Organization Mission in the Democratic Republic of the Congo, 27 May 2003, http://www .globalsecurity .org/military/library/report/2003/n0335898 .pdf (accessed 30 June 2003) .

51 Duffield, War as a network enterprise, 153–165 .

52 Carney, Congo’s contract review .

53 A scanned version of the report in French can be downloaded from http://www .freewebs .com/congo-kinshasa/ (accessed 5 September 2009) .

54 Bernard-Henri Levy, War, evil and the end of history, London: Gerald Duckworth and Co . Ltd, 2004, 4 .

55 Ibid .

56 Levy, War, evil and the end of history, 3 .

57 The OECD Guidelines on Multinational Enterprises are a voluntary set of principles and stand-ards of good practice addressed by governments to multinational enterprises . Covering a broad range of issues relating to business ethics such as human rights, development, corruption and supply chain behaviour, they are nevertheless not legally binding . OECD governments are ex-pected to promote their observance .

58 The Extractive Industries Transparency Initiative (EITI) is a coalition of governments, compa-nies, civil society groups, investors and international organisations that sets a global standard for transparency in the oil, gas and mining industry . It has issued a set of reporting guidelines, a Statement of Principles and six Criteria which represent the global minimum standard for EITI implementation . It aims at increased transparency in payments by companies to governments and to government-linked entities, as well as transparency in revenues by host country govern-ments . EITI is implemented in 30 resource-rich countries .

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Chapter 7

New corridorsand new markets

Drug-money laundering on the south-west coast of Africa

Ray H Goba

INTRoduCTIoNIt is almost two decades since Namibia’s independence and the end of inter-national isolation and apartheid . Over the years, interceptions and seizures of illicit drugs have become an increasingly regular phenomenon on the Namibian criminal landscape . Viewed in isolation each interception of illicit drugs, big or small, may constitute no more than proof of the existence of a consumer on the local scene, or be a pointer to the existence of a consumer in some other country beyond Namibia’s borders . In the recent past, whether or not detected illicit drugs were destined for a local consumer depended to a large extent on the type of drugs one was dealing with, and the quantities involved . The same considerations applied to the determination of whether the drugs were for resale, in other words for commercial use or personal (ab)use . Cannabis was generally considered to be destined for local consumption . It was the drug of choice for recreational consumers, and remains relatively cheap and is readily available, especially in the former African urban residential areas popularly referred to as ‘townships’ . Although cannabis is not grown or produced in Namibia, there is a long history of its importation from South Africa and other countries in the sub-region . On the other hand, cocaine and mandrax were generally seen as being in transit to some other destination such as South Africa or Europe . It is widely acknowledged that cocaine is sourced from Latin America . The absence of an established consumer market over the years led to a general view that Namibia was not a consumer but a transit state for cocaine .

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Suspected cannabis dealers or persons found in possession of the substance were invariably Namibian nationals, South Africans, or temporary residents and visitors from the sub-region . With respect to cocaine and mandrax, interceptions and seizures often involved West Africans (especially Nigerians) and to some extent Zambians and Tanzanians .

This scenario obscured the fact that these individuals were progressively establishing and developing new routes and consumer markets for cocaine and other hard drugs . It was not readily appreciated that in the same manner that a cannabis consumer market had developed, a cocaine consumer market could soon develop once demand had been established . While one cannot go so far as to insinuate complacency on the part of law enforcement authorities one can certainly say with confidence that the threat was not seriously entertained . Support for this view can be found in Namibia’s failure to modernise or amend its illicit drug legislation in a timely manner . Namibia was also slow to ratify the United Nations Convention Against Trafficking in Illicit Drugs and Psychotropic Substances of 1988, which to date stands as the most progressive and holistic uni-versal instrument to combat the illicit drug trade .

Criminal sanctions imposed by the courts tended to reflect these factors through their varying levels of severity . While it was generally taken as common cause that the motivation for dealing or trading in illicit drugs is financial profit, law enforcement seemed reluctant to go beyond the satisfaction of making a highly publicised drug seizure accompanied by the conviction and sentencing of the persons found in possession of the drugs . Financial investigations to de-termine who funded the criminal enterprise, how and to whom the merchandise was distributed or sold and how realised proceeds were accounted for or dealt with were never pursued .

There were reasons for this scenario, however . Though the need to hide, dis-guise or conceal ill-gotten gains from the proverbial long arm of the law seems obvious and the practice has been in existence since the beginnings of profit-motivated crime, it was not until slightly over 20 years ago that the international community began to attach importance to the latent threat of acts designed to achieve what has now become household terminology – money laundering . The idea of a new, specific and hitherto-unrecognised crime began to grow . Namibia’s common and statute law, like that of most states, did not recognise such insidious and clandestine conduct as specific criminal phenomena . Money laundering did not exist as a specific crime . Accordingly, law enforcement, to the extent that it

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addressed the problem at all, only did so peripherally to the specific crimes under investigation .

Although money laundering, as universally understood, has been in exist-ence for so long, it was not until the adoption of the UN Convention of 1988 that global attention was drawn to money laundering as specific unlawful conduct, and then only in the context of fighting drug trafficking . Namibia did not ratify the Convention until March 2009, long after it had ratified the more compre-hensive and more recent United Nations Convention against Transnational Organized Crime (UNTOC) and promulgated legislation to adopt its provisions in Namibian municipal law . Relevant legislation includes the Anti-Corruption Act which came into effect in 2005, the Prevention of Organised Crime Act and the Financial Intelligence Act, both of which came into operation on 5 May 2009 . In trying to keep up with global developments and standards, the Bank of Namibia has regularly issued administrative regulations to banking institutions to comply with the recommendations of the Financial Action Task Force (FATF), seen as authoritative on the subject, but which are merely persuasive and without binding legal effect . This was because the Bank of Namibia was aware of the risks posed to the integrity of the financial services sector by money laundering; in particular, to banking institutions which fall within its regulatory mandate . Significantly, under Namibian legislation money laundering is not limited to the proceeds of illicit drug trafficking, but extends to the disguise or concealment of all proceeds of crime . As money laundering is now viewed as the Achilles heel of organised crime, this is as it should be . Targeting money laundering as a specific criminal act and using it as a tool to fight organised crime seems to be the most brilliant innovation in the history of law enforcement; yet it is apparent that this avenue has always been available .

CHARACTeRISING THe ILLICIT dRuG TRAdeIn 2008 it was estimated that trade in illegal drugs constituted 5 to 6 per cent of overall world trade, slightly more than the combined trade in agricultural products and cars .1 At the same time the United Nations estimated that the inter-national drug trade alone constituted about 8 per cent of all international trade, that is, approximately $400 billion annually .2, 3 The value of the US cannabis crop is estimated to be $25 billion a year . It has been said that this makes it one of the top three US agricultural products, behind soy beans and corn .4

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The coca plant that is used to produce cocaine is grown in many countries in South America including Peru, Bolivia, Colombia (the single largest producer), Ecuador, Brazil, Venezuela, Panama and Guyana . Opium poppy plants are grown predominantly in South-East Asia’s Golden Triangle (Laos, Myanmar, Thailand) and in the Golden Crescent (Afghanistan, Iran, Pakistan) . They are also grown in Turkey, Egypt, Eastern Europe, Mexico, Central America and Central Asia . The UN Drug Control programme estimates that 50 per cent of the rural population in five central Asian republics grows plants for producing drugs .5

In the 2007 World Drug Report the UN reports that 4,8 per cent of the world’s 15- to 64-year-old population (200 million people) use drugs, but only 0,6 per cent are classified as ‘problem drug-users’ – that is, those who use them on a monthly basis .

Undoubtedly, global demand for drugs is a reality . Dr Francis Thoumi, a pro-fessor at Universidad del Rosario in Bogota, Colombia, researched the reasons behind the growth of coca production in Colombia (though all tropical countries have the capacity to produce coca) and the prevalence of cocaine and other mind-altering drugs in the USA . He expressed his opinion in these words: ‘The truth is that the illicit drug industry is a symptom of unresolved social problems which generate guerrillas, paramilitaries, drug traffickers and white-collar crimes .’6

An analysis of reported drug interceptions of all types of illicit drugs reveals that the illicit drug trade has the characteristics of organised crime: it is trans-national, secretive and cash based . It manifests all the aspects of globalisation . It involves the movement of people, and is associated with migration issues, for example through the use of transitory couriers between states; and in some coun-tries, permanent migration in search of a better life . It follows traditional trade routes and is conducted in similar manner to lawful business, although suppliers, merchants, transporters, wholesalers, distributors and retailers do not advertise their trade publicly . Even consumers do not flaunt their habits in public but do so privately, or in the company of fellow consumers . The manner of payment for purchases varies depending on the perceived risk of detection . Payment options for evading detection are as many as there are for normal business transactions . It is in this respect that the task of establishing how drug purchases are funded, identifying financiers (investors) in the business and consequently how the real beneficiaries – so-called ‘drug lords’ – account for sales proceeds, poses a huge challenge . Hence the perennial questions of whether the proceeds of illicit drug deals are indeed laundered, and if so, how much money laundering is taking place .

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Renowned Minister of Trade in Venezuela and editor of Foreign Policy, Moises Naim, wrote a book on the general subject of illicit trade .7 He pointed out that ‘illicit trade is trade first and crime second’ – those involved in the trade view the transaction as a source of income . Illicit trade follows many of the same rules as trade in licit goods, taking advantage of all aspects of the global economy, such as levelling of tariffs and the use of advanced technologies . Most illicit trade is carried out through decentralised networks which change with every transaction and or setback (such as an arrest) . New networks arise when old ones are broken down .

In order to arrive at a fairly accurate assessment of what is taking place it is helpful to draw lessons from the reported experiences of states that have been at the forefront of fighting illicit drug trafficking and tracing the proceeds of the trade . The US National Drug Threat Assessment Report of 2009 notes that

Drug money laundering is a globalised industry . The majority of Drug Trafficking Organisations (DTOs) operating in the United States includ-ing money launderers working for Mexican and Colombian DTOs that are responsible for wholesale-level drug-trafficking are transnational or-ganisations with a presence in multiple countries around the world . Illicit transactions cross national boundaries through various traditional and emerging money laundering methods as drug proceeds are moved from US market areas to foreign destinations .8

CoMMoNALITIeS oF THe ILLICIT INTeRNATIoNAL dRuG TRAde Over the years, law enforcement reports and cases in Namibian courts have pointed overwhelmingly to collusion between Namibian residents and South Africans in the illicit cannabis trade . Not all cannabis emanating from South Africa is grown in South Africa . Some of it is smuggled in from Malawi, Mozambique, Zimbabwe and Lesotho . However, some is processed or blended in South Africa and re-exported to other countries, including Namibia . Smuggling of cannabis to Namibia is usually done by long-distance truck drivers acting as the agents of principals in Namibia or South Africa . Although most intercepted drug-smuggling truckers deny it, Namibian police believe that some of them deal in drugs in their own right on the side, for extra income .

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Although some interceptions have involved high volumes and high-value quantities of cannabis, the money laundering associated with it has not been con-sidered a problem in the past . As previously stated, money laundering on its own was not a crime, and police had no reason to go beyond investigating the associ-ated drug offence . If a suspicious amount of unexplainable money was discovered in the process, it was dealt with in terms of one or other of the provisions in the Criminal Procedure Act relating to disposal of items seized for investigation or used in the commission of a crime or connected to its commission . This could result in forfeiture by order of court or return to the rightful owner .

In any event, whatever proceeds are realised in the cannabis trade are prob-ably expended at lower levels of distribution, where there is little potential for capital accumulation . In the past, reputable researchers have pointed out that some drug proceeds may be used in furthering crime, or be integrated with legal funds in the establishment of new ventures or legitimate companies – a process referred to as ‘gentrification’ . Or the money may not be spent at all, but is hoarded and passed on as an inheritance .

In December 2003, the Transnational Institute’s (TNI) Crime and Globalisation project hosted a seminar on the Economic Impact of the Illicit Drug Industry . The report of the seminar states that the ‘goal of the seminar was to review the substance of the existing figures of the global business volume of the illegal drug industry and the notion of where the illegal proceeds of the in-dustry are going’ .9

The summary report of the proceedings made a number of interesting obser-vations which are still valid today . These include the mystery, questionability and unreliability surrounding figures on the aggregate size of money laundering in the world peddled without apparent basis by various international organisations, including the International Monetary Fund (IMF) . Even recent statistics issued by the International Narcotics Control Board (INCB) raise serious questions about the real extent of the global narcotics industry .10 The INCB points out that the figures in their report are from states that were reporting to the INCB as at 1 November 2008 and do not reflect global reality . An analysis of the statistics reveals low narcotics volumes, painting a picture of an industry in decline . If the INCB can clearly acknowledge that the figures do not reflect reality, this raises the spectre of global ignorance of what really is going on . For developing nations there is a real prospect of waking up one day and finding that Drug Trafficking Organisations have taken control . As will become apparent from the following

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discussion, the budding cocaine trade in and through Namibia represents a real and present threat .

The TNI report noted that one of the presenters, anthropologist Carolyn Nordstrom, observed that drugs did not automatically generate cash profits, but were frequently exchanged for diamonds (as in Sierra Leone) or for a variety of other goods and services that were not necessarily illicit . For example, in Angola there was no demand for cocaine but a strong demand for antibiotics . She further noted that there are global markets that interlink with the drug market . A single person or group could move goods worth millions of dollars without any cash transactions . This would be of prime importance for guerrillas and paramilitaries . These observations are significant in light of the budding cocaine trade linking Angola with the South American illicit drug industry, revealed by growing arrests and interceptions of Angolans transiting from South America through South Africa and Namibia .

The TNI report noted further that at the seminar, the overall picture with regard to criminal money flows and money laundering was that there was a

near total vacuum of knowledge: little is known about money laundering methods, how much is invested and what impact this has . Despite a mul-titude of control bodies and regulations there is little empirical data and the overall picture looks more like a façade of control . There is [a] much fractured level of knowledge about money laundering generally and about what factors determine preferred methods of laundering . The market seems very imperfect . Most drug money is expended at lower level distri-bution where there is little possibility for capital accumulation .11

The report also noted that many questions remain unanswered . For example, how is money from drugs transferred to other sectors such as production, real estate, high-value assets or durable valuables that can be traded? The possibil-ity was raised that a proportion of the cash assumed to be laundered is, in fact, merely hoarded . Another unknown was in what situations ‘floating money’ can be said to be ‘threatening’ . If money is moved to a safe haven, nothing is known about what happens to it thereafter . It may flow into the capital market, helping to maintain liquidity and keep house prices low, both of which are positive devel-opments . It is important to consider which effects of the illicit drug economy can be considered positive and which negative . It is not all gloom and doom .

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Researchers point out that generally the preferred ways of dealing with drug money are cash holdings, simple bank accounts, real estate, general consump-tion, debt repayment between criminals, buying impunity, and philanthropy . A preference for general consumption over investment has been noted . In many instances there is not much evidence of sophisticated laundering techniques . Although traffickers operate internationally, they are mostly local . However, there is a paucity of knowledge concerning what factors determine preferred methods of laundering . The drug market is imperfect and money laundering methods depend to a large degree on how the money is generated . Of necessity, laundering methods differ depending on methods of production and transit and countries of consumption .

Though some countries have had instances of fees being paid for money laun-dering, there have been few professional money launderers . It has been suggested that the most well-known instances of professional money laundering in the USA, such as Operations Polar Cap and Green Ice, were in fact ‘sting’ operations, in which law enforcement authorities set up money laundering services to lure drug traffickers . Most of the money transfers encountered in those cases were in fact international payments for drug transactions, and not laundering (in the proper sense of the term) to disguise capital accumulation and investments . Thus it is important to distinguish money laundering from simple payments, as failure to do so results in the inflation of statistics regarding the wealth (and threat) of transnational organised crime .

Michael Levi, a sociologist and criminology professor at Cardiff University, opined in his presentation that

Many criminals just spend their money as they go along, like most of us . Only when they have more money than they wish to spend immediately, do they move capital to some secure location . If you have nothing to recycle, then you have no need to launder the unspent proceeds . Since law enforce-ment strategies shifted to going after the proceeds of crime there is a need for laundering and legally secure places where others will not be able to get at either information or your actual money .12

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THe BuddING SouTH-SouTH CoCAINe TRAdeThe escalating occurrence of cocaine trafficking in the countries of Southern Africa, which have relatively less experience of the operational methods used by sophisticated DTOs from the Americas, presents a huge challenge for the affected states .

The number of Angolan nationals arrested and arraigned before Namibian courts for cocaine trafficking has been increasing steadily over the last five years, peaking in 2009 . On the other hand the number of Namibians involved in the cocaine trade has been so low as to be insignificant . The figures suggest that those Namibians implicated in drug dealing have been arrested for crimes involving other types of drug, notably cannabis . While ethnic profiling may lead to perceptions of xenophobia, in the area of organised crime its utility is widely acknowledged .13 Classification of criminal groups on the basis of ethnicity has its own utility . In this respect it is only factual to state that the cocaine trade through Namibia is dominated by Angolans, because these are the individu-als most frequently arrested . It is also true that law enforcement agents target Angolans because of information given to them through Interpol channels . This may account for the rising numbers of this particular group being arrested .14

Angolan nationals arrested in possession of cocaine on Namibian territory are invariably in transit . Fairly large quantities of cocaine have been intercepted on national roads . The cocaine is ferried in motor vehicles or in personal luggage on inter-state coaches . However, most of the cocaine confiscated in Namibia has been intercepted at the international airports of Hosea Kutako and Walvis Bay . Those intercepted at airports have been found carrying cocaine in their luggage or in specially-packaged portions called ‘bullets’ lodged in their stomachs follow-ing oral ingestion . Some drugs have been smuggled into Namibia as unaccompa-nied baggage . In one specific case, a consignment of artificial hair was soaked in a cocaine solution, dried and then sent to Namibia .

