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MoneyLaunderingwithDerivatives WolfgangHafner

Geneva,Sept.2001


1.MoneylaunderingasordinaryBusiness 2.Nomoneylaunderingthroughcashtransactionsinindustrialcountries 3.MoneyLaundering:Instrumentsreplacetransactions 4.Derivatives:Thedifferentmarkets 5.Derivatives:Thedifferenttypes 6.Howaswapworks 7.Howtolaundermoneyinthederivativesmarket 8.BunchedordersorhowtheUSGovernmentmadeiteasytolaundermoneywithderivatives 9.Moneylaunderingwithderivativesisnoissue


1.Moneylaunderingasanordinarybusiness

Moneylaunderingisamechanismthatconcealstheillicitoriginofproperty.A mechanismthatworksasafirewallagainstdetectionandsubsequentconfiscationofsuch property.Howthismechanismfunctionsdependsonthestageofdevelopmentofagiven financialsystem.Themethodsofmoneylaunderingarebeingdevelopedaccordingtothe dynamicsofchallengeandresponsebetweenthelawandtheoffender.Ononesidethere arethosewhotrytoerectafirewallagainstconfiscation.Andontheothersidethereis thelawofthenationalstatetryingtoremovethiswallandcollectthedirtymoney.

MoneylaunderersbehavelikenormalbusinessmenasIngoWalterwroteinhisbook Thesecretmoneymarket.Thedemandforhiddenmoneyvariesdependingonthe customersmotivation.Andthecostofsecrecyvarieswiththerisk.Differentkindsof assetshavedifferentrates,returnsandcosts.Moresecrecycostsmoremoney.Andof coursehereplaysalsotheEconomyofScalesinfluencedbypolitics.TheBankofNew YorkforexamplewherehugesumsofRussianmoneywaslaunderedseemstohaveno biggerproblemswiththewrongdoing.

Sotheprocessofmoneylaunderingcouldbeseenasanordinarybusiness.Itfollowsthe lawofalleconomicdevelopmentwithinnovationsasaresponsetobottlenecks.The

famouseconomistJosephA.Schumpeterdefinedinnovationsasthesettingupofanew productionfunction.And,toquoteSchumpeteragain:Innovationsdonotremain isolatedevents,andarenotevenlydistributedintime,butonthecontrarytheytendto cluster,tohappeninbunches.Inthepresentcontextthismeansthatothertechniques usingfinancialinstrumentsasderivativesortheInternetcouldalsobeusedtoerecta firewall.Nevertheless,wearerestrictingourdiscussiontoderivatives.

Themainresultofthisdevelopmentisvisibleinhistoricalperspective.Lookingbackin timerevealshowmoneylaunderinghasevolvedfromlowtechinasmallenvironmentto hightechinaglobalizedworld.Inthesecondhalfofthe19thcenturyallabankrobber likeJesseJameshadtodowhenthejobwasdonewastoleavetownanddepositthestolen cashinabankaccountinthenexttown.InthosetimesoftheWildWestmoneyinabank accountwasasgoodascleanmoney.

Butbythetimeoftheroaringtwentiesputtingdirtymoneyinabankaccountwasnot enoughanymore.Thelaundrymenalsoprogressed,addingnewfeaturestotheirbusiness: crossbordertransactionsandtheuseofdifferentjurisdictions.Forinstancetakethe CanadianaccountsofChicagomobsterAlCapone.OrtheinventionoftinyLiechtenstein asataxhavenforrichGermansbysomelawyersfromZurich.Liechtensteinalsoserved asanescapefromtheGermancurrencyembargointhetwentiesandthirties.

Sixtyyearslater,whenthewaronmoneylaunderingbeganinthemideighties,eventhe smartestmixofdomesticandcrossbordertransactionsprovedtobefallible.Therelations betweenItalyandSwitzerlandareagoodexampleofthisdevelopment.Untilthe breakthroughofagroupofMilanprosecutorscalled'manipulite'or'cleanhandsagainst corruption'inJanuary1993therewasanimpenetrablewallbetweenthepoliceand judiciary(tschudischeri)ofthetwocountries.Sincethebeginningof'manipulite'in spring1992theSwissauthoritieshavereceivedmorethan1000lettersfromthe prosecutors'officeinMilanaskingthemtoliftbankingsecrecy,whichtheydidinmost cases.ButAmericasclocksworkdifferent.AsareportfromtheUSGeneralAccounting Officetellsmoneylaunderingthorughcrossbordertransactionsisstillpossibleonalarge scaleintheUSA.EvenifthemoneyoriginatesfromRussia.