The Namibian police have confirmed that while some of the cocaine is smug-gled into Namibia as a diversionary tactic, to disguise the actual destination intended, a significant quantity is now sent to Namibia for local consumption . Namibia has progressed from being a transit state to a consumer state .15

All the cocaine that passes through or ends up in Namibia originates from South America . Arrested suspects most often state that they receive the cocaine in Sao Paulo, Brazil . They travel through South Africa on the outward and inward journeys . Typically, the journey starts in Luanda . It may be routed

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through Kinshasa, Windhoek, Walvis Bay, Johannesburg, Cape Town or Lisbon . According to Namibian police the choice of route depends on the perceived risk of interception .

The majority of those apprehended carry the cocaine in their bodies or in their luggage . The quantities are small but high in value . This gives rise to the question of whether some of those arrested are traffickers in their own right, or mere couriers recruited by DTOs in South America or their agents in Angola or Namibia . The classic explanation given by arrested suspects is that they travelled to Brazil on holiday or to buy goods for resale in Angola . While in Brazil they were approached by someone, usually identified only by a first name, who re-quested them to deliver a parcel to some other person in Angola for a fee . They do not normally admit that they travelled to Brazil specifically to obtain cocaine .

As a result of the oil boom, the Angolan economy has been doing rather well since the end of the civil war in 2002 . Angola is now the second-largest oil pro-ducer on the sub-continent, after Nigeria . Furthermore, as a result of decades of war (firstly for independence; post-independence, the civil war that followed the demise of colonialism) Angola lacks effective governance systems and is in the process of normalising its public administration, economic and financial systems . The economy is largely cash-based . Although the local currency, the kwanza, is used, the US dollar is more common in daily business life . Exchange controls are largely ineffective . While theoretically the amount of money an individual can export at ports of exit such as airports is controlled, smuggling of quanti-ties in excess of permitted levels does occur . There is also a thriving diamond industry which is not effectively regulated . Additionally, some basic necessities of life and many luxury goods are unavailable, though demand for these is very high . Access to hard cash enables individuals to fly to South America for holiday purposes or to purchase goods for resale in Angola . After Portugal, Brazil is the other ‘natural’ destination for Angolans because of historical links dating back to the transatlantic slave trade era . Many Angolans regard Brazilians as their natural cousins . They share a common language, Portuguese; due to decades of colonisation, ethnic languages are not commonly used in Angola .

With the advent of peace and the opening up of Angolan society to the outside world, travel has become easier for Angolans . Luanda is now connected to the major capitals of the world . There are direct flights to Cairo, Havana, Lisbon, Maputo, Nairobi, Addis Ababa, Johannesburg, Windhoek, Kinshasa and many other cities . A simple measure of affluence in developing countries is the type

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of motor vehicle that one finds; increasingly, large American four-wheel-drive vehicles are seen in Angola . Indeed, a relatively affluent society is developing .

Angolan law enforcement officials have confirmed that some drug traffickers are sent from Angola to obtain drugs by local drug lords who already have cus-tomers waiting for the merchandise, whether in Angola or Europe . Young and impressionable women and men may be approached to go on paid holidays to Brazil, and are told to contact someone on arrival who will give them a parcel to bring back to Angola for them . They are given spending money and a place to stay . They are usually offered payment for the favour and are given a telephone number to call, or are told that someone will approach them and identify them-selves by a specified name or code . While some of the individuals that are sent to Brazil are gullible or naive, others know the real purpose of the trip full well, and agree to put their lives at risk, literally and figuratively, by swallowing ‘bullets’ of cocaine . Some have successfully done so in the past and know the risks (includ-ing death by overdose should the ‘bullet’ burst in the stomach), but are tempted by the huge rewards offered for a successful operation .

According to statements given by arrested couriers the amounts offered range between $5 000 and $10 000 . This sort of sum is extremely tempting for a desperate young person with a family to support . For those already in the game a portion may be paid up front as deposit, with the balance to be paid upon successful delivery . Risk insurance (in the form of guaranteed legal assistance and financial assistance to families) is provided should the courier be incarcerated (or even die) . This also ensures protection for the DTOs, as a courier – assuming he or she survives the trip – is unlikely to give police officials much information under such circumstances . According to the police, few couriers give truthful information .

To the DTOs, these are necessary expenses encountered in the course of busi-ness . The use of couriers lowers risk for the DTO, in that couriers are expendable and can be replaced if arrested . Furthermore, the use of couriers minimises the potential loss of substantial amounts of the drug, as they can only carry a limited amount on their persons . Thus, while the arrest of a ‘swallower’ brings a measure of satisfaction to a customs or police officer, it is insignificant to a DTO; it is a small price to pay . Besides, a courier who is arrested may be merely a decoy, al-lowing many others to get through undetected . Drug dealers often leak infor-mation on couriers to the authorities, to divert attention from others carrying larger quantities of drugs .

In an interesting article written in 2005 on the cocaine trade between Africa and South America, Joanna Wright points out that although only a

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small percentage of South America’s cocaine exports passes through Brazil, the country has become a base for foreign and indigenous crime groups involved in the distribution of the drug . Most of the cocaine routed through Brazil is from Colombia, Peru and Venezuela and is of very high quality .

She also notes that as youth populations in the US and Europe stabilise, causing cocaine consumption to reach a plateau, South Africa is growing as a consumer of cocaine and as a transit point that enables traffickers to avoid ‘suspi-cious’ direct routes from South America to other countries .16 Other observations are that traffickers use Brazil as a gateway while operating behind legal business fronts, carrying out a mixture of legal and illegal activities; that Suriname is a ‘transit state par excellence’ for drugs to Europe because of its direct air and sea connections to the Netherlands; that Colombian and Brazilian gangs use speed boats to convey large quantities of cocaine to fishing vessels out at sea, which then ferry the drugs to Europe via Spain and Portugal; and that the use of couri-ers or ‘mules’ is described as ‘ant traffic’ because it involves small amounts of cocaine and happens daily . Wright reports that Brazilian police link ‘ant traffic’ with Nigerian groups that organise mules or couriers and have been operating in Rio de Janeiro since cocaine started arriving in the 1980s .

She notes further that these Nigerian groups have progressed from being cou-riers themselves to hiring local call girls who are offered opportunities to go on all-expenses-paid vacations abroad, notably to South Africa . White Europeans are used to take drugs to Europe (often in containers, rather than swallowed) and black Africans to take drugs to Africa (usually in the form of cocaine ‘bullets’) . These are exactly the same practices noted by Namibian police .

Wright also reports that many traffickers are being arrested and dealt with by Brazilian courts . For couriers, the major exit ports are the international airports of Rio de Janeiro and Sao Paulo . However, increased surveillance and controls at these airports have led traffickers to relocate their operations . Cape Verde, previ-ously a Portuguese colony, has grown into a strategic transit point for drugs traf-ficked through north-east Brazil to Europe and Africa . Wright’s observations are confirmed by other research – Brombacher and Maihold point out that Ghana, Guinea-Bissau, Guinea, Cape Verde and Senegal are under suspicion of becom-ing major hubs for cocaine smuggling .17 Guinea-Bissau in particular has already earned the reputation of being Africa’s first ‘narco-state’ . The growth of West Africa as a major transit route for drugs (and a developing market for drugs) led UNODC Executive Director Antonio Maria Costa to declare that West Africa is ‘under attack from Latin American drug traffickers’ .18

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It is not inconceivable that drugs channelled through West Africa may find their way to Southern Africa, especially given the Nigerian connection with both sides of the Atlantic .

As far back as 2005, more than half of all the cocaine seized at Brazilian air-ports was destined for South Africa (52,3 per cent) . Europe was second, at 37,1 per cent . Those arrested were mostly South Americans (52,3 per cent), Africans (34,7 per cent) and Europeans (10,4 per cent) . The large number of people apprehended for drug trafficking en route to South Africa indicates the growing significance of South Africa as a destination for drugs . Three-quarters of the cocaine (777 kg) seized in Africa in 2003 was found in South Africa, followed by Nigeria with 135 kg . Even then the UNODC was reporting that Andean-produced cocaine destined for South Africa was leaving from Venezuela or Brazil, either being sent to South Africa directly or via another African country . Most of the cocaine was couriered by ‘mules’ travelling directly from Sao Paulo to Johannesburg . Later, drug couriers began travelling to Cape Town, as law enforcement authorities clamped down on the Johannesburg route .19

An analysis of the cocaine-trafficking situation in Namibia confirms that trafficking by human couriers is still the dominant mode of smuggling through South Africa . However, according to South African police and media reports of seizures, fairly large consignments have also arrived in South Africa, invari-ably through OR Tambo International Airport . Better controls often lead to the diversion of drugs; hence the shipments to West Africa and South Africa, from where cocaine is transmitted to Europe by couriers . This has made South Africa an ‘important link’ in the international trafficking and organised crime network, with the ‘additional burden of serving as the regional hub’ .20

After the end of apartheid, trafficking in cocaine in South Africa increased dramatically as international trade links by sea, air and land were established, border controls were relaxed and the tourism industry grew . Communication and banking networks, previously prohibited, were developed with the rest of the international community . Furthermore, as many South Africans returned home after many years of exile, migrants from other countries followed . There is now a significant Nigerian population which has become relatively established – partly because of rampant corruption in the Department of Immigration . With the increased availability of cocaine came increased use of the drug . West African gangs are said to handle 80 per cent of South Africa’s cocaine trade .

More recently, African cocaine traffickers from Brazil have come to include Kenyans, Mozambicans and Angolans in addition to Nigerians . These are the

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same groups involved in the South African trade . With the passage of time, South Africans have also become involved, including those previously already engaged in trafficking in cannabis . Routes used include from Brazil through Johannesburg to Harare, Zimbabwe by air, and then back to South Africa by road; from Brazil via Lisbon and Switzerland to South Africa; and from Brazil to Maputo in Mozambique and then to South Africa . A similar trend has been observed in Namibia in the last five years, as Angolans have been apprehended ferrying cocaine by road to South Africa on several occasions . Since Namibia is not a producer, the logical conclusion is that the cocaine was smuggled into Namibia in some way as a diversion .

That Angolans and Mozambicans are engaged in cocaine trafficking is aided by the fact that they share the Portuguese language with Brazilians . Indeed, ex-perience shows that diaspora-type links play an important role in the organisa-tion of crime . Brombacher and Maihold point out that the cocaine gateways into Europe are facilitated by ‘suck links’ . They state that:

Numerous connections with Hispanic and Lusophone production and transit countries, large and well established Diaspora networks, the prox-imity to Africa, and long coastlines make the Iberian Peninsula the ideal gateway and most important hub for South American cocaine .21

According to Major-General Hifindaka of the Namibian Police this pattern is replicated in Africa, especially between Brazilians on the one hand and Mozambicans and Angolans on the other . Nigerian criminal groups, whose criminal tentacles span the globe, also exploit ethnic bonds in their operations .

While human couriers originating from Latin American countries are used to smuggle cocaine on flights to Europe, in Namibia a shift has been observed over the last few years . In the beginning, Nigerian traffickers couriered cocaine themselves; in later years they tended to use Angolans, who currently make up the single largest group of couriers . However, in recent months police have en-countered cases of Namibians being recruited by Nigerians to travel to Brazil to collect cocaine . Namibian nationals have been arrested in Brazil, while a Nigerian pleaded guilty in a Namibian court to recruiting a Namibian woman .

As far as the transatlantic division of labour in drug trafficking and the role of ethnicity is concerned, Brombacher and Maihold point out that there is a basic division of labour between South Americans, Europeans and Africans . Citing the findings of international drug control institutions, they state that two main

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cocaine transfer procedures can be distinguished: first, paying West African middlemen (mostly Nigerians) with small quantities of cocaine for transhipping wholesale quantities of cocaine by fishing boat and storing it temporarily in West Africa; and second, transhipping to Europe in less suspicious yachts, cargo ships and fishing boats . The former is dominated predominantly by Nigerian networks which also control street sales in European cities . Brombacher and Maihold state that

in comparison to other ethnic groups, Nigerian networks demonstrate a high degree of flexibility and inner-ethnic networking . The air couriers themselves are often not members of criminal organisations . They are used by traffickers as a means of transportation, being ‘loaded and unloaded’ in the respective importing and exporting countries .22

On the other hand, large-scale transatlantic operations are controlled mainly by South Americans . Citing substantial seizures by the Portuguese Coast Guard, Brombacher and Maihold opined that this seemed to point to the development of a Lusophone trafficking route running from Brazil to Portugal via Guinea-Bissau and Cape Verde . This view would seem to support the experience of South African law enforcement authorities recounted in Joanna Wright’s article, that West Africans control 80 per cent of the South African cocaine trade .

Information extracted from Angolan couriers apprehended in Namibia con-sistently shows similar patterns of operation to those experienced in West Africa and Europe . The Lusophone connection seems to be at the root of cocaine traf-ficking through Southern Africa as well . Typically, young men and women are targeted for recruitment . They are offered money and a return air ticket to go on a holiday to Brazil . They are also paid up to $10 000 per trip to courier cocaine . Individuals that ingest ‘bullets’ of cocaine assume much higher personal risk and are paid accordingly . They may use the money to buy their own goods for resale back home, usually popular products with high turnover such as human hair, perfumes (usually counterfeit) etc .

In one case reported by Namibian police, a Namibian courier apprehended before departure had been given a parcel by a Nigerian man to deliver to someone in Brazil . Unbeknown to him the parcel contained several thousand US dollars in cash . The use of first names and false names is widespread, so that apprehended couriers are invariably unable to provide useful information regarding the iden-tity of the principals, intermediaries, handlers or even the eventual recipients .

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Sometimes all they have is a telephone or cellular phone contact number . Besides, couriers’ movements are monitored at all stages of the trip . Criminal networks carry out highly effective surveillance at airports and know immediately when a delivery fails because of an arrest .

Hence it is difficult for police to follow up on the intended recipients, or to effect controlled delivery of the drugs in order to apprehend the real culprits . This is why law enforcement efforts in most cases concentrate on interception as a means of disruption, and rarely (if ever) apprehend the real drug lords, or recover the proceeds of cocaine trafficking . There is a high degree of intelligence employed by organised crime groups in their operations to frustrate law enforce-ment efforts . It is pretty much a ‘guerrilla’-type activity, which requires commen-surate counter measures on the part of law enforcement .

Having analysed the cocaine trade between Latin America and Southern Africa and perused available research data on the nature of the trade in South America and globally, my conclusion is that wholesale cocaine trafficking to Southern Africa is controlled by Colombian networks which cooperate with Nigerian and Lusophone (Portuguese- and Spanish-speaking) groups . The latter are intermediaries in the chain . Though they may have access to realisable quan-tities of cocaine, these quantities are small, and used by Colombian organisations more as payment for assistance offered with transport, delivery, transhipment and other logistical issues . It is this ‘currency cocaine’ that is smuggled by air couriers or sent by post .23 Angolans, Namibians, South Africans and Mozambicans are recruited, primarily as ‘mules’ . It is possible that with the passage of time and increased trust between Africans and South American groups that the former will move up the ranks .

The larger consignments smuggled through international airports as cargo fall in a different category . They are shipped between the big players across the Atlantic and involve huge investments . Several interceptions have been carried out at OR Tambo International Airport in South Africa in the last two years; and at least one such consignment was found at the Hosea Kutako International Airport, Windhoek after it was not collected for several weeks . However, it eventually disappeared from the goods sheds and several people were later ar-rested while transporting part of the consignment to the west coast of Namibia . Another portion was intercepted while being ferried by road to South Africa by two Angolans .

Namibian police state that through cooperation with the Brazilian police and Interpol they have established that Brazilian DTOs operate on a cash-on-delivery-

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in-Brazil basis . Selling on credit is not viable, as heavy losses may be incurred if the drugs are intercepted or if a buyer is unable to pay . Because of the illicit nature of the business, normal procedures associated with international trading (such as letters of credit, or financing through merchant banks) are not possible . Therefore, most of the cocaine that is sent from Brazil to Southern Africa has already been paid for (and some of which would be small quantities of ‘currency cocaine’ . Major buyers on the African continent also make payments in cash on delivery to Brazil . It has been noted that the drugs industry is a highly cash-intensive business and ‘in the case of cocaine and heroin the physical volume of notes received is much larger than the volume of drugs themselves’ .24

THe NATuRe ANd FoRM oF dRuG-MoNey LAuNdeRINGThe question that needs to be answered first is whether there is financial profit-ability in illicit drug trafficking; in particular, cocaine trafficking . The facts speak for themselves: in view of the risks involved, engaging in the enterprise would be senseless if it were not profitable . Researchers and UN bodies are of the unani-mous view that drug trafficking is the most lucrative branch of organised crime, with cocaine generating the highest revenues . The biggest source of illicit profits comes from the drug trade and it was drug trafficking that provided the initial catalyst for concerted international efforts against money laundering .25 The lack of information on the extent of the money-laundering problem is due in part to its cash-intensive nature .