2.Nomoneylaunderingthroughcashtransactionsinindustrialcountries

ThisimprovementincrossbordercooperationnotonlyhappenedbetweenSwitzerland andItaly.UndertheguidanceoftheG7statesthecombatagainstmoneylaunderinggot tighterinalldevelopedcountries.Duringtheninetiesasaconsequencetherathercash orientedwayoflaunderingmoneydisappearedindevelopedeconomies.ToquotePeter Qurik,anIMFresearcher:"Theresult(forthenineties)suggeststhatinindustrial countries,proceedsoftaxevasion,likethoseofcrime,arenolongerlaunderedprimarily throughcashtransactions."

Thisraisesthequestion,whetherthisdevelopmentisreflectedbytheregulatoryboards andiftheirconceptstillfunctionsinaworldofhighdevelopedlabourdivision,whereone doesnotunderstandandatleastdoesnotwanttoknowwhattherealsensebehinda financialtransactionis.Andeventoughfightersagainstmoneylaundererslike

TransparencyInternationalcapitulateconfrontedwiththecomplexityoftheissue.Inthe WolfsbergPrinciplestheywrote:Theprivatebankerwillperformduediligenceonthe intermediaryandestablishthattheintermediaryhasaduediligenceprocessforitsclients, oraregulatoryobligationtoconductsuchduediligence,thatissatisfactorytothebank. Theprinciplesareratherswampy.Theprinciplesputtheknowyourcustomerburdenone theshouldersoftheintermediary.YoucantakeitalsoasIamnotresponsibleifmoney isbeeinglaundered;theintermediaryisresponsible.Averyeasywayoutofthe problem.

TwoEnglishcriminologists,MichaelGoldandMichaelLevididastudyofthesuspicion basedreportingofmoneylaundering.Theyfound:"Fewofthecaseswelookedatcould bedescribedassophisticatedmoneylaundering...Theywereoftenratheramateurish attemptstobanktheproceedsofcrime,usingsomeprecautionsbutinsufficienttoconceal thesuspicion....Thisisnottoarguethatmoresophisticatedlaunderingdoesnotexist: ratheritindicatesthatsuchsophisticationisnotcaughtbythepresentsystemof suspicion."Andthisiswherederivatives,thewildcardofinternationalfinance,comein asaglobalizedandsophisticatedfinancialinstrument.Forthemoneylaundererthiswas partofarealinnovation:FinancialInstrumentsreplacingtransactions.


3.Moneylaundering:Instrumentsreplacetransactions

Withinthelasttwentyyearsderivativeshaveevolvedfromanobscureinstrumentfor speculatorsintoapillaroftoday'sglobalcapitalism.Theyhavemovedtothefinancial mainstreamandnowoperateonaparwiththeirmoretraditionalcounterparts,stocksand bonds.Butdonothinkderivativesareanewdevelopment.Theyareasoldastrade.Here forexampleyouhavetwoderivativecontractsfromthetimeofHammurabi4000years ago.Inonecontractafemaletraderpaysinadvanceasumofmoneyforgraindelivered aftertheharvest.Theothercontractisapromiseforthedeliveryofslaves.And,what makesthiscontractreallymodern,itwaspossibletosellthecontract.

Modernderivativescomeinthreevarieties:forwards,optionsandswaps.Basicallythey areabetonthedirectionofpricemovementofsomeunderlyingvalue,whichcanbea commodity,afinancialasset,foreignexchangeoranindexthereof.Thepartybettingthat thepriceoftheunderlyingvaluewillgodownissaidtobe"short"onthecontract.The partybettingthatthepriceoftheunderlyingvaluewillgoupissaidtobe"long"onthe contract.Ifthepriceoftheunderlyingvaluemovestherewillbeawinnerandaloserin respecttothecontract.Ifthepricegoesup,thelongsidewillwin.Ifthepricegoesdown, theshortsidewillwin.Generallyanyonecanselladerivative(subjecttotheircredit)and anyonecanbuyaderivative(subjecttotheirpayingforit).

Somuchfortheworkingmechanismofderivatives.Thekeytomoneylaunderingwith derivativesistomanipulatethetwosidesofthecontractinsuchawaythatthelosingside isassociatedwiththedirtymoney.Thusthewinningsidegetscleanmoneyfrom successfulfutures,optionsandswapcontractsawelldefined,legalandeconomically legitimatesourceofincome.