In the experience of law-enforcement officials, transactions are invariably conducted in cash . Recruited couriers carry cash on them to pay for the drugs in Brazil . They return with drugs concealed in luggage or orally ingested as well as other goods for resale back home . Legitimate goods may provide cover for the real purpose of the original journey to Brazil . The process therefore entails bulk-cash smuggling of US dollars . This cash is physically carried to South America . There is no paper trail, and this makes it difficult (if not impossible) to determine the origin of the funds, or to establish which funds are being laundered and which are legitimate .

Namibian police and customs officials have in the past intercepted Angolans carrying large sums of cash exiting Namibia at the airports . But weaknesses in exchange control laws make it difficult for officials to hold onto any seized cash in order to facilitate court-ordered forfeiture . This is because, even if a drug

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trafficker enters Namibia through a land border-post and does not declare cur-rency in his or her possession, there are a variety of valid defences which he or she could raise if arrested, for example those based on mistake of fact and/or law . Besides, the only form that any person entering Namibia at any designated port of entry is required to complete is an immigration form . To the extent that any currency declaration is required, this is done to prove that visitors have sufficient funds for their upkeep and will not be a burden on the state while in Namibia . It is not intended to be a customs declaration in the proper sense .

Individuals found with suspiciously large sums of cash typically claim that the money is legitimate and that they are on their way to Johannesburg en route to Dubai to purchase motor vehicles, exotic furniture or other goods for resale, or that they are travelling to South America for a holiday and to buy goods for resale . This makes it difficult for law enforcement to confiscate the cash . Furthermore, by law, one is required to surrender foreign currency to an authorised dealer only within 30 days of acquisition . Thus, unless the precise date of acquisition can be determined it is not possible to prove a violation, because of the wide array of possible explanations that could be given to explain legal possession of the cash .

This means that some of the proceeds of drug trafficking are laundered through bulk-cash smuggling to pay for drugs purchased, or are simply spent, whether on daily needs or on luxuries . Some of the cash smuggled for drug purchases is in fact licit, but is laundered in the sense that it is smuggled for an illegitimate purpose just as legitimate cash is laundered in the financing of terrorism .

Those drugs imported into Namibia and on-sold for consumption in other markets such as Europe or South Africa are also paid for in cash . A European or South African buyer would typically pay cash on delivery to a distributing intermediary . Similarly, the retail drug business is a cash business . This makes the task of detecting money laundering and controlling it very difficult .

International experience has proven that drug-money laundering also occurs through the formal financial systems . Indeed, it was the increasing abuse of global financial systems for drug-money laundering that brought the threats posed by money laundering to international attention . Money laundering there-fore also threatens financial systems in Southern Africa . These systems are fairly well developed and modern in South Africa, Namibia, Botswana, Swaziland and Lesotho (the so-called Common Monetary Area), and to a lesser extent in Zambia and Zimbabwe . Systems in Angola and the Democratic Republic of Namibia are less sophisticated following decades of underdevelopment, political unrest and

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civil wars . Financial systems in all countries can be abused for money launder-ing to a greater or lesser degree, but particularly those that have no anti-money laundering legislation and regulatory measures .

Any attempt to accurately quantify the magnitude of drug-money laundering in Southern Africa, or within the smaller territorial boundaries of a less popu-lous state such as Namibia, would seem to serve no useful purpose; likewise any attempt to ascertain to any degree of scientific certainty the uses to which pro-ceeds of drug trafficking are directed . Specifically, where money generated from cocaine trafficking goes is unknown, as stated earlier .26

Citing UN estimates, Brombacher and Maihold state that about 80 per cent of total revenues from wholesale smuggling (according to 2009 statistics, approxi-mately $250 million) remains in the hands of West African intermediaries . The TNI report highlights the different figures given by different groups for different audiences and purposes, and the controversy that these figures have generated . The figures are probably usually exaggerated as they usually refer to retail turn-over, which is much more than the value of the illicit international drug trade . In the TNI report it was recommended that ‘any serious estimate should study the difference between wholesale export and import prices which are about 1000 per cent compared to about 5 per cent in licit trade’ .

They further state that

difficulties encountered in obtaining hard facts and figures cast doubt on whether getting accurate figures is really that important . It is not possible, for example, to assess the impact of controls on drug distribution systems . Though it has been suggested that empirical evidence about the differences controls have made could be obtained from the money launderers them-selves, qualitative research is possibly the best that can be done to obtain an assessment . Policy-makers are more influenced by social impacts than by the hard facts and figures of drug trafficking . The only significant per-formance indicator for policy-makers is prevalence; quantity is generally ignored . Therefore, while research may be useful to assess the effects of the illicit drug industry on a specific country, the ‘real answer is that drugs are a policy area with very strong moral overtones . It has been said that “when you are on a crusade you don’t need a map”’ .27

The street values often used by law enforcement officials (based on specific local experience) may be useful as indicators of the net retail costs of the drug, inclusive

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of all transport and risk expenses incurred in getting the drug to Namibia . This approach would take into account the real probability that drug seizures con-stitute a very small percentage of the actual volumes passing through . Global figures suggest that only 2 per cent of drugs are seized – the rest go undetec-ted . Recent estimates of the Financial Action Task Force (FATF) calculated in this way suggest that the aggregate size of global money laundering is between 2 per cent and 5 per cent of world economic output, or between $590 billion and $1,5 trillion, most of which is the product of illicit drug trafficking; though some results from corruption, fraud and organised crime .

Namibia is largely a transit destination for cocaine . It is a consumer destina-tion by virtue of its proximity to South Africa, which has a larger population and therefore potentially a significantly larger market; and because its financial systems are inextricably tied to those of South Africa . Its currency, the Namibian dollar, is pegged equal to the South African rand and both currencies are inter-changeably used in everyday transactions without restrictions . One can obtain South Africa rand from any bank without commissions or charges . Namibia is therefore an ‘extension’ of South Africa, in terms of market perception from a drug-trafficking angle . Namibia is also a transit location for cocaine destined for Europe . It has been reported that the euro has replaced the dollar in the western hemisphere as the currency of choice among traffickers, who are drawn by bigger profits on the European street, where a kilogram of cocaine sells for about $50 000 – compared to $30 000 in the United States . In 2007, US authori-ties said that 90 per cent of the €1,7 billion (equivalent to $2,3 billion) registered as having entered the United States in 2005 came through Latin America, where drug cartels laundered their proceeds .28 On the south-west coast of Africa and in Southern Africa the US dollar is still the currency of choice for drug traffickers .

While it is widely known that Angola is awash with US currency it is not known how much of it is in circulation . However, the relatively large amounts found on Angolan nationals in Namibia indicate that a significant amount is being transhipped to South America . The recent collapse of the Zimbabwean dollar and that country’s use of hard currency (especially the US dollar) have increased the amount of US currency in circulation in Southern Africa . To compound the problem, illicit diamond dealing in Zimbabwe grows the number of sources of hard cash, increases opportunities for counterfeit currency avail-ability and indeed threatens normal international business .29 Traffickers have been known to rely on the same routes and methods they use to smuggle drugs into Europe and to smuggle cash out of the United States, sometimes in large

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quantities to avoid financial systems that create a paper trail . For example, West Africa is said to have become a hub for shipments of money to Latin America, as exemplified by the seizure of €5,4 million in cash aboard a Spanish charter jet that led law enforcement to Hugo Bernal, a leading Colombian drug trafficker arrested in March 2007 .30

eFFeCTIve dRuG TRAFFICKING CouNTeR-MeASuReS FoR dRuG-MoNey LAuNdeRING IN SouTHeRN AFRICAResearchers Brombacher and Maihold have argued

that drug consumption follows market mechanisms; consumption drops off as prices rise . The high price of cocaine, however, is not driven by pro-duction costs . These costs are vanishingly small . It is the public actions taken to control the supply of cocaine and the violent character of illegal markets which make the narcotic so expensive . On the one hand these actions raise the risk of prosecution faced by the drug traffickers, and on the other hand, they cause shortages in supply of the drug . An intervention in the drug’s value chain only makes sense from a supply-side viewpoint when it leads to a price increase for consumers . This point has compelling implications for drug control: efforts to stem drug supply, whether they are of a repressive, prosecutorial, or developmental character, must be judged based on their impact on the final price of cocaine . An exponentially in-creasing price curve runs parallel to the value chain of cocaine, meaning that the further along the value chain the cocaine is from the producing country, the higher the selling price .31

They point out that in Germany, a kilogram of cocaine has a conservatively es-timated street value of €80 000 . The same kilogram of cocaine costs €1 200 in Colombia – and the coca leaves used in its production, €250 . Because of the ex-ponential value increase, a shortage of coca leaves or cocaine in the Andes agri-cultural production area does not have any effect on retail prices in Europe . Thus, Brombacher and Maihold argue that interventions should be undertaken against the cocaine value chain at the point where the price of the drug is already so high that the impact of the shortage does not evaporate – namely, as close as possible to the consumer markets . At the same time, interdiction at any transit level raises

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the risk level for drug traffickers and consequently raises drug prices . Finally, they came to the conclusion that interdiction efforts carried out close to consum-er markets are the most efficient instrument for controlling international drug supply, recommending the control of price levels and consumption of cocaine in Europe through the use of ‘systematic transit’ interdiction in and around Europe using legal, political and technical instruments . Although their research was Euro-centred, their conclusions are valid and applicable to the Southern African situation . This would include – in a holistic fashion – the control of chemical precursors and the eradication of illicit crops, alternative development plans and interdiction efforts on drug transit routes, all practices endorsed by the UN Commission on Narcotic Drugs . Selective interdiction efforts, they argue, only lead to a shift in trade routes, as criminal networks can react flexibly without the need to worry about saving costs .

These approaches make a great deal of sense even in the context of the growing transit trade in cocaine and the inevitable development of a consumer market on the south and south-west coasts of Africa . They represent an important step in drug-money-laundering control .

While measures targeting the trafficking of specific drugs (most importantly cocaine) are important, of equal or more importance is the need to target the money associated with drug trafficking . This would include all money or assets found in the possession or control of proven or suspected traffickers, since money is the motivating factor for engaging in drug trafficking and is the life-blood of syndicates . In general, drug proceeds are used to pay sources of supply, to support the infrastructure of the organisation and to acquire personal assets . Leftover cash is used either as part of the organisation’s working capital or for personal wealth .

In this respect law-enforcement focus must centre on the flow of money back to the international sources of supply . This is the money that is destined to finance the next cycle of illegal drugs that will be smuggled to Africa from South America . This is also the money that will enable international drug syndicates to continue their business . Payments to sources of drugs are almost exclusively in cash . This cash is handled and transported covertly, just like the drugs that generated it, according to the Drug Enforcement Agency (DEA) of the USA .

This approach has been pursued with some measure of success by the Office of National Drug Control Policy of the USA . The DEA treats financial investiga-tions into this aspect of drug proceeds as ‘contraband’ investigations as opposed to the asset-tracing investigations of the typical money-laundering scenario .

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Such investigations focus on identifying and interdicting those drug proceeds flowing back to the source of supply . This approach would require the tightening of exchange control legislation to control the movement of cash across borders . It would also require law enforcement, police, immigration, intelligence and customs to cooperate in the surveillance of cash-smuggling activities within the region . Cooperation and information-sharing, training and joint operations should also be encouraged between respective law enforcement agencies along the South Atlantic coast .

Travellers to known cocaine-supply destinations should be scrupulously vetted (within the law) to ensure that only genuine travellers enter; and then only with limited amounts of foreign cash in their possession . In certain cases, controlled delivery of detected cash to the command and control centre in the supply country must be facilitated with the cooperation of law enforcement in that country, taking account of all inherent risks including corruption . This is an area that has been poorly regulated on the whole, enabling couriers to leave their home state and transit through to South America without much hindrance . A great deal of effort must be directed at detecting and intercepting cash on its way to drug-supply sources rather than drugs already acquired .

Enhanced bulk currency interdictions will ultimately affect the command and control of drug syndicate centres in the Americas . It is they who will feel the pinch more than anyone else in the value chain .

Additionally, it is necessary to cooperate at an international level in identify-ing members of the drug syndicates and their agents on the African continent who recruit couriers and send them to South America and in establishing a data-base and criminal watch-list of these individuals . Investments, businesses and assets controlled by such individuals must be identified and targeted for confis-cation under local legislation .

In light of the increasingly sophisticated nature of transhipment of wholesale consignments of cocaine across the Atlantic, including the use of aircraft, fishing boats and ‘submersibles’ (crude, submarine-type vessels used on the West African coast), it is imperative that states such as Namibia, South Africa and Angola – which have long coastlines – tighten up law enforcement along their coastlines to prevent the offloading of drugs .

Finally, an approach that not only seeks to intercept drugs landed on the African continent but to intercept cash on its way to pay for drugs will have beneficial implications for drug-money-laundering control in Southern Africa .

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It would increase the risks for traffickers, and consequently increase the price closer to consumer markets, which would ultimately lower demand and profits .

NoTeS

1 Branko Milanovic, Globalization and the corrupt states, YaleGlobal, 2 November 2007, http://yaleglobal .yale .edu/content/globalization-and-corrupt-states (accessed 8 November 2009) .

2 UNESCO, The globalization of the drug trade, Globalisation101 .org: The Levin Institute, State University of New York, Case study: illicit drugs and globalisation, 1 March 2008, http://www .unesco .org/most/sourdren .pdf (accessed 20 October 2009) .

3 All references to ‘$’ are to US dollars unless otherwise indicated .

4 European Monitoring Centre for Drugs and Drug Addiction, The state of the drug problem in Europe, 2007 Annual Report, http://www .emcdda .uuropa .eu/html .cfm/index419EN .html (ac-cessed 20 October 2009) .

5 UNESCO, The globalization of the drug trade .

6 Francis Thoumi, Drug policies, reforms, and Columbo-American relations: Proceedings from the international seminar, ‘Drug trafficking, the relations between Europe, Latin America and the United States’, Bogota, Colombia, 24–26 October 2005, http://www .drugpolicy .org/docU-ploads/Drug_Trafficking_Europe_Latin_America_United_States .pdf (accessed 20 October 2009) .

7 Moises Naim, Illicit: how smugglers, traffickers and copycats are hijacking the global economy, the economic impact of the illicit drug industry, Summary Report of Proceedings of the TNI Expert Seminar, 5–6 December 2003, Amsterdam Transnational Institute .

8 National Drug Threat Assessment 2009, US National Drug Intelligence Centre, 2009 .

9 Transnational Institute, Summary of the report of the proceedings of the TNI Expert Seminar, 5 –6 December 2003: The economic impact of the illicit drug industry, September 2004, TNI Crime and Globalisation: Transnational Institute, http://www .tni .org/crime (accessed 19 October 2009) .

10 International Narcotics Control Board, International Narcotics Control Board R eport 2008, Vienna: INCB, 2008, paras 107 to 111 .

11 TNI Crime and Globalisation, 4 .

12 Michael Levi, TNI Crime and Globalisation, 17 .

13 For example, references to Mafia-type groups (Italian, Japanese, Chinese, Russian, Nigerian) are common .

14 Deputy Inspector General Operations, Namibian Police: Major-General Villo Hifindaka, inter-view conducted by author, 7 October 2009 .

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15 Chief Inspector Barry de Klerk, Drug Law Enforcement Unit, Namibian Police, interview con-ducted by author, 13 October 2009; Major-General Hifindaka, author interview .

16 Joanna Wright, Cocaine traffickers develop new routes from Brazil, http://www .unodc .org/pdf/brazil/crime (accessed 18 November 2009) .

17 Daniel Brombacher and Günther Maihold, Cocaine trafficking to Europe, options of supply control, Stiftung Wissenschaft und Politik (SWP) Research Paper, RP10, Berlin, September 2009, 9–11 and 13ff http://www .swp-berlin .org .

18 United Nations Office on Drugs and Crime (UNODC), “The threat of narco-trafficking in the Americas”, Vienna: UNODC Article, 2008, p1 .

19 Joanna Wright, Cocaine traffickers develop new routes from Brazil .

20 Rob Boone, UNODC representative for Southern Africa (in a statement cited by Joanna Wright, Cocaine traffickers develop new routes from Brazil) .

21 Brombacher and Maihold, Cocaine trafficking to Europe, options of supply control, 13 .

22 Brombacher and Maihold, Cocaine trafficking to Europe, options of supply control, 15ff


24 Billy Steel, Money laundering information website, http://www .laundryman .u-net .com/page7_wcwdo .html (accessed 20 November 2009) .

25 See UNODC on Money Laundering and Countering the Financing of Terrorism (Website infor-mational) http://unodc .org/unodc/en/moneylaundering (accessed 10 November 2009) .


27 Transnational Institute, Expert Seminar Report, citing Peter Reuter, Professor in the School of Public Affairs and Department of Criminology, Maryland University .

28 Victoria Burnett, Euro becomes currency of choice for cocaine traffickers, New York Times, 10 May 2007, http://www .nytimes .com/2007/05/10/world/americas/10iht-dea .4 .5655293 .html?_r=1 (accessed 10 November 2009) .

29 Zimbabwe formally abandoned the use of its currency, the Zimbabwe dollar, in February 2009, following years of world-record hyper-inflation and political turmoil .

30 Burnett, Euro becomes currency of choice for cocaine traffickers .

31 Brombacher and Maihold, Cocaine trafficking to Europe, options of supply control, 16ff .

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Chapter 8

Taking sidesFactors affecting political will in combating money laundering

Joras Ferwerda

INTRoduCTIoNMy first encounter with research on money laundering was in 2005 when the Dutch Ministry of Finance asked a team of scientists1 to answer these two very specific questions: ‘How much money is laundered in the Netherlands?’ and ‘What are the effects of money laundering?’ Implicitly the question was whether or not money laundering should be fought . The fight against crime in general seems to be much more evident than the fight against the specific crime of money laundering . Since the Financial Action Task Force (FATF) was founded in 1989, awareness of money laundering has greatly increased, as has the action taken by countries to fight it, but this has not been without problems .

Money laundering has been taken much more seriously internationally since 9/11, when the United States increased the pressure to fight both money launder-ing and the financing of terrorism . This is also the case in Southern Africa . An Institute for Security Studies (ISS) conference in 2008 entitled ‘Taking money laundering seriously’ included presenters from numerous African countries,2 who gave a professional and fairly thorough overview of the money launder-ing issues in their countries . Remarkably, all the presenters discussed a lack of political will to fight money laundering in their countries, which had also been apparent in the Netherlands . Apparently, political will is not as evident in the fight against money laundering as it is in the fight against other crimes . This is the primary thrust of this chapter .

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Taking sides: Factors affecting political will in combating money laundering

Both developed and developing countries seem to face the same question: ‘Why should we fight money laundering?’ Without an answer to this question it is under-standable that the (political) will to fight money laundering will be lacking .

This chapter specifically answers the following questions:

Why is there a lack of political will to fight money laundering? QQ

What is the effect of this on anti-money laundering (AML) policies? QQ

How can we promote effective AML policies? QQ

THe CAuSeS oF A LACK oF PoLITICAL wILL To FIGHT MoNey LAuNdeRINGDifferent countries have always had different amounts of political will in a whole range of policy areas . There are many historical and/or cultural facts that cause these differences . This chapter restricts itself to the factors that cause a lack of political will to fight money laundering .

Money laundering is ‘invisible’ The FATF defines money laundering as the processing of criminal proceeds to disguise their illegal origin .3 A key term here is ‘disguise’ . The goal of money laundering is to create a façade that makes it hard to see what is actually going on . Apart from that, as money laundering is a criminal act in most countries it is therefore deliberately done in such a way that it is not visible to the public eye or, more significantly, to the police . This makes money laundering more or less ‘invisible’ to policy makers, among others . Its effects, too, are not easily seen . Most crimes have visible effects – dead bodies (murder), missing items (theft), counterfeit goods, etc ., but a specific goal of money laundering is to leave no trace at all . Nor does it leave any apparent victims, who might go to the police . It is little wonder that there appears to be a lack of political will to fight money laun-dering, as the crime appears to be victimless . As far back as 1859, John Stuart Mill concluded that governments should not forcibly stop people from engaging in victimless crimes, because these crimes do no real harm to others . Since there are no victims of money laundering, nor are there specific police/crime statistics on this crime . Even in the statistics of the financial sector, money laundering is not visible as it is normally hidden within a facade of foreign direct investment (FDI), loans, turnover, trade and other general categories .

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Why fight the invisible? Since money laundering is not visible (or is so only sporadically), the logical con-sequence is that it does not receive the same amount of interest as other matters requiring the more urgent attention of government . Government action is, as an economist would call it, a scarce good . Governments have to prioritise the policy areas on which they wish to act .

Even when politicians see money laundering as a priority and fight it inten-sively, the result of this fight might still be relatively hard to see, especially when there is a preventative focus . It could be that certain policy actions decrease the amount of money laundered significantly, but when this reduction is not directly measurable, there is no visible result . Politicians are thus unable to demonstrate the success of their policy and this might diminish their chances of being re-elected, especially when the means to fight money laundering could have been used in a visibly effective way in another policy area .

Why fight money laundering when there is no visible negative effect?

THe eFFeCTS oF A LACK oF PoLITICAL wILL To FIGHT MoNey LAuNdeRINGAlthough money laundering is fought by national and international institutions, mostly fed by intelligence from the private sector (banks, notaries, lawyers, customs, etc .), the initiatives of governments and their ongoing action are es-sential, which makes the political will to fight money laundering crucial .

No anti-money laundering policiesThe most logical consequence of a lack of will is simply that no action is taken . In this case, the primary effect of a lack of political will to fight money laundering is that no government action is taken to prevent criminals spending their ill-gotten gains . Since there is no obvious pressure from the public to fight money launder-ing, there are no direct (electoral) effects . Most of the pressure on a government that does not take action to fight money laundering comes from other countries .

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The international approach towards anti-money laundering policyAnti-money laundering policy has become a major issue in the Western world since 9/11, especially in the United States . Since money laundering is usually an international crime and the effectiveness of the fight against it depends on co-operation between countries, countries are more or less forced to cooperate in fighting money laundering . As soon as a country neglects its role, it creates an opportunity for criminals elsewhere to launder their dirty money in that country . The chain is, so to speak, only as strong as its weakest link .

The international AML approach, especially by the FATF, focuses on more or less forcing countries to fight money laundering by threatening economic iso-lation and/or blacklisting instead of focusing on creating the (political) will to take action . The AML measures in each country are evaluated by other countries and compared with the current standards of adequate AML policy represented by the FATF’s ‘forty recommendations’ . Countries that fail to comply with these minimum requirements are placed on the FATF blacklist .4 They could face eco-nomic isolation as a result, especially because their appearance on the blacklist produces reputational damage that reduces potential trade .5

However, what is evaluated is whether all measures to fight money laundering are in place (laws, institutions, international agreements, etc .), and not whether they are used effectively . Measuring ‘law in the books’ and not ‘law in action’, combined with a lack of political will, has an unwanted side effect .

The result of this approach is fairly obvious . When someone is asked to do two tasks, but only evaluated on one of them, the one that is evaluated will be concentrated on unless the person has an internal motivation to do both . A common example (probably because it is so close to this writer) is that of a pro-fessor at a university: he is supposed to write scientific papers and teach the new generation . When he is evaluated solely on his scientific output, he will perform the teaching part of his job with as little time and energy as possible, unless he has some sort of personal drive to educate the students . By the same reasoning, countries are asked to fight money laundering but are evaluated solely on the ‘law in the books’ . These countries can institute all kinds of AML measures without catching a single money launderer . They specialise in meeting the requirements of what is actually measured (whether or not they have adequate means to fight money laundering), instead of what should be measured (how well countries actually fight money laundering) . Therefore the current international approach

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to money laundering can lead to countries spending their scarce resources on measures that do not have the desired result, or indeed any result .

THe PoSSIBLe SoLuTIoN To A LACK oF PoLITICAL wILL In economics, a central assumption is that behaviour is driven by costs and bene-fits (not necessarily measured in money) . When costs (disutility) exceed the ben-efits (utility), rationally this means an action will not be performed . Conversely, when the benefits exceed the costs it will be performed . At first, this theory was applied only to consumer/producer behaviour, but it has been extended to other general actions and to other decision-making bodies, such as institutions and governments, and even to criminals . The consideration of costs and benefits is not always as conscious as one might expect . Costs and benefits are not always known and their consideration might therefore be an estimate, a guess or even just a gut feeling . When governments decide in which policy field they would like to act, an un/conscious cost-benefit analysis influences this decision . This is also the case with AML policy .

The cost-benefit analysis of anti-money laundering policyMost costs of AML policy are very apparent . They include enforcement costs (police, judges, prisons), costs to the private sector (reporting obligations for fi-nancial and credit institutions and other sectors/businesses), institutional costs (setting up financial intelligence units), implementation costs (criminalising money laundering through changes to the law, appropriate punishment, making a case) and costs of international cooperation (signing memoranda of under-standing, processing extraditions, information sharing) . However, the benefits of AML policy are not quite so apparent . The only real result of this policy might be a decrease in the amount of money laundering that takes place, but why is that beneficial? This is the central question in this chapter . Governments only perform effective AML action when they have (domestic) incentives to do so: when there is sufficient political will . To create this political will, it is necessary to show that the benefits of AML policy exceed its costs . Doing so seems to be the role of science- and research-oriented institutes, like the ISS . The rest of this chapter thus focuses on the effects of AML policy in a bid to illustrate the domes-tic incentives for fighting money laundering .

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Literature review on the effects of AML policyThis literature review is based on a systematic search of the publications of international organisations such as the International Monetary Fund (IMF), Organisation for Economic Development (OECD) and the Financial Action Task Force (FATF) . In addition we browsed through Econlit, an economic search da-tabase that includes about 750 journals and over 44 000 working papers . We also used the search engine of the Dutch Central Catalogue (NCC), which includes around 14 million books and 500 000 magazines . Last, we analysed the Journal of Money Laundering Control and the Journal of Financial Crime. The table shows the results of this literature study .

Table 1 The effects of money laundering6

EffectType of effect Effect in which sector?

Short term

Long termEconomic Social Political Real Financial

Public and monetary

1 . Losses to the victims and gains to the perpetrator7

X X X

2 . Distortion of consumption8 X X X

3 . Distortion of investment and savings9 X X X

4 . Artificial increase in prices10 X X X

5 . Unfair competition11 X X X6 . Changes in imports and exports12 X X X

7 . More (or less) economic growth13 X X X

8 . Change in output income and employment14

X X X

9 . Lower revenues for the public sector15 X X X

10 . Threatens privatisation16 X X X X

11 . Changes in the demand for money, interest and exchange rates17

X X X

12 . Increase in the volatility of interest and exchange rates18

X X X

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Although this literature search turned up an extensive list of 25 effects of money laundering, most are only mentioned in passing, which means that their identi-fication might be the result of guesswork rather than in-depth research . Unger et al . conclude that ‘most literature on money laundering effects is pure speculation . . . one source refers to the other source, without much of an empirical solid back up’ .32 Some studies that are an exception to this general conclusion are described below .

13 . Greater availability of credit19 X X X

14 . Higher capital inflows20 X X X X

15 . Changes in foreign direct investment21 X X X X

16 . Risk for the financial sector, solvability and liquidity22

X X X X

17 . Profits for the financial sector23 X X X

18 . Reputation of the financial sector24 X X X X

19 . Illegal business contaminates legal business25

X X X X X

20 . Distorting of economic statistics26

X X X

21 . Corruption and bribery27

X X X X

22 . Increase in crime28 X X X X X

23 . Undermines political institutions29

X X X

24 . Undermines foreign policy goals30

X X X

25 . Increase in terrorism31 X X X X

Source: Author, based on Table 4.1 in B Unger, G Rawlings, M Siegel et al, The amounts and effects of money laundering, 2006. For details of the effects see 92–107.

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The estimated effects of AML policyAlthough some of the literature sources from which the list of 25 effects is drawn date back more than a decade, the testing and estimation of these effects has just begun . While criminologists are responsible, to a great extent, for describing the different types of money laundering and their contexts, economists focus on estimating the effects money laundering may have on the economy and society . Three such effects are focused on here: the effect of AML policy on other crimes, the effect of money laundering on economic growth and the capital flow gener-ated by money launderers .

The effect of AML policy on other crimesWhen the US was not able to win the ‘war on drugs’ it decided to go after the money that criminals made from the drugs trade . The US took the view that the whole world had to join its fight against money laundering in order to prevent criminals from spending the proceeds of their drugs-related crimes . So the rationale for fighting money laundering was, and still is, to make it harder for criminals to enjoy their ill-gotten gains . The rationale is that if governments succeed in making money laundering difficult, then becoming a criminal will be less attractive33 since it will be harder to enjoy the fruits of crime, even when the crimes that are committed result in large gains and are themselves not detected . It is therefore possible that AML policy might not only decrease money launder-ing, but also crime in general .

Ferwerda assesses whether this reasoning is reflected in reality .34 To do so one needs to quantify the crime levels and the effectiveness of AML policy in each country . Although one can argue that crime levels are not precisely measureable, data such as police records of total crimes committed can be used to approximate the crime levels .

Data on the effectiveness of AML policy is even more cumbersome . The infor-mation is quite hard to quantify and differs across countries . The only structured and more-or-less consistent information is from the FATF mutual evaluation reports, based on the FATF’s Forty Recommendations . If they are all fully im-plemented these Recommendations should provide a country with a complete framework for successfully combating money laundering . The forty recommen-dations include:

The definition of money launderingQQ

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Descriptions of the crimes which generate launderingQQ

The sectors that should be monitored more closely QQ

The regulatory institutions and international cooperation needed .QQ 35

Although the FATF mutual evaluation reports are based on the same forty recommendations,

as a result of the way the assessments were made and even their layout, the assessments differed widely in quality, content, layout, and even across institutions and countries, making it very difficult to make sensible cross-country comparisons and analysis .36

The fact that the FATF applies scores to each recommendation for each country creates the opportunity to quantify the degree of AML policy for each country . However, these scores are not internationally comparable (mostly because the economic realities of the country are taken into account), so Ferwerda and Bosma37 completely reapplied them to make them comparable across 17 countries and the forty recommendations . They consistently applied 680 scores to measure the degree of AML policy .

Econometric methods were used to analyse the data, taking into account country characteristics such as the legal framework, economic strength, levels of corruption and public enforcement . The conclusion of this econometric research is that AML policy can be used to reduce crime levels . More intense international cooperation in the fight against money laundering is especially associated with lower crime rates .

Thus, the efforts of the international organisations (like the UN, FATF, IMF and the World Bank) have to be seen positively and might be important in not only decreasing the amount of money laundering worldwide, but also the levels of crime .38

The effect of money laundering on economic growthQuirk39 was the first to conduct empirical research on the effects of money laun-dering . He used the widely respected economic growth model of Barro40 to esti-mate the effect of money laundering on economic growth . Quirk changed Barro’s growth model by replacing the human capital variable with a money-laundering variable . As he had no (country specific) estimates of money laundering, he used countries’ crime levels as a proxy variable instead . The problem, of course, is that

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the effect of crime in general is estimated and not the effect of money launder-ing specifically . Quirk found that money laundering (actually crime) dampens economic growth .

Ferwerda and Bosma41 did a follow-up study on the work of Quirk . They also estimated the effect of money laundering on economic growth based on Barro, but used six different actual estimates of money laundering for 17 countries, all based on the Walker model and the improved Walker model .42 To test the ro-bustness of Quirk’s results, the crime level was also used as a proxy for money laundering . It turned out that the result found in Quirk (1996) – that money laun-dering dampens economic growth – was consistent with Ferwerda and Bosma’s study . Higher values in the six different estimates of money laundering and the crime rate were all associated with lower economic growth rates .

Since Ferwerda and Bosma had estimates of crime and money laundering, they were able to estimate their effects separately . Their research showed that, while money laundering itself does not dampen economic growth, the crime that is intermingled with it does . Thus money laundering dampens economic growth because it is intermingled with crime . This clearly relates to Ferwerda’s43 finding that AML policy reduces crime . By fighting money laundering one also decreases crime, which leads to more economic growth .

The effect of money laundering on capital flows Estimates say that money laundering worldwide is ‘heavily concentrated in Europe and North America’ .44 The reasons probably lie in the more advanced fi-nancial systems in the Western world and the fact that it is a good place to enjoy a life of luxury on the proceeds of crime .45 This geographic concentration of money laundering has its effect on capital flows worldwide . Proceeds of crime are gained all over the world and when a large proportion of this money finds its way into the Western economies, it means that it subtracts money from other parts of the world . Baker46 estimates that about $500 to $800 billion comes from the develop-ing and transitional economies and flows into the financial system in the West . So the money-laundering process removes a significant amount of capital (and therefore, potential development) from developing countries . He concludes that the rich are getting richer and the poor are getting poorer – because the average income globally is increasing at the same time as the number of people living below the poverty line is increasing – and suggests that this movement of capital might be one of the important reasons behind it . Baker47 estimates that, for every

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$1 of aid sent by the West to developing nations, $10 finds its way back to the West ‘under the table’ through illicit financial flows .

With this amount of money flowing out of developing countries, it is not dif-ficult to imagine how hard this makes it for them to develop . It is thus important for developing countries to fight money laundering and stop this unjust outflow of capital .

CoNCLuSIoNA lack of political will to fight money laundering is a global phenomenon . While money laundering is a crime, the fight against crime in general seems to be much more evident than the fight against money laundering specifically . Having the political will to fight money laundering is essential for initiating and improving AML measures and making them effective . This chapter argues that the lack of political will to fight money laundering comes from the fact that money launder-ing is not a ‘visible’ crime in itself and its effects, too, are hard to measure . These characteristics make it an unlikely topic for governments to prioritise . This could lead to there being no AML policies at all or, in response to international pres-sure, to ineffective AML policies . This chapter stresses that we should focus on the domestic incentives to fight money laundering by showing, measuring and calculating its effects . The conclusions of research on the effects of money laun-dering are that:

AML policies can be used to reduce crime levels in general, not just money QQ

laundering . Intensive international cooperation in the fight against money laundering is especially associated with lower crime rates .Money laundering itself does not dampen economic growth; rather, it is the QQ

crime that is intermingled with it that does so .Illicit outflows of capital from developing countries to the developed world QQ

means that it is especially important for developing countries to fight money laundering . Doing so reduces crime levels, thereby increasing economic growth and slowing the outflow of capital

It is also important that the other effects of money laundering mentioned in the literature are evaluated by researchers so that the cost-benefit analysis of AML policy becomes more and more decisive .