Derivativesarecomplexfinancialconstructions.Askanaccountantaboutderivativesand

hewilltellyouthatitisnearlyimpossibletounderstandtherealdealbehindacomplex derivativeconstructionifhedidnotconstructtheinstrumenthimself.Theprime opportunityforlaunderingliesinthiscomplexity.And,astheFATFreportremarks:A highvolumeofactivityonthemarketisessentialtoensurethehighdegreeofliquidityfor whichthesemarketsareknown.Thewayinwhichderivativesaretradedandthenumber ofoperatorsinthemarketensurethatthereisthepotentialobscuringoftheconnection betweeneachnewparticipantandtheoriginaltrade.Nosinglelinkintheseriesof transactionswilllikelyknowtheidentityofthepersonbeyondtheoneheisdirectly dealingwith.


4.Derivatives:Thedifferentmarkets

Themajorityoftradesareinoverthecounter(OTC)products.Thoseprivatelynegotiated contractsareprovideddirectlytoendusersandcontainmainlyforeignexchangeand interestratederivatives.EspeciallytheOTCmarketasawhollyprivatelyorganised markethasuntilnownotbeensubjecttoregulatoryoversightastheCommodityFutures TradingCommissionaswellastheBankforInternationalSettlementcantellyou.

Wellknownarethesocalledstandardisedcontractssoldonexchanges.Theconditionsof theseexchangetradedderivatives(quantityandqualityoftheunderlyinggood,contract period)arestandardised.

Anotherderivativesmarketisthehedgefundindustry.Hedgefundsoftenareinvestment partnershipsoperatingoutofofficesinNewYorkorotherUScities,butthelegal corporationishiddenaway,offshore,farawayfromthepryingeyesofUSregulatorsand taxauthorities.Hedgefundsareheavelyleveragedbyborrowingandusederivatives. Fortunemagazineestimatedthatthereweremorethan3000hedgefundsin1998.The managersofthesespeculativefundsplacelargebetsonthedirectionofpricemovements andgetgoodmoney.Eachyearabouthalfofthetop20namesontheFinancialWorldlist ofWallStreetshighestpaidprofessionalsarehedgefundmanagers.Butalsothefamous LongTermCapitalMarketwasahedgefund,beingbettedinthewrongdirectionsthe outcomewasfatalforUBS.ThatUBShaslostmuchmoneyisnoaccident.Swissbanks areheavelyinvolvedinhedgefunds.

Inmostcountriessuchhedgefundsarenotatallcontrolledbyfinancialregulators.They haveneverthelessaverybiginfluenceontheinternationalfinancialmarkets.Last NovemberforexampletheEcuadoriangovernmentwasnotabletomeetdebtpayments.If sotheNewYorkFederalReserveBoardthehedgefundsdonotstayclear,the Ecuadoriandebtrestructuringwouldhavedescendedintochaosandinternational financialdestabilisation.

Andwiththemodernmeansofcommunicationtherealsoisalackoftransparency. BesidetheexchangesandthephonebasedotcdealsthereevolvedthankstotheInternet thesocalledElectronicCommunicationNetworksorECN.ECNsarealternative tradingsystemswhichdisseminatethepriceandsizeofopenordersandmatchbuyers andsellersofsecuritiesoveranelectronicnetwork.


FortheECNsanonymityisaveryimportantissue.Connectedtooneofthenets,youcan forexampleenteralargerorderthanyouwishtohavedisplayedinthesystem.Youare allowedtomakediscretionaryorderswhichenableyoutosetamoreaggressivepricefor yourorderwithoutexposingyourhandtothemarket.Thesetrickypossibilitieshelpto concealamoneylaunderingmechanismandarethereforequiteusefulformoney launderertodotheirbusiness.

ECNsarenoextraordinaryconstruction.Tradepoint,theLondonbasedstockexchange andjointventurepartneroftheSwissExchange(SWX)wasmainlyfoundedbytwo ECNs:ByInstinet,afirmownedbyReuters,andbyArchipelago,ownedbybig Americaninvestmentfirms.