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NoTeS

1 I was among the members of this team . The results of this study were reported to the Dutch Ministry of Finance in B Unger, G Rawlings, M Siegel et al, The amounts and effects of money laundering, 2006, http://www2 .econ .uu .nl/users/unger/ferwerda/Amounts%20and%20Effects%20ML .pdf (accessed 12 November 2010) .

2 Botswana, Kenya, Lesotho, Malawi, Mozambique, Namibia, South Africa, Swaziland, Tanzania, Uganda, Zambia and Zimbabwe .

3 Financial Action Task Force (FATF), The Forty Recommendations, http://www .oecd .org/fatf/40recs_en .htm, 1996, 1 .

4 For an example of this, see FATF, Annual and overall review of non-cooperative countries or territories, 2005, http://www .fatf-gafi .org (accessed 10 June 2005) .

5 See also B Unger and J Ferwerda, Regulating money laundering and tax havens: the role of blacklisting, paper presented to the European Consortium for Political Research (ECPR) conference on (re)regulation in the wake of neoliberalism, consequences of three decades of privatization and market liberalization, Utrecht University, 5–7 June 2008 . ‘When the Pacific island Nauru was blacklisted for money laundering, economic sanctions were discussed and media reports indicated that it was threatened with sanctions . But not much happened . The US authorities issued cautions to its banks to take special precautions when dealing with Nauru . When only three countries remained on the blacklist – Nauru, Nigeria and Myanmar – some banks and financial institutions took their own initiatives and refused to make any transactions with any of these countries, but they were the decisions of individual corporations, not particu-lar countries, and definitely not multilateral sanctions .’ (E-mail interview with Greg Rawlings on 25 April 2008 .)

6 The notes in each field of the table are updated from Unger et al, The amounts and effects of money laundering, 110–111 .

7 J Boorman and S Ingves, Financial system abuse, financial crime and money laundering, International Monetary Fund (IMF), 2001, 9; M Camdessus, Money laundering: the importance of international countermeasures, Plenary meeting of the FATF, Paris, 10 February 1998; N Mackrell, Economic consequences of money laundering, in A Graycar and P Grabosky (eds), Money laundering in the 21st century: Risks and countermeasures, Canberra: Australian Institute of Criminology, Research and Public Policy Series, 1997; J Walker, Estimates of the extent of money laundering in and through Australia, paper prepared for the Australian Transaction Reports and Analysis Centre, 1995 .

8 B L Bartlett, The negative effects of money laundering on economic development, Platypus Magazine 77 (2002); Mackrell, Economic consequences of money laundering; Walker, Estimates of the extent of money laundering in and through Australia .

9 E Aninat, D Hardy and R B Johnston, Combating money laundering and the financing of terror-ism, Finance & Development 39(3) (2002); Bartlett, The negative effects of money laundering on economic development, 19; Camdessus, Money laundering; Mackrell, Economic consequences

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of money laundering; R McDonell, Money laundering methodologies and international and re-gional countermeasures, paper presented at a conference on gambling, technology and society, Rex Hotel, Sydney, 7–8 May 1998, 10–11; J McDowell, The consequences of money laundering and financial crime, economic perspectives, Electronic Journal of the US Department of State 6(2) (2001); P J Quirk, Money laundering: muddying the macroeconomy, Finance & Development 34(1) (1997); V Tanzi, Macroeconomic implications of money laundering, in E U Savona, Responding to money laundering, international perspectives, Amsterdam: Harwood Academic Publishers, 1997, 95–96; Walker, Estimates of the extent of money laundering in and through Australia, 1995 .

10 D I Keh, Drug money in a changing world: economic reform and criminal finance, 1996, UNODC, http://www .unodc .org/pdf/technical_series_1996-01-01_2 .pdf (accessed 9 June 2010), 5; P Alldridge, The moral limits of the crime of money laundering, Buffalo Criminal Law Review 5 (2002), 314; FATF, Money laundering and terrorist financing through the real estate market, 2007, http://www .fatf-gafi .org .

11 Mackrell, Economic consequences of money laundering; McDowell, The consequences of money laundering and financial crime; Walker, Estimates of the extent of money laundering in and through Australia .

12 R W Baker, The biggest loophole in the free-market system, Washington Quarterly 22(4) (1999),

33; R W Baker, Capitalism’s Achilles heel, dirty money and how to renew the free-market system, Hoboken, New Jersey: John Wiley, 2005; Bartlett, The negative effects of money laundering on economic development, 18–20; Walker, Estimates of the extent of money laundering in and through Australia; J Zdanowicz, US trade with the world and Al Qaeda watch list countries – 2001: an estimate of money moved out of and into the US due to suspicious pricing in interna-tional trade, 2004, http://business .fiu .edu/pdf/PrintJun2007/tfml .pdf .

13 Aninat, Hardy and Johnston, Combating money laundering and the financing of terror-ism; Bartlett, The negative effects of money laundering on economic development, 18–20; Camdessus, Money laundering; J Ferwerda and Z S Bosma, The effect of money laundering on economic growth, paper for applied economics research course, Utrecht School of Economics, Utrecht University, 2005; J Ferwerda and Z S Bosma, Measuring compliance, paper prepared for the conference: Tackling money laundering, Utrecht, 2–3 November, 2007; McDonell, Money laundering methodologies and international and regional counter-measures, 10; McDowell, The consequences of money laundering and financial crime; Quirk, Money laundering; Tanzi, Macroeconomic implications of money laundering, 92, 96 .

14 Bartlett, The negative effects of money laundering on economic development, 18; Boorman and Ingves, Financial system abuse, financial crime and money laundering, 8; McDowell, The con-sequences of money laundering and financial crime; Walker, Estimates of the extent of money laundering in and through Australia .

15 P Alldridge, The moral limits of the crime of money laundering, Buffalo Criminal Law Review 5 (2002), 135; Boorman and Ingves, Financial system abuse, financial crime and money laun-dering, 9; Mackrell, Economic consequences of money laundering; McDonell, Money laun-

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dering methodologies and international and regional counter-measures, 10; McDowell, The consequences of money laundering and financial crime; Quirk, Money laundering .

16 McDowell, The consequences of money laundering and financial crime; Keh, Drug money in a changing world: economic reform and criminal finance, 11 .

17 Bartlett, The negative effects of money laundering on economic development, 18; Boorman and Ingves, Financial system abuse, financial crime and money laundering,; Camdessus, Money laundering; FATF, Basic facts about money laundering, 2002, http://www .fatf-gafi .org; McDonell, Money laundering methodologies and international and regional counter-measures, 10; McDowell, The consequences of money laundering and financial crime; Quirk, Money laun-dering; Tanzi, Macroeconomic implications of money laundering, 97 .

18 Tanzi, Macroeconomic implications of money laundering, 8; McDonell, Money laundering methodologies and international and regional counter-measures, 10; Camdessus, Money laun-dering, 2; FATF, Basic facts about money laundering, 3; Boorman and Ingves, Financial system abuse, financial crime and money laundering, 9 .

19 Tanzi, Macroeconomic implications of money laundering, 6 .

20 Baker, Capitalism’s Achilles heel; H Gnutzmann, K McCarthy and B Unger, Dancing with the devil: a study of country size and the incentive to tolerate money laundering, Tjalling C Koopmans Institute Discussion Paper Series, 8(18) 2008; Keh, Drug money in a changing world, 4; Tanzi, Macroeconomic implications of money laundering, 6; B Unger and G Rawlings, Competing for criminal money, Global Business and Economics Review 10(3) (2008) .

21 Baker, Capitalism’s Achilles heel; Boorman and Ingves, Financial system abuse, financial crime and money laundering, 9; FATF, Basic facts about money laundering; Walker, Estimates of the extent of money laundering in and through Australia .

22 Alldridge, The moral limits of the crime of money laundering, 310; Aninat, Hardy and Johnston, Combating money laundering and the financing of terrorism; Boorman and Ingves, Financial system abuse, financial crime and money laundering, 9–11; Camdessus, Money laundering; FATF, Basic facts about money laundering, 2002; McDonell, Money laundering methodologies and international and regional counter-measures, 10; McDowell, The consequences of money laundering and financial crime, 2001; Tanzi, Macroeconomic implications of money launder-ing, 98 .

23 Alldridge, The moral limits of the crime of money laundering, 310; E Takáts, A theory of ‘crying wolf ’: the economics of money laundering enforcement, paper presented at a workshop organ-ised by Donato Masciandaro at Bocconi University, Milano, March 2006 .

24 Aninat, Hardy and Johnston, Combating money laundering and the financing of terrorism; Bartlett, The negative effects of money laundering on economic development, 19; Boorman and Ingves, Financial system abuse, financial crime and money laundering, 9–11; Camdessus, Money laundering; FATF, Basic facts about money laundering, 2002; M Levi, Money laundering and its regulation, Annals of the American Academy of Political and Social Science 582 (2002), 184; McDonell, Money laundering methodologies and international and regional counter-measures, 9; McDowell, The consequences of money laundering and financial crime; Quirk,

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Money laundering; Tanzi, Macroeconomic implications of money laundering, 92, 98; Walker, Estimates of the extent of money laundering in and through Australia .

25 Alldridge, The moral limits of the crime of money laundering, 315; Camdessus, Money launder-ing; FATF, Basic facts about money laundering, 2002; Levi, Money laundering and its regula-tion, 184; McDonell, Money laundering methodologies and international and regional counter-measures, 11; Quirk, Money laundering .

26 Alldridge, The moral limits of the crime of money laundering, 306; McDonell, Money laun-dering methodologies and international and regional counter-measures, 10; Quirk, Money laundering; Tanzi, Macroeconomic implications of money laundering, 96; Zdanowicz, US trade with the world and Al Qaeda watch list countries – 2001 .

27 Alldridge, The moral limits of the crime of money laundering, 308; Bartlett, The negative effects of money laundering on economic development, 18, 19; Camdessus, Money laundering; FATF, Basic facts about money laundering, 2002; Keh, Drug money in a changing world, 11; McDowell, The consequences of money laundering and financial crime, economic perspectives; Tanzi, Macroeconomic implications of money laundering, 92, 99; Quirk, Money laundering, 19; Walker, Estimates of the extent of money laundering in and through Australia .

28 Bartlett, The negative effects of money laundering on economic development, 18–22; FATF, Basic facts about money laundering, 2002; J Ferwerda, The economics of crime and money laundering: does anti-money laundering policy reduce crime?, Review of Law and Economics 5 (2009); Levi, Money laundering and its regulation, 183; Mackrell, Economic consequences of money laundering; D Masciandaro, Global financial crime: terrorism, money laundering, and offshore centres, Global Finance Series, Ashgate: ISPA, 2004, 137; McDonell, Money launder-ing methodologies and international and regional counter-measures, 9; McDowell, The conse-quences of money laundering and financial crime; Quirk, Money laundering, 19 .

29 Camdessus, Money laundering; FATF, Basic facts about money laundering; Mackrell, Economic consequences of money laundering; McDonell, Money laundering methodologies and interna-tional and regional counter-measures, 9; McDowell, The consequences of money laundering and financial crime; Tanzi, Macroeconomic implications of money laundering, 92, 99 .

30 Baker, The biggest loophole in the free-market system, 38–39; Baker, Capitalism’s Achilles heel .

31 Masciandaro, Global financial crime, 131 .

32 Unger et al, The amounts and effects of money laundering, 102 .

33 How AML policy influences the incentives of (potential) criminals is modeled in Ferwerda (2009), one can use this model to show algebraically that anti-money laundering policy reduces crime .

34 Ferwerda, The economics of crime and money laundering .

35 Ibid .

36 M Arnone and P C Padoan, Anti-money laundering by international institutions: a very pre-liminary assessment, Paper presented at the conference: Corralling the economy of crime and

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money laundering: A challenge for banks and international institutions into the 21st century, Rome, 28–30 September 2006, 11 .

37 Ferwerda and Bosma, Measuring compliance .


39 Quirk, Money laundering .

40 R Barro, Economic growth in a cross section of countries, Quarterly Journal of Economics 106(2) (1991) .

41 Ferwerda and Bosma, The effect of money laundering on economic growth .

42 Walker pioneered estimating the amount of money laundering worldwide . See Walker, Estimates of the extent of money laundering in and through Australia . His model was adjusted/improved by Unger et al, The amounts and effects of money laundering .


44 J Walker, How big is global money laundering?, Journal of Money Laundering Control 3(1) (1999), 25 .

45 Baker, Capitalism’s Achilles heel .

46 Ibid; R W Baker, The scale of the global financial structure facilitating money laundering, paper presented at the conference: Tackling money laundering, 2–3 November 2007, Utrecht, abstract available at http://www2 .econ .uu .nl/users/unger/conference .html (accessed 11November 2009) .

47 Ibid .

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Chapter 9

Cross-border trade-based money laundering in

Southern AfricaConcept, current practices

and challenges

Charles Kamba

INTRoduCTIoN

BackgroundCriminal behaviour has been likened to a stream of water, ‘following gravity and constantly prodding the banks for weak points through which it can spread further’ .1 As defences are set up to combat money laundering, criminals devise new methods to move their funds deeper underground or through less regulated sectors of the economy . Recent studies indicate that criminals increasingly take advantage of international trade to launder money because this method has re-ceived little attention .

Criminal organisations and terrorist financiers use three main methods for moving money to disguise its origins and integrate it into the formal economy . First, through the use of the financial system; second, the physical movement of money (for example, by using cash couriers); and third, the physical movement of goods across borders through the trade system . The first two methods of money laundering have received considerable attention . A study on trade-based money laundering (TBML) conducted by the Financial Action Task Force (FATF), the international intergovernmental body that develops and promotes policies to combat money laundering and terrorist financing, notes that the scope for abuse of the international trade system has received relatively little attention .2 As in-creased regulation of other business has become more effective at minimising

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Cross-border trade-based money laundering in Southern Africa

the dangers of money laundering, the FATF sees trade financing as becoming an even more attractive means of money laundering .

This chapter looks at the extent to which countries in Southern Africa are prepared to combat TBML by analysing the institutional frameworks that exist in some of the countries . It further highlights the challenges faced by the region in combating TBML . It is hoped that this will stimulate strategically positioned regional organisations such as the Southern Africa Development Community (SADC) and the East and Southern African Anti-Money Laundering Group (ESAAMLG) to play an active role in combating TBML .

Trade-based money laundering can be defined as the process of disguising the proceeds of crime and moving value through the use of trade transactions in an attempt to legitimise their illicit origins . Methods include:

Over invoicing – by misrepresenting (stating above the true value) the price QQ

of the goods in the invoice and other documentation, the seller gains excess value as a result of the paymentUnder invoicing – by misrepresenting (stating below the true value) the buyer QQ

gains excess value when the payment is madeMultiple invoicing – by issuing more than one invoice for the same goods, a QQ

seller can justify the receipt of multiple payments . This is harder to detect if the colluding parties use more than one financial institution to facilitate the transactionShort shipping – the seller ships less than the invoiced quantity or quality of QQ

goods thereby misrepresenting the true value of goods in the documents . The effect is similar to over invoicingOver shipping – the seller ships more than the invoiced quality or quantity of QQ

goods thereby misrepresenting the true value of goods in the documents . The effect is similar to under invoicingDeliberate obfuscation of the type of goods – parties may structure a transac-QQ

tion to avoid alerting any suspicion by the authorities, financial institutions or third parties which become involved . This may simply involve omitting information from the relevant documentation or deliberately disguising or falsifying it . This activity may involve a degree of collusion between the various parties Phantom shipping – no goods are shipped and all documentation is com-QQ

pletely falsified

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Complex techniques – money launderers can launder their illegal money using QQ

a combination of several transactions, which involve the manipulation of the financial and international trade systems . The black market peso arrangement (BMPA) provides a useful illustration of how a number of different money-laundering techniques can be combined into a single criminal operation

The BMPA (see case study 3 below) is the largest known money laundering system in the Western hemisphere . It is responsible for moving an estimated $5 billion worth of drug proceeds per year from the United States to Colombia .3 The scheme allows drug traffickers to launder their illicit proceeds by exchanging their dollars in the USA for pesos in Colombia without physically moving funds from one country to the other . Money brokers act as intermediaries between the drug traffickers and Colombian businesses that use the money to pay for US products such as home appliances, consumer electronics, alcohol, tobacco and used auto parts, which are exported to Colombia and elsewhere . The Colombian businesses complete the money laundering cycle, paying for the dollars they need with pesos in Colombia, and the pesos, in turn, go directly to local drug traffick-ers who use the money to fund the next narcotics shipment to the US .

Money launderers prefer the international trade system because the involve-ment of more than one country makes the transactions more complex and thus difficult to investigate . Foreign countries, currencies, measurement units, trade and custom regulation, and jurisdictional matters represent a major challenge for financial investigators .

Trade-based money-laundering transactions involve crossing national borders, even though some transactions occur through unlawful entry points . A proportion of such transactions are conducted through corrupt financial inter-mediaries who give advice on the best methods to evade tax or to conceal sources of funds used to procure commodities . Foreign branches of intermediaries can be used to channel illegitimate funds from countries with effective anti-money laundering systems to those with weaker systems . This risk is pertinent to the Southern Africa region where anti-money laundering systems are of uneven strength .

Focus on TBML: A justificationIt is increasingly being recognised that steps to assist poorer countries to move beyond aid and debt dependence will require measures to tackle capital flight,

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tax evasion and the abuse of international trade to launder money . An inevitable result of TBML is that developing countries lose both their investment capital and the tax revenues that would otherwise flow from this capital being invested in the domestic economy . TBML clearly represents a massive haemorrhaging of the domestic financial resources of many developing countries .4 For example, export of goods at a price that is lower than the market price will result in sub-optimal revenue flows to the economy .5 It thus reduces foreign exchange reserves which may, in turn, increase the amount of external borrowing needed to finance devel-opment expenditures .6 In essence, TBML represents a potential loss of economic growth and development, can account for persistent balance of payments deficits and erodes the domestic tax base, thereby also affecting income redistribution .7

The current global financial and economic crisis has shattered confidence in the self-regulating powers of markets and decisively thrown the deregulation process into reverse . This should lead to better transparency and international cooperation in international trade finance . Experts are predicting that things must and will change, with increasing powers being given to law enforcement agencies to work across borders to track down illicit capital flight . This presents a great opportunity in combating TBML .

At its 2005 World Summit, the United Nations’ General Assembly, building on the Monterrey Consensus, resolved to ‘support efforts to reduce capital flight and measures to curb the illicit transfer of funds’ . By combating TBML, the in-ternational community will have gone a long way in fulfilling this mission .

INSTITuTIoNAL FRAMewoRKTo get an appreciation of whether or not TBML occurs in Southern Africa and, if so, to what extent, the writer conducted field research in four countries: Botswana, Namibia, Zambia and Zimbabwe . Interviews were conducted with identified stakeholders to acquire or document information . The key stakehold-ers identified are:

Customs agenciesQQ

Tax authoritiesQQ

Central banksQQ

Law enforcement agenciesQQ

Financial intelligence unitsQQ

Financial institutions involved in international trade financeQQ

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Banking supervisorsQQ

Investigative journalistsQQ

Private sector – for example, exporters, importers, freight forwarders, ship-QQ

pers, pre-shipment firms, air couriers, commodity brokers and retail outlets

BotswanaIn Botswana, although there is no particular legislation dealing specifically with trade-based money laundering, the legal framework that deals with money laundering, in general terms, is the Proceeds of Serious Crime Act of 1990 .8 The Act criminalises money laundering and empowers law enforcement agencies to share information both locally and internationally in investigating and prosecut-ing money laundering . Furthermore, the Banking Act of 1995 and the Banking (Anti-Money Laundering) Regulations of 2003 create a framework for reporting on suspicious activity .

Currently, the government unit mandated to deal with money laundering is the Directorate on Corruption and Economic Crime (DCEC), which acts as the de facto financial intelligence unit (FIU) . Although, together with the Bank of Botswana, it receives suspicious transaction reports (STRs), the analysis of STRs, investigations and their dissemination is restricted to the DCEC . The DCEC was established in 1994 in accordance with the Corruption and Economic Crime Act (CECA) to conduct the investigation of corruption and economic crime offences .

In 2007, the Directorate opened 486 cases for investigation . This represented 33,4 per cent of the total reports (1 455) received .9 Of these, 61 related to allega-tions of money laundering that involved suspicious transactions amounting to P29,9 million, of which P13,3 million was in foreign currency transactions . The Directorate was not in a position to say whether there were any TBML cases .

The investigations carried out by the Directorate are mainly initiated by STRs that are submitted by financial institutions . The DCEC also works closely with other state agencies in investigating money laundering in general . However, the challenge encountered by the DCEC with international trade transactions, especially those involving Chinese traders, is that some businesses do not keep proper books of accounts, so it becomes difficult to establish how much stock was received from suppliers who would have been paid through telegraphic transfers made offshore .

The agency cooperates with other agencies in the region to investigate matters of mutual interest . An example is the Great Triangle Investments (GTI) matter

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which involved three jurisdictions – South Africa, Namibia and Botswana . GTI, a company registered in Botswana, approached the Offshore Development Company (ODC), a company owned by the government of Namibia, for an off-shore investment business deal, promising good returns for their money . ODC obliged and invested P101 million with GTI . ODC transferred money through its First National Bank account in Namibia into various accounts in South Africa and then into Botswana through the GTI business account . The ODC subsequently approached GTI for the payment of the capital investment as well as interest, but GTI repeatedly failed to do so . It later transpired that the money had been laundered to offshore accounts in Europe . The Botswana authorities assisted Namibian authorities in investigating the scandal .

Despite this success, the criticism levelled at the DCEC by the ESAAMLG Assessment Report in 2007 in respect of combating money laundering in general, equally applies to TBML:10

The resources and Anti Money Laundering (AML) skills of the DCEC are currently insufficient for this agency to fulfill the overall functions of a Financial Intelligence Unit … This is compounded by the fact that the DCEC is currently conducting all money laundering investigations regard-less of the predicate offences whereas its mandate is focused on corruption and the cheating of public revenues . This situation creates coordination issues .11

The Directorate is not adequately trained to tackle TBML, which is understand-able because its focus is on corruption .

The DCEC’s efforts are complemented by the de facto Anti-Money Laundering Task Force made up of the following agencies:

Botswana Police Services (BPS)QQ

Botswana Unified Revenue Services (BURS)QQ

Ministry of FinanceQQ

Department of ImmigrationQQ

Bank of Botswana (BoB)QQ

Attorney General’s OfficeQQ

DCECQQ

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The composition of the de facto AML Task Force presents an opportunity to combat TBML, as it includes representatives from agencies that deal with inter-national trade, money laundering and law enforcement . However, it appears the task force is largely to coordinate the work of the ESAAMLG, such as compiling mutual evaluation reports .

The training courses offered at the Police College for law enforcement agen-cies relate to fraud and money laundering in general terms, among others . There is no training specific to TBML . This probably explains a lack of understanding of what TBML entails . The agency acknowledges the need for training on TBML to fully equip officers with techniques to investigate it . It is envisaged that the establishment of the Financial Intelligence Agency will equip police officers with these techniques .

According to the ESAAMLG Assessment Report:12

Whilst the majority of crime within Botswana does not generate signifi-cant proceeds, there has been a trend for more sophisticated and proceeds generating offences to occasionally occur . The authorities (also) reported an increase in the level in the organisation of criminals . These offences are often cross border related and will involve the smuggling of some commodity. There is some indication of increased drug trafficking being conducted, with cannabis being the predominant drug . (Own emphasis .)

This suggests that the incidence of TBML might be on the increase in Botswana . This is more so given the decision by the new President, Ian Khama, to increase tax on alcoholic beverages by 70 per cent (later reduced to 30 per cent, with the possibility of reverting to 70 per cent), which will encourage smuggling of beer from across borders and might make Botswana an easy market for drug trafficking .13 The impact of this decision needs further investigation .

The Botswana Unified Revenue Service does not make any analysis specific to TBML .14 However, the agency recently set up an Intelligence & Risk Profile Unit which will be mandated to look at money laundering issues . The Valuation Unit uses customs evaluation methods to detect cases of under or over invoicing of imports and exports . The agency’s main concern is revenue collection, which explains why most of the cases are settled out of court . When it comes across cases of money laundering, the agency refers the matters to the DCEC .

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The Government Gazette of 12 November 2008, published the Financial Intelligence Bill that will see the establishment of a Financial Intelligence Agency specifically to fight money laundering .15 Its highlights include:

It provides for a National Coordinating Committee on Financial Intelligence QQ

which will be made up of the Director and representatives from the Ministry of Finance and Development, DCEC, the police, the Attorney General’s Chambers, BoB, BURS, the Ministry of Foreign Affairs and International Co-operation, the Department of Immigration, the Non Bank Financial Institution Regulatory Authority, Directorate of Intelligence and Security, and the Ministry of Defence, Justice and SecurityThe National Coordinating Committee ‘will assess the effectiveness of poli-QQ

cies and measures to combat financial offences such as money laundering, financing of terrorism and the acquisition of property from the proceeds of any other offence’ . It will make recommendations to the Minister for legisla-tive, administrative and policy reforms with respect to financial offences It provides for the reporting of suspicious transactionsQQ

It empowers the Financial Intelligence Agency to work with similar interna-QQ

tional organisationsThe Financial Intelligence Agency will be an independent body ‘free from the QQ

control of any other authority’The Agency shall be the central unit responsible for requesting, receiving, QQ

analysing and disseminating information to an investigatory authority

The coming into effect of this Bill, it is envisaged, will help Botswana to effectively tackle money laundering in general terms and TBML in particular .

In conclusion, money laundering is a relatively new concept in Botswana which state agencies are still in the process of understanding . That the Customs Department is creating a unit to deal with money laundering issues is a positive development . TBML investigations in Botswana are currently greatly impeded by the limited understanding and lack of training on TBML and international trade practices of state agencies . Because of this, it is difficult to understand its nature and extent in the country . However, the establishment of a fully fledged Financial Intelligence Agency will go a long way to improve this situation .

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NamibiaIn Namibia the main legal instrument dealing with international trade is the Customs and Excise Act of 1998, which establishes a declaration and disclosure framework for the physical transportation of all goods including cash or other monetary instruments that are imported or exported . Under the Customs and Excise Act, money in whatever form is deemed to be goods for customs declara-tion purposes . The declaration or disclosure is required of all persons, regardless of country of citizenship .

The Prevention of Organised Crime Act of 2004 (POCA), which criminalises money laundering, and the Financial Intelligence Act of 2007, which seeks to establish the FIU as a statutory body, came into effect in May 2009 .

Given the previous absence of an appropriate anti-money laundering frame-work, the Bank of Namibia (BoN) exercised its powers under the Banking Institutions Act of 1998 (BIA) to issue general determinations and circulars related to anti-money laundering to address aspects of money laundering until the POCA and the Financial Intelligence Act came into effect . In this regard, the BoN issued in June 1998 ‘Determinations on Money Laundering and “Know Your Customer Policy” BID-3’ (BID-3), which required banking institutions to keep records relating to their customers . A complementary circular, BIA 2/02, was issued by the BoN in June 2002 . This circular was an attempt to provide guidance on the prevention, detection and control of possible money-laundering activities . However, without the POCA, the determination and circular had a weak legal basis as they were issued under the BIA which does not explicitly cover anti-money laundering . In view of the sophisticated financial system of Namibia, a strong and robust legal and institutional anti-money laundering framework became imperative .

A specialised commercial crimes unit has been set up in the Prosecutor General’s Office .16 It is known as the Anti-Corruption, Anti-Money Laundering, Extradition and Asset Forfeiture Unit . It assists police and revenue authorities in investigating complex fraud cases and tax evasion matters, which invariably include some trade-based money laundering . The challenge that the Unit faces is that it has both human and logistical constraints and requires training in con-ducting financial crime investigations . In this respect, the Prosecutor General has entered into a Memorandum of Understanding (MOU) with South Africa’s National Prosecution Authority, in terms of which the latter assists with capacity building of prosecutors and police to understand the nature of complex financial

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transactions, the ability to collect forensic financial evidence and to lead such evidence in court .

The Bank of Namibia set up a financial intelligence centre (FIC) within the bank .17 The intention is that with the Financial Intelligence Act coming into effect, this centre will become a fully fledged FIU . The centre began training all stakeholders on money laundering in March 2009 . The training will incorporate fighting TBML .18 This was done in preparation of money laundering becoming a statutory offence when POCA and FIA came into effect in April 2009 .

The Customs and Excise Department falls under the Ministry of Finance (MoF) and is responsible for, inter alia, controlling movement of goods at major entry points . It is mandated to deal with international trade matters and revenue collection . Through BoN regulations, the department has the power to seize un-declared currency and other goods and to hand over such cases to the police . The department cooperates closely with the BoN on currency issues .

The criminal matters that the department has encountered relate to falsifica-tion of customs forms, including falsified invoices; and theft of motor vehicles – mainly from South Africa – which are brought into Namibia to be resold . Criminal syndicates are believed by the Namibian law-enforcement agencies to operate these organised activities using Namibia as a transit point to support operations in South Africa, Angola and international networks transiting through Dubai . There seem to be a clear route for hard drugs that come from South America and Asia into Southern Africa . Some of the hard drugs destined for Europe from these regions come through South Africa for re-routing to the European region and sometimes to Canada . Some of the drugs are routed to South Africa through Luanda and Dar es Salaam . Namibia is more a transit country than a consumption one . There have been seizures of cocaine at the Namibian International Airport, which was being smuggled from Brazil to Angola . West African syndicates have been identified in some cases as coordinating part of these activities .

The department is in the process of obtaining more scanners which will be used to inspect containers at the major points of entry . Currently only 3 to 5 per cent of cargos are being inspected . The acquisition of more scanners will assist greatly in combating TBML .

The department also suspects that export processing zones (EPZ) are being used for TBML, in that some goods from the EPZ are not being exported but rather being sold in the local markets, thereby depriving the state of tax revenue . Furthermore, investigations are underway to establish the nature and extent of

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smuggling of precious stones from the country . Preliminary findings suggest an Angolan link .

In conclusion, Namibia is in the process of building both legal and institution-al frameworks to combat money laundering . The establishment of the Financial Intelligence Centre at the Bank of Namibia and the Anti-Money Laundering Unit in the Prosecutor General’s office are positive developments . The FIC has taken the initiative to train key stakeholders on TBML .

ZambiaZambia was one of the first countries in Africa to introduce anti-money laun-dering legislation . The Prohibition and Prevention of Money Laundering Act 14 of 2001 (PPMLA) governs anti-money laundering matters . It provides for the Anti-Money Laundering Investigations Unit (AMLIU), which is headed by a Commissioner who is also a Commissioner under the Narcotic Drugs and Psychotropic Substances Act of 1993 . Effectively the AMLIU falls under the Drugs Enforcement Commission (DEC) . The functions of the Unit as set out in Section 6(1) of the Act are:

(a) to collect, evaluate, process and investigate financial information including that from regulated institutions and supervisory authorities, relating to financial and other business transactions suspected to be part of money laundering for the purpose of preventing and suppressing money laundering offences .(b) to conduct investigations and prosecutions of money laundering offences .(c) to liaise with other law enforcement agencies in the conduct of investi-gations and prosecutions of money laundering offences .(d) to supervise the reporting requirements and other administrative ob-ligations imposed on regulated institutions and supervisory authorities in the implementation of the Act .(e) to assist in developing training programmes for use by regulated insti-tutions and supervisory authorities in the implementation of the Act .(f) to cooperate with other enforcement agencies and institutions in other jurisdictions responsible for investigations and prosecution of money laundering offences .

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Supervisory authorities and regulated institutions are obliged to disclose to the Unit whenever they receive information about a business transaction that indi-cates that any person has or may have been engaged in money laundering . Thus the AMLIU is the de facto financial intelligence unit in Zambia .

The Act also provides for the Anti-Money Laundering Authority whose func-tions are to provide policy directives to the Commissioner and to advice the Minister on measures required to prevent and detect money laundering . The Authority is composed of:

Attorney General (Chairman)QQ

Inspector General of the Zambian PoliceQQ

Commissioner of the Drugs Enforcement CommissionQQ

Director General of the Anti Corruption CommissionQQ

Governor of the Bank of ZambiaQQ

Commissioner General of the Zambia Revenue AuthorityQQ

Ideally, the Authority as structured should be able to play a leading role and provide policy directives on TBML, especially given the inclusion of the Commissioner General of the Zambia Revenue Authority .

Although Zambia has a solid legal framework to tackle not just TBML but money laundering in general terms, the main weakness is that the focus when the AMLIU was established, was to deal with money laundering arising from drug trafficking . This explains why the AMLIU falls under the Drug Enforcement Commission . A recent damning mutual evaluation report done on Zambia by ESAAMLG noted:

The AMLIU which is intended to operate as a financial intelligence unit suffers from serious weaknesses which undermine its capacity to play that role . It has not fulfilled some of its statutory obligations under the PPMLA . Further, it does not meet the Egmont Group definition of an FIU and lacks secrecy and confidentially ethics [sic] expected from an institution of its nature .19

Most financial institutions involved in international trade finance monitor cross-border transactions that they finance to ensure that they do not become an ac-complice in money laundering .20

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Interviews also indicate that, in the absence of proper training, the banks face a particular challenge when dealing with TBML: with international trade finance, banks rely on documents that the customer presents . One financial institution, whose holding company is a member of the Wolfsberg Group, for example, highlighted the need to include TBML on the training modules for banking staff dealing with trade finance . Such training is being developed and is a positive development in combating TBML .

Interestingly, most financial institutions submit a minimal number of suspi-cious transaction reports to the AMLIU . The reason for this is that the banks conduct investigations internally . The previous experience with the DEC was counterproductive, as the approach the latter took on receipt of a STR was to im-mediately issue a seizure notice against the suspected money launderer and make a public announcement to that effect . This puts unnecessary pressure on banks . As a result, the banks have had to create in-house FIUs to monitor suspicious transactions . They only report to the DEC those instances where they are almost certain money laundering is involved .