5.Derivatives:Thedifferenttypes

Firstyouhaveheardsomeinformationaboutthemarketplaceswherederivativesare beingdealt.AndnowIwillgiveyouashortoverviewaboutderivativesandhowtheyare used.Generallytherearethreedifferentletssayvanillatypesofderivatives: Forward Option Swap

Forwards:Aforwardcontractobligesonepartytobuy,theothertosell,anominated underlyingataspecificprice,quantityanddateinthefuture.Theunderlyingcouldbethe interestrate,acurrencyacommodityoranythingelse.Thechangeinvalueinaforward contractisbroadlyequaltothechangeinvalueintheunderlying.Oneofthecontract partnersexpectsforexampleahigherinterestrateinfutureandtheotherpartnerhasa contradictoryview.Attheendofthecommittedperiodonesidewillwin,theotherlose. FinancialFutures,thestandardisedvariationofaforward,arepurchasedorsoldata stockexchange.

Acalloptionconfersupontheholdertheright(butnottheobligation)tobuythe underlyingcontractorinstrumentatafixedpriceduringorattheendoftheoption period,whateverthecasemaybe.Ontheothersideaputoptionconfersupontheholder theright(butnortheobligation)toselltheunderlyingatafixedprice.Optionscouldbe standardised,whichmeansbeingdealtonstockexchangesorprivatelynegotiated.

Aswaptransactioncommitstheparticipantstoexchangecashflowsatspecificintervals. Thoseintervalsarecalledpaymentorsettlementdates.Exceptwithcurrencyswaps,the notionalprincipalisusedtocalculatethepaymentstream.Theprincipalitselfisnot exchanged.Thevastmajorityofswapsareclassifiedintothetwofollowinggroups: interestrates currency

Allswapsareotccontracts.


6.Howaswapworks

Wherasthedetailsofaswapmaybecomplicated,thebasicideaofaninterestswapis verysimple.Twopartiestakeoutloansandswaptheinterestpayments.Eachparty,rather thanpayingtheinterestonitsownloan,paystheinterestontheloantakenoutbythe otherparty.Letshavealookatanexample:Aswissmultinationalcorporationwantsto buildupanetofretailsellersinSwitzerland.Thecorporationisverywellknownandcan thereforeborrowataverygoodratebothinthedirectmarketandtheindirectmarket.The corporationneedsforthisinvestmentabout10MillionSwissFrancs.

OntheothersideasmallSwissresearchfirmneeds10Millionforalongtermresearch project.Howdoestheswapworknow?foralongterminvestmentthebigcorporation getsthemoneyforabetterpricefromthebondmarket,thenthesmallresearchfirm. Thebigcorporationalsogetsthemoneyforabetterpricefromabank Becauseitisnotwellknown,thesmallResearchFirmhastopayamuchhigherpricefor abondloan,thantheinternationalcorporation.Butcomparedtothepricesforabank loanthedifferenceisrathersmaller.Thismeansthat,comparedtothecorporation,the researchfirmhasacomparativeadvantageinbankloans;itisatasmallerdisadvantage comparedtothecorporationwhenitborrowsfromabankthanwhenitborrowsinthe bondmarket.

Ontheotherside,comparedtotheResearchFirm,thecorporationhasabigger advantageinthebondmarket.Althoughithasanabsoluteadvantageinbothtypesof borrowingitcanborrowmorecheaplythantheResearchFirminbothitsadvantage overtheResearchFirmisgreaterinthebondmarket.

ShowninnumberstheborrowingRatesforthecorporationandtheresearchfirmare:

Corporationresearchfirm
Bankloan(floated)5.1%5.9% Bonds(fix)9.0%11.0%


Ifyoulookatthenetinterestpaymentsyoucanseetheadvantageforbothunderthis contract.(allnumbersin%)


Corporation Paysonthebond9.0 ReceivesfromRF10.0

PaystoResearchFirm5.6 NetPayment(floated)4.6


ResearchFirm Paystobank5.9 ReceivesfromCorporation5.6 PaysforCorporation10.0

NetPayment(fix)10.3

Withaswapitwaspossibletoseparatethecreditriskfromtheinterestrisk.Bond marketsperformbetterwithfixedinterestrateloansthanbanks,whichareusedtodeal withsmallerfirms.Banksoftenhavebetterinformationandarebetteratmonitoringloan performanceandaremoreflexibleindealingwithrepaymentproblems.

CurrencySwapsaresimilartointerestrateswaps.IfforexampleaSwissCorporation wantstoinvestintheUnitedStates,thecapitalwouldberatherexpansive.Thesame wouldapplyforanAmericanFirminvestinginSwitzerland.Soitcostsbothless,ifthey takeloansintheirowncountry,givetheloantotheotherpartyandletitpaytheinterest rate.