The following table shows a breakdown of the STRs received by the DEC from 2003 to 2007 .21 It is not apparent how many of these are TBML related .

Table 1: STRs received from banks in Zambia

Year 2003 2004 2005 2006 2007

Number of STRs 0 37 71 70 54

Banks submit few STRs to the AMLIU as they have no faith in its ability to discharge its functions in terms of the enabling Act . The perception created in Zambia is that the AMLIU deals with drug-related matters . It has thus been largely left to the Zambia Revenue Authority (ZRA) to deal with TBML matters, albeit in the context of revenue collection .

The ZRA has encountered a number of TBML, which they deal with as tax evasion cases .22 Examples include:

Fifteen fuel tankers which were purportedly on transit to DRC from South QQ

Africa . The tankers ‘disappeared’ inlandInterception of trucks smuggling cigarettes and beer . Recently a truck with QQ

1 000 cases of beer was intercepted without any customs declaration forms .

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It was explained that tax on beer is very high in Zambia, going as high as 125 per centNGOs enjoy tax exemptions and staff abuse this facility to import goods for QQ

themselves and even for sellingInterception of trucks with Chinese furniture, clothing materials and build-QQ

ing materials with three or more different sets of invoicesCounterfeit commodities such as music CDs, Colgate toothpaste, Vaseline QQ

and Kiwi shoe polish

The ZRA has been able to track some of these criminals through the Mobile Compliance Unit and the Investigations Unit . The main challenge that the customs authorities face is lack of exchange of information in the region between the importing and exporting countries . Although some MOUs are in place, they are not being acted on . As a result, criminals are able to use misleading invoices to pay as little customs duty as possible, if at all . Although the focus for ZRA is revenue collection, the cases they deal with should ideally be treated as criminal matters . However, the other state agencies that are responsible for prosecuting these matters are constrained because of resource limitations . The cases end up being dealt with administratively .

ZimbabweThe legal framework that governs international trade in Zimbabwe is mainly the Customs and Excise Act23 and the Exchange Control Act .24 Trade information is recorded on Customs Declaration forms (which are submitted to the tax authori-ties) and Control Document (CD) forms (which are submitted to the Exchange Control authorities at the Central Bank) .

Although there is no particular legislation dealing specifically with trade-based money laundering, the legal framework that deals with money laundering in general terms is the Serious Offences [Confiscation of Profits] Act 25 and the Bank Use Promotion and Suppression of Money Laundering Act .26 The latter Act designates, among others, any person who is in the business of importing and exporting, and imposes responsibilities on them . These include:

Conducting due diligence on customersQQ

Submitting STRsQQ

Restructuring to be able to detect and report suspicious transactionsQQ

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Protecting whistleblowersQQ

Assisting criminal investigationsQQ

The government department mandated to deal with TBML is the Financial Intelligence Unit .27 The Unit falls under the Ministry of Finance, although it is accountable to the Governor of the Reserve Bank for its day-to-day activities . It is headed by a Director and has the following sub-units:

Analysis and MonitoringQQ

InvestigationsQQ

Bank Use PromotionQQ

Precious MineralsQQ

Regional ControllerQQ

The International Access Points Section that will monitor activities at all points of entry such as airports is still to be approved .

The enabling Act provides in section 5 for an Inspectorate of the FIU which includes officers of the Central Bank, Zimbabwe Revenue Authority and the National Economic Conduct Inspectorate . The Inspectorate has investigative powers . Furthermore, the FIU receives STRs from financial institutions and other agencies such as customs department, police and banking supervision in the Central Bank .28 About 5 000 STRs were received between 2007 and 2008 . This information has led to investigations and subsequent prosecutions . About 150 cases have been fully dealt with, either through the court system or through out–of-court settlements .

The FIU considers the following to be some of the red flags for TBML:

High frequency of transactions in a bank account, especially an individual’s QQ

accountRequests for large offshore bank transfers within a short space of timeQQ

False declarations on CD formsQQ

Unapproved flights into and out of ZimbabweQQ

Illegal trading activities across unmonitored border postsQQ

False dividend and/or branch profits declarationsQQ

Under and/or over invoicing of goods across bordersQQ

Smuggling of minerals and other commoditiesQQ

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Most cases investigated by the FIU are settled out of court . First, because they usually involve corporate entities which wish to protect their brands . Second, the judicial system is not well versed in TBML . Taking cases to court becomes a protracted process . The FIU is looking at ways of having regular workshops on money laundering for law enforcement agencies, prosecutors, magistrates and judges .

Examples of cases that have been investigated and settled include:29

A freight company with offices in both Zimbabwe and South Africa . The South QQ

African office was claiming to be acting as an agent for the Zimbabwean office and charging commissions . This process was used to extract foreign currency from Zimbabwe . Following investigations, restitution of US$2,9 million was paidA tobacco company falsely declared some of its exports as damaged consign-QQ

ments at the Mozambican ports to avoid repatriation of proceeds . Visits to the Mozambican Customs revealed that the goods were properly exported without any damage as claimed by the companyInvestigations into a listed company which buys fruit from local farmers for QQ

export to European and Asian markets revealed that the selling commission was being deducted twice and way above the 7,5 per cent limit imposed by the Exchange Control Authorities . An agent in South Africa was deduct-ing 8,0 per cent and a further 9,0 per cent was being deducted by an agent in Europe . The money was then stashed in a trust account in Jersey . Neither of the commission deductions was known about by the Exchange Control Authorities, as prior approvals had not been sought . Furthermore, the company also used its local foreign currency account to import ingredients for the treatment and packaging of fruits at overstated prices, which allowed them to launder funds by paying the excess amounts into the same trust ac-counts

Other cases are at various stages of investigations . These include a case involving a Zimbabwean artist who had R600 million in a South African bank account . The artist is suspected to be involved in the smuggling of diamonds from Chiadzwa . His/her account has been frozen with cooperation from the South African Financial Intelligence Centre . The artist’s defence is that the money was sourced from donors in Europe to establish an Arts Village in South Africa to coincide with the 2010 FIFA World Cup™ .

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The FIU efforts are complemented by the Suppression of Money Laundering Advisory Committee set up in terms of section 9 of the enabling Act . The Committee is made up of the following agencies:

Zimbabwe Republic PoliceQQ

Zimbabwe Revenue AuthorityQQ

National Economic Conduct InspectorateQQ

Anti-Corruption CommissionQQ

Reserve Bank of Zimbabwe (RBZ)QQ

Attorney General’s OfficeQQ

Financial Intelligence UnitQQ

The functions of the Committee include the formulation of a national policy to combat money laundering .

The Zimbabwe Revenue Authority (ZIMRA) also plays an important role in combating TBML . It is represented on the Suppression of Money Laundering Advisory Committee and some of its officers form part of the Inspectorate of the FIU . Thus its mandate goes beyond dealing with revenue collection . In this respect, ZIMRA’s concern is ‘transfer pricing’, which is the setting of prices in international trade transactions that are not at arm’s length and involves under or over invoicing for purposes of tax evasion .30 It can also take the form of mul-tiple invoicing, over and under shipment of goods, and falsely described goods . Although these activities might be motivated by TBML, that aspect is largely the domain of the FIU . ZIMRA’s responsibility, where there is transfer pricing, is to ask for the people involved to account for the revenue due to the state .

Although ZIMRA has prosecuted cases related to customs duty and taxes, most cases, including cross-border transactions, are settled out of court . First, because the court process is protracted and time consuming . Second, it can be damaging to the perpetrators especially if they are corporate entities with brands to protect .

ZIMRA cooperates with virtually all countries in the region through bilateral agreements . This involves sharing information and investigating cases of mutual interest . However, the main impediment to prosecuting cases where cross-border trade is involved is that it depends on the laws that obtain in the other country . For example in the Mutumwa Mawere cases,31 Mawere’s extradition to Zimbabwe was successfully challenged in the South African courts .

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Investigations carried out by ZIMRA reveal that exporters and importers sometimes collude to produce fake invoices . For example:

A Zimbabwean, Company A Ltd, approaches a South African, Company B Ltd and says, ‘We want to buy your products but we also want to get money out of Zimbabwe .’ Company B then issues Company A an inflated invoice . On delivery of the goods, Company A pays Company B in terms of the invoice . Company B deducts what is due to it and pays the balance to Company A’s bank accounts in South Africa .

Zimbabwe does not make use of pre-shipment inspection firms . Customs rely on scanners and physical examinations at points of entry . Scanners are used mainly at the Beitbridge border post and at the airport in Harare . Customs officials also conduct physical inspections at inland container depots, largely based on the risk profile of the goods being imported or exported and the traders involved .

The Central Bank is also crucial in combating TBML . It recently installed a new IT system that provides enhanced capability to detect, analyse and dis-seminate information on suspicious financial transactions .32 Working with law enforcement and other government agencies, the RBZ maintains export/import desks at ports of entry and conducts audits of mining entities to detect and prevent illegal mineral smuggling and money-laundering activities . An increase in STRs and prosecution of financial crime cases is attributed to these efforts .

The Central Bank has also engaged a United States-based international fo-rensic auditing firm, Alex Stewart International LLC, to conduct investigations at mining companies suspected of under invoicing of exports .33 For example, Zimplats, which is involved in platinum mining and is a member of the Implats Group, in its report to its shareholders for the quarter ended 30 September 2008, alluded to the investigations and stated:

This matter is still to be concluded . The Reserve Bank of Zimbabwe to whom Alex Stewart International LCC report are still to respond to Zimplats management’s letter … in which Zimplats further refuted allega-tions made in the final Alex Stewart International LLC report .34

Zimbabwe values information sharing with other competent foreign authorities and creating an operational environment staffed by officers with an adequate knowledge of practices in other jurisdictions . Zimbabwe therefore entered into

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MOUs with other countries which include information sharing, training and exchange programmes for staff . It signed MOUs with South Africa and Egypt, while those with Nigeria and Mauritius are ready for signing . MOUs with other neighbouring states are at an advanced stage of being put in place . This is in line with the spirit of the 1999 MOU which paved the way for the birth of the regional cooperating body, ESAAMLG .

Recruitment of staff from various fields and the introduction of the whistle-blower facility have assisted the agency to understand and investigate the nature and extent of TBML in Zimbabwe .

In conclusion, despite its economic and political challenges, Zimbabwe has a workable institutional structure to investigate and act on trade-based money laundering . Other countries in the region can benefit immensely from the ex-periences of the FIU . However, there is scope to involve other state agencies in combating TBML, lest the FIU is overwhelmed by the cases it has to handle .

CHALLeNGeS IN CoMBATING TBML

Lack of training Most stakeholders in the region lack awareness of what constitutes trade-based money laundering . This is largely attributable to lack of training . The Best Practice paper urges training of government authorities and bankers on recognis-ing trade-based money laundering . For government authorities, training could include a focus on the existence of financial and trade data and its relevance to crime targeting .35 Examples could include:36

Comparing import/export data to detect discrepancies in countries of origin, QQ

brokers, prices, places of entry and exit for the products and any seasonal flows for the products in questionComparing export information with tax declarations to detect discrepanciesQQ

Using information supplied by the country’s FIU to identify patterns of de-QQ

posits, imports and exports of currency, as well as reports of suspicious finan-cial activities and the parties identified therein

Financial crime investigators should also be fluent in business statistics, price indexes, industry reports and surveys by agencies monitoring the industry .37

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Currently, many financial institutions focus their anti-money laundering training at the customer level and not at their personnel working in their trade services departments .38 The Best Practice paper encourages training for banking supervisors on how best to evaluate the adequacy of a bank’s policies, procedures and processes for handling trade finance .

Lack of resources and equipmentCountries in the region lack the necessary equipment, especially scanners at borders . This makes it possible for criminals to smuggle goods, especially counterfeit commodities and cigarettes . Only about 5 per cent of goods being imported or exported are inspected . This is based on a computerised selectivity system which targets certain commodities and countries, among other factors .

This is compounded by the fact that Southern Africa, like the rest of Africa, has porous borders . For instance, Zambia is a landlocked country . Its border countries are Angola (1 110 km), Democratic Republic of Congo (1 930 km), Malawi (837 km), Mozambique (419 km), Namibia (233 km) Tanzania (338 km) and Zimbabwe (797 km) .39 This presents an opportunity for criminals to smuggle goods using undesignated points of entry . This is compounded by the lack of a coordinated approach by states to combat the practice . As aptly put by Christensen:

Whilst capital has become completely mobile, the ability to police cross-border dirty money flows remains largely nationally based .40

Lack of coordinationWhereas it is ideal that state agencies share information and coordinate their efforts in combating TBML through such platforms as the Anti-Money Laundering Taskforces, this is not currently the case . There is an opportunity to enhance coordination which is not being adequately used .

As suggested by the FATF, governments in the region should set up Trade Transparency Units as specialised units whose designated responsibilities are to monitor imports and exports, analyse trade data and identify anomalies to detect any TBML . The staff should have experience in conducting both anti-money laundering and trade fraud investigations, and have access to information from all the relevant trade and law enforcement agencies .

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Lack of cooperation Another impediment to the fight against TBML is lack of cooperation from other countries . This is exacerbated when tax havens and other financial offshore centres are involved because of their strict banking secrecy laws . The distinctive feature of financial offshore centres over the years has been that they have offered investment environments for foreign companies to pay either very little tax or no tax at all . In addition, they have refused to share information about the identity of such companies or their financial dealings with other countries . Significantly, they would not cooperate with tax authorities from the countries from which companies doing business offshore originated .

This protection was over the years extended to individual offshore investors . As a result, tax havens were therefore ideal for criminals seeking to evade tax and to launder illegal earnings . Following up and investigating corruption and tax fraud present insurmountable challenges for law enforcement agencies if a tax haven is involved . At the heart of the problem lies the fact that tax havens insist that the inquiring agency should present full information on the identity of the account holder as well as the account details . Often this information is the subject of the inquiry, and therefore not readily available .

However, the veil of secrecy of tax havens is likely to be removed as a result of the decision made by the G20 in London in March 2009 . The G20 warned that if tax havens refuse to adopt new rules on financial transparency they will face international sanctions, including withdrawal of funding by the World Bank .

New cooperation agreements mean former tax havens will assist countries in the region in cases involving tax and exchange control evasion, which are invari-ably TBML matters .

It is vitally important that countries in the region strengthen international cooperation by sharing information through mutual legal assistance arrange-ments and conducting joint TBML investigations .

Inadequate documentationEven though it is known that cross-border trading transactions are fraught with corruption and money laundering, accurate and comprehensive documentation of transactions is often problematic . This is partly because the volumes involved are enormous . In some cases, the difficulties of documentation result in laxity on the part of customs agencies, which is exploited by criminals to smuggle

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contraband across borders . Where information relevant to cross-border transac-tions is recorded, it is voluminous and complicated, and needs to be analysed to disentangle lawful from unlawful transactions . The actual money-laundering activity is not always easy to separate and document .

Responsibility of financial institutionsOne of the basic tenets of trade finance, codified in international standard banking practice through the International Chamber of Commerce (ICC), is that banks deal with documents and not with goods, services or performance to which the goods may relate .41 Banks involved in trade finance only verify if the documents submitted by the seller show that the requirements of the buyer have been met . Bank responsibility does not include verifying if the deal really has occurred .

Furthermore, according to the Wolfsberg Trade Finance Principles:

[T]he majority of world trade (approximately 80%) is now carried out under ‘Open Account’ terms . This means that the buyer and seller agree the terms of the contract, the goods are delivered to the buyer who then arranges a clean payment, or a netting payment, through the banking system . In these circumstances, unless the FI [financial institution] is providing credit facilities, the FI will only see the clean payment and will not be aware of the underlying reason for the payment . The FI has no vis-ibility of the transaction and therefore is not able to carry out anything other than the standard AML [anti money laundering] … screening on the clean/netting payment . Where the FI is providing credit in relation to the trade transaction there may be more opportunity to understand the underlying trade and financial movements .42

The Wolfsberg Trade Finance Principles provide comprehensive anti-money laundering guidance relating to Letters of Credit (LCs) and Bills of Collection (BCs) . They emphasise:43

Practising due diligence in identifying and knowing the customer; but also in QQ

risk-based checks in relation to parties who may not be customersReviewing relevant information in a transaction relating to the relevant QQ

parties involved, documentation presented and instructions received .

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Monitoring transactions for the presence of unusual and potentially suspi-QQ

cious features

We strongly recommend that the Wolfsberg Trade Finance Principles be em-braced by all financial institutions involved in trade finance to curb TBML .

CoNCLuSIoNThe anti-money laundering system in Southern Africa is of uneven strength . Namibia is creating a legal and institutional framework to combat money laundering . Botswana is establishing a Financial Intelligence Unit to combat money laundering . In Zambia there is already a solid legal framework to combat money laundering . However, this is not supported by an equally solid institu-tional framework . A perception exists in Zambia that money laundering is only drugs related largely because the AMLIU falls under the Drugs Enforcement Commission . Zimbabwe has both a solid legal and an institutional framework to combat TBML . However, the economic and political crisis in the country has resulted in major challenges in combating money laundering .

Southern Africa is particularly vulnerable to TBML because of its heavy reli-ance on the extractive industries and other natural resources . There is a great degree of exposure to the risk of falsified invoicing and transfer pricing . While capital has become almost completely mobile, the ability to police cross-border dirty money flow remains largely nationally based . The vast majority of dirty money flows are laundered through the global banking system including tax havens, through complex multi-jurisdictional ladders .

TBML investigations are greatly impeded by understaffing and lack of crime-specific training among stakeholders . The analytical help currently provided to the money laundering investigations is not at the required level to prosecute effectively . Namibia has taken initiatives to address this by establishing an Anti-Money Laundering Unit within the Office of the Prosecutor General and entering into a MOU with South Africa in terms of capacity building to deal with, inter alia, TBML .

Customs departments play a crucial role in detecting and investigating TBML because of their presence at points of entry . However, most customs officials see their role as being confined to revenue collection . There is a need for a paradigm shift if states are to combat TBML . This is evidenced in the region under study, where most customs officials view TBML as the domain of the FIUs .

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Zimbabwe and Namibia have FIUs, while Botswana is in the process of estab-lishing one . Zambia has a de facto FIU in the form of the Anti-Money Laundering Investigations Unit . However, the Zambian unit has been criticised for its lack of financial expertise . A fully fledged FIU shares the same core functions of receiv-ing, analysing and disseminating financial information to combat money laun-dering . Its ability to transform data into financial intelligence is a key element in the fight against money laundering . Furthermore, its ability to network and share financial intelligence based on agreed principles of information exchange has served as a formidable mechanism for fighting financial crime worldwide .44

Most countries in the region have anti-money laundering task forces which include customs agencies, the police, central banks, FIUs, the Attorney General and the Anti-Corruption Commission . Ideally, the task forces should be in-formed of TBML trends in the respective jurisdictions and devise ways of com-bating them . However, at present the task forces largely coordinate the work of the ESAAMLG, such as compiling mutual evaluation reports . There is scope for the task forces and ESAAMLG itself to play a crucial role in the fight against TBML .

Case study 1: International battery drug gang

Batteries filled with hashish and heroin allegedly raked in billions for an in-ternational drug syndicate that was operating between Durban and Britain . In 2009 six people were arrested in Durban and two in the UK . There were suspicions that the SA-UK ‘battery gang’, as it was dubbed, had connections in the South African government, possibly customs and police officials .

The South African Police Service Hawks narcotics division was tipped off about the syndicate after a consignment of 160 kg of heroin concealed among boxes of curios from South Africa had landed at Heathrow Airport in early September 2009 .

Investigations by the UK authorities led to the arrest of one suspect and the seizure of 240 kg of heroin . The South African Hawks conducted discreet checks on the companies that had sent the consignment . This led to the arrest of Moganentham Nadasen and Gopal Ganesh at SA Cultural Curios, a small shop in Phoenix’s Starwood Mall . This arrest led police to other businesses, and from one warehouse to the next, to another storage

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facility, a battery factory and to a home in La Lucia where the syndicate had run their packaging laboratory to conceal the drugs .

Police arrested three more suspects, all British nationals, and confis-cated drugs including 116 kg of heroin, 6 tons of hashish (cannabis resin) and 500 kg of compressed cannabis . The estimated street value of the drugs seized is R600 million .

The evidence obtained and the interviews conducted indicated the drugs had been shipped from South-East Asia, including Pakistan, offloaded in Maputo and trucked via Johannesburg to Durban . In Durban, the drugs were allegedly taken to various storage facilities and warehouses and then to a house in La Lucia where ‘packaging and concealment’ took place . Most of the drugs were concealed in empty battery casings and boxes of curios . The boxes of curios and drug-packed batteries would then be freighted to OR Tambo Airport in Johannesburg and flown to the UK, where they ended up in duplicate front companies such as SA Cultural Curios UK and battery shops . From there, they were distributed throughout the UK and Europe . ‘This was all happening under the pretence of legitimate trade,’ said the head of the SAPS Hawks narcotics division, Senior Superintendent Devon Naicker . To support the trafficking scheme, an entire battery warehouse had been established in Durban, specialising in the production of battery casings .

Source: Sunday Argus, 20 September 2009

Case study 2: Transfer pricing

Commodities or value can be moved between or among a number of coun-tries through the use of subsidiary companies . The process can be illustrated by a transfer pricing scenario in which company A, which is engaged in ex-porting commodities from country B, sets up several subsidiary companies, each of which is registered in a different country . Subsidiary A1 is located in country C, subsidiary A2 in country D and subsidiary A3 in country E . Countries C and D are low tax havens .

In a tainted transaction, company A exports commodities to company A3 . It declares a certain value-per-unit for the commodities, for example $10 . While the commodities head to country E, a chain of value is built up through documented transactions . Company A1 levies a charge of $3

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for insuring the shipment, company A2 charges $4 for management and marketing services provided to company A . These transactions result in a landing price of $17 payable by company A3 . Company A3 may mark up each commodity by a further $3 and sell it for $20 . The laundering arises from the fact that A1 and A2 may in fact be shell companies, existing only on paper, but generating a profit for the shareholders of A and A3 . The tax declared in country B is based on the unit price of $10 . The tax declared in country E is based on a profit of $3, but the value earned through the subsidiaries is greater, because the ‘locations of convenience’ C and D are low tax havens .

Case study 3: The black market peso arrangement

The BMPA involves the Colombian drug lords smuggling drugs into the US and selling them for cash . Next, the drug lords sell the US dollars at a discount to money brokers in Colombia . Third, the money brokers pay the drug lords with pesos from their bank account in Colombia . Fourth, the money brokers identify Colombian importers who want dollars to buy goods from US exporters . Fifth, the money brokers pay the US exporters . Sixth, the US exporters ship the goods to Colombia . Finally, the Colombian importers sell the goods for pesos and repay the money brokers .

In the Southern African context, this may involve, for example, a Zimbabwean launderer smuggling diamonds into South Africa and selling them for cash . Next, the smuggler sells the rands at a discount to money brokers or foreign currency dealers in Zimbabwe . Alternatively, the foreign currency can be used to import fuel for sale in Zimbabwe . The fuel is sold in US dollars in Zimbabwe . Part of the proceeds are then deposited in a foreign currency account (FCA) and the rest is used to source more diamonds .

NoTeS

1 IMF/World Bank, Financial Intelligence Units: an overview, 2004, 92, https://www .imf .org/external/pubs/ft/FIU/fiu .pdf (accessed 25 July 2009) .

2 FATF, Trade based money laundering, 2 June 2006, http://www .fatf-gafi .org/dataoecd/60/25/37038272 .pdf (accessed 20 June 2009) . FATF has made a follow up, Best practices paper on trade-based money laundering on 20 June 2008, http://www .fatf-gafi .org//dataoecd/9/28/40936081 .pdf (accessed 20 June 2009) .

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3 United States, National money laundering strategy, 2007, 57, http://www .treas .gov/press/re-leases/docs/nmls .pdf (accessed 20 October 2009) .

4 John Christensen, Africa’s bane: tax havens, capital flight and the corruption interface, 2009, http://www .realinstitutoelcano .org/wps/wcm/connect/a3e13c004f018b94b9e8fd3170baead1/WP1-2009_Christensen_Africa_Bane_TaxHavens_CapitalFlight_Corruption .pdf?MOD=AJPERES&CACHEID=a3e13c004f018b94b9e8fd3170baead1 (accessed 25 October 2009) .

5 M E de Boyrie, S J Pak and J S Zdanowicz, Money laundering and income tax evasion: the de-termination of optimal audits and inspections to detect abnormal prices in international trade, Journal of Financial Crime 12(2), (2004), 123–130 .

6 M E de Boyrie and J A Nelson, Capital movement through trade misinvoicing: the case of Africa, Journal of Financial Crime 14(4), (2007), 474–489 .

7 Ibid .

8 [Chapter 8:03] .

9 Interviews with the DCEC .

10 ESAAMLG, Mutual evaluation/detailed assessment report – Anti money laundering and com-bating the financing of terrorism: Republic of Botswana, August 2007 .

11 Ibid, 5–6 .

12 Ibid, 14 .

13 Monkagedi Gaothlhobogwe, Khama steps up war on alcohol, Mmegi, 3 October 2008 .

14 Interviews with Botswana Unified Revenue Services .

15 Monkagedi Gaothlhobogwe, Law to fight money laundering on the cards, Mmegi, 20 November 2008 .

16 Interview with the Prosecutor General .

17 Interview with Bank of Namibia and Customs & Excise .

18 See remarks by the Deputy Chief of Mission, Embassy of the United States, Namibia, Matt Harington, Anti-money laundering training for customs officials, 2 March 2009, http://wind-hoek .usembassy .gov/march_2_2009 .html (accessed on 25 October 2009) .

19 ESAAMLG, Mutual evaluation/detailed assessment report – anti-money laundering and com-bating the financing of rerrorism: Republic of Zambia, 2008, 10 .

20 Interviews with financial institutions .

21 ESAAMLG, Mutual evaluation/detailed assessment report: Zambia, 59 .

22 Interview with ZRA .

23 [Chapter 23:02] and the Regulations thereof, more particularly the Customs and Excise (General Regulations] 2001 .

24 [Chapter 22:05] .

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25 [Chapter 9:17] .

26 [Chapter 24:24] .

27 The Unit is also sometimes referred to as the Financial Intelligence Inspectorate and Evaluation Unit . Section 3 of the Bank Use Promotion and Suppression of Money Laundering Act ‘es-tablished a Unit of the Reserve Bank to be known as the Bank Use and Suppression of Money Laundering Unit’ . It appears this Unit is the de facto FIU .

28 Interview with the FIU .

29 Presentation on the ML/TF Threaths Facing the Region – Cross Border Terrorist Financing/Money Laundering Typologies, Zimbabwe’s Presentation [sic] . Unpublished paper prepared by the FIU in Zimbabwe outlining the nature of TBML in the country (on file) .

30 Interviews with ZIMRA .

31 Basildon Peta, SA court refuses to keep Zim tycoon in jail, Cape Times, 1 July 2004 .

32 Interviews with RBZ .

33 In his mid-year Monetary Policy Statement Review issued in July 2008, the Reserve Bank of Zimbabwe Governor stated in Clause 11 .2 ‘These audits … have already unravelled very glaring discrepancies and financial prejudices to the country by some mining houses against whom appropriate remedial measures will be taken in due course’, http://www .rbz .co .zw/pdfs/2008Julymps/mps .pdf (accessed 23 November 2008) .

34 Zimplats, Report for the quarter ended 30 September 2008, http://www .zimplats .com/pdf/QtrSep08 .pdf (accessed 23 November 2008) .

35 FATF, Best practices paper on trade-based money laundering .

36 K A Scott, Trade-based money laundering, New York Law Journal 17 September 2008 .

37 A Vassileva, A strategic assessment of trade-based money laundering in Florida, Florida Department of Law Enforcement, May 2007, 8 .

38 FATF, Best practices paper on trade based money laundering .

39 World Factbook, https://www .cia .gov/library/publications/the-world-factbook/geos/za .html (accessed 3 June 2010) .

40 Christensen, Africa’s bane .

41 See ICC Rules ‘The Uniform Customs and Practice for Documentary Letters of Credit (2007 Revision), ICC Publication No . 600’ and ‘The Uniform Rules for Collections, ICC Publication No . 522’ .

42 The Wolfsberg Group, The Wolfsberg Trade Finance Principles, 2009, 1, http://www .wolfsberg-principles .com/pdf/WG_Trade_Finance_Principles_Final_(Jan_09) .pdf (accessed 20 June 2009) .

43 The Wolfsberg Group, The Wolfsberg Trade Finance Principles, Appendixes I and II, 8–28 .

44 IMF/World Bank, Financial Intelligence Units, 93 .

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CHAPTeR 1

Introduction

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Kabemba, C . The Kimberley Process and the Chiadzwa Diamonds in Zimbabwe, June 2010, http://www .boell .org .za/web/114-572 .html (accessed 24 November 2010) .

Moshi, H P . Fighting money laundering: The challenges in Africa, ISS Paper 152, Pretoria: Institute for Security Studies, 2007 .

Unger, B . The scale and impacts of money laundering, Cheltenham: Edward Elgar Publishing, 2007 .

CHAPTeR 2

A critical assessment of risk-based approaches to money laundering and the financing of terrorism in a dynamic environment

Bayart, Jean-François, Ellis, Stephen and Hibou, Béatrice . The criminalization of the state in Africa . Oxford: James Currey, 1999 .

Chaikin, David . Commercial corruption and money laundering: a preliminary analysis . Journal of Financial Crime 15, (2008) .

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Financial Action Task Force (FATF) Guidance on the risk-based approach to combating money laundering and terrorist financing . FATF/OECD, June 2007 . Available at http://www .fatf-gafi .org/dataoecd/43/46/38960576 .pdf (accessed 8 November 2010) .

FATF . Money laundering and terrorist risk assessment strategies . FATF/OECD, 18 June 2008 . Available at http://www .fatf-gafi .org/dataoecd/46/24/40978997 .pdf (accessed 8 November 2010) .

FATF . Trade-based money laundering . FATF/OECD, June 2006 . Available at http://www .fatf-gafi .org/dataoecd/60/25/37038272 .pdf (accessed 8 November 2010) .

Fundira, Bothwell . Money laundering in Zimbabwe . In Charles Goredema (ed), Confronting the proceeds of crime in Southern Africa: an introspection . Pretoria: Institute for Security Studies, May 2007 .

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Goredema, Charles . Zimbabwe . In Gastrow (ed), Penetrating state and business: organised crime in Southern Africa, vol 2 . Pretoria: Institute for Security Studies, 2003 .

Goredema, Charles and Madzima, Jackson . An assessment of the links between corruption and the implementation of anti-money laundering strategies and measures in the ESAAMLG region . ESAAMLG, May 18 2009 . Available at http://www .esaamlg .org/userfiles/Corruption_and_AML_Systems .pdf (accessed 8 November 2010) .

Gotz, Elias and Jonsson, Michael . Political factors affecting efforts in post-communist Eurasia: the case of Georgia . Journal of Money Laundering Control 12(1), (2009) .

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Kegoro, George . The Nakumatt Holdings & Charterhouse Bank Affair . Unpublished paper, International Commission of Jurists Kenya, 2010 .

Mirugi-Mukundi, Gladys . Money laundering control in Kenya – new dawn or false promise? ISS Today, the african .org, 12 July 2010 . Available at http://www .the-african .org/blog/?p=268 (ac-cessed 7 November 2010) .

Moshi, H P B . Fighting money laundering: the challenges in Africa . Pretoria: Institute for Security Studies, 2007 .

Ncana, Nkululeko . FirstRand still haunted by Spitz and Ansbacher woes . TimesLive, 8 August 2010 . Available at http://www .timeslive .co .za/business/article591034 .ece/FirstRand-still-haunted-by-Spitz-and-Ansbacher-woes (accessed 18 October 2010) .

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Pellegrina, Lucia Dalla and Masciandaro, Donato . The risk-based approach in the new European anti-money laundering legislation: a law and economics view . Review of Law & Economics 5(2), (2009) .

Unger, Brigitte . The scale and impacts of money laundering. Edward Elgar Publishing, 2007 .

Wrong, Michaela . It’s our turn to eat: the story of a Kenyan whistle blower . London: Fourth Estate, 2009 .

CHAPTeR 3Money laundering and the global financial crisis of 2008

Cali, Massimiliano, Massa, Isabella and Te Velde, Dirk . The global financial crisis: financial flows to developing countries set to fall by one quarter . November 2008 . Available at http://www .odi .org .uk/resources/details .asp?id=2523&title=global-financial-crisis-financial-flows-developing-countries-set-fall-one-quarter (accessed 1 November 2010) .

Davies, Linda . Nest of vipers . London: Orion, 1995 .

Davis, Morris A . What’s really going on in housing markets? Federal Reserve Bank of Cleveland, 1 July 2007 . Available at http://www .clevelandfed .org/research/Commentary/2007/0707 .cfm (ac-cessed 1 November 2010) .

IMF . World economic report, April 2008 . Washington: IMF, 2008 .

Islam, Iyanatul and Saget, Catherine . The financial and economic crisis: a decent work response . International Labour Organisation . International Institute of Labour Studies, 2009 . Available at http://www .ilo .org/public/english/bureau/inst/download/tackling .pdf (accessed 1 November 2010) .

Keith, Allison and Mueller, Carly . The subprime mortgage crisis . 22 April 2009 . Available at http://www .pdftop .com/ebook/subprime+crisis/ (accessed 1 November 2010) .

Oyelade, Abraham . Cure for global economic crisis . 16 April 2009 . Available at http://www .groun-dreport .com/Business/The-Global-Economic-Crisis/2895844 (accessed 1 November 2010) .

Sergeant, Barry . Brett Kebble: the inside story . Cape Town: Zebra Press, 2006 .

CHAPTeR 4The control of money laundering: Foreign exchange bureaus in Kenya, Uganda and Malawi

Government of Kenya . Central Bank of Kenya Act (Act 15 of 1966) . Nairobi: Government Printer, 1966 .

Government of Kenya . Money Laundering Regulations 2000 . Nairobi: Government Printer, 2000 .

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CHAPTeR 5Trade-based money laundering: Counterfeit goods in the Eastern and Southern African region

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CHAPTeR 7New corridors and new markets: Drug-money laundering on the south-west coast of Africa

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CHAPTeR 9Cross-border trade-based money laundering in Southern Africa: Concepts, current practices and challenges

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"the invisible threat: money laundering in eastern and southern africa"

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