7.Howtolaundermoneyinthederivativesmarket

Thebasicmechanismofmoneylaunderingwithderivativesissimple.Justmakesureyou losethedirtymoneyinaderivativecontractandputyourselfinapositiontolayyour handsonthecleanderivativesgainontheothersideofthecontract.

Letstakeforexampletheabovementionedinterestswap.SocouldaJapaneseinvestment firmwithconnectionstotheYakuzahaveacontractwithanItalianinvestmentfirm, ownedbytheMafia.Aslongasagreedinthecontracttheycanexchangeinterestrate paymentsonanunderlyingamountbetweenJapanandItaly.Oneinterestratecouldbe fix,theotherfloating.Ifthefloatinginterestrategoesup,correspondingtotheLIBOR, thenmoneyislaunderedforoneparty;iftheLIBORgoesdown,moneyislaunderedfor theotherparty.Shouldthewwaplaundermoneyforbothpartiesyouneedasecond contractwithsimilarconditionsfortheotherside.

Butasoftenisthecase,thedevilliesinthedetail.Tobeabletoexploitthelaundering potentialofderivativesyouneedtoknowthemechanismsofthesefinancialinstruments aswellasoftheglobalderivativemarkets.

ThefollowingtypologyisprovidedbythelatestTypologiesReportFebruary1999(case

No9)fromtheFinancialActionTaskForceFATFasanexampleofhowfundscanbe launderedusingthederivativesmarket.

Thisisthefirsttimethattheleadinggroupofglobalmoneylaunderingexpertsgathered aroundtheFATFtableinParishavementionedthisparticularlaunderingmethod.Even thoughthistrickhasbeenknownsinceSyedZiauddinAliAkbarfromBCCIsderivatives armCapcomexplainedittoundercoverAgentRobertMazurfromUScustomswayback in1988.LetmequotethemostimportantsectionoutoftheKerryReport,areportthat hasbeenmadefortheUSSenat:IntestimonytotheSubcommittee,Customsagent RobertMazurtestifiedhowAkbarused"mirrorimage"tradingtolaunderhugesumsof money.Mirrorimagetradinginvolvesbuyingcontractsforoneaccountwhilesellingan equalnumberfromanotheraccount.Sincebothaccountsarecontrolledbythesame individualanyprofitorlossiseffectivelynetted.AccordingtoMazur,Akbarexplained thatbecausethese"mirrorimage"transactionscanbelostamongmanymillionsof dollarsworthoflegitimatetransactions"itwouldtakeforeverforanyonetoeverfindit."

Asarule,moneylaunderingexpertsarestillfocusedoncashtransactionbased launderinginvolvingoffshorebanks,corruptlawyers,gangstersandthelike.

Buttheworldfinancialmarketsarecompetitiveandinnovative.Andintheirdarkbut neverthelessgrowingmoneylaunderingsectortheforcesofcompetitionandinnovation havereplacedyesterdaysLombrosotypecraftsmanwithanewbreedofsophisticated hightechoperators.

Inthefollowingexamplethebrokermustbewillingtoallocategenuinelylosingtradesto theaccountintowhichcriminalproceedsaredeposited.Insteadofrelyingonmisleading orfalsedocumentation,thebrokerusesthegenuinelosstodocumentitandthereforeto beallocatedtothedetrimentofthedirtymoneyaccountholder.

Asanexample,abrokerusestwoaccounts,onecalledAintowhichtheclientregularly depositsmoneywhichneedslaundering,andonecalledBwhichisintendedtoreceive thelaunderedfunds.Thebrokerentersthetradingmarketandgoeslong(purchases)100 derivativecontractsofacommodity,tradingatanofferpriceof$85.02,withaticksize of$0.25.Thenotionalamountforonecontractis10'000Dollars.Atthesametimehe goesshort(sells)100contractsofthesamecommodityatthebidpriceof$85.00.At thatmoment,hehastwolegitimatecontractswhichhavebeenclearedthroughthefloorof theexchange.

Laterinthetradingday,thecontractpricehaschengedto$84.72bidand$84.74offered. Thebrokerreturnstothemarket,closingbothopenpositionsattheprevailingprices. Now,thebroker,inhisownbooksassignstheoriginalpurchaseat$85.02andthe subsequentsaleat$84.72toaccountA.Thepercentagedifferencebetweenthetwoprices is30pointsorticks(thedifferencebetween$84.72and$85.02).Tocalculatethelosson thiscontract,theticksizewhichis$0.25ismultipliedbythenumberofcontracts,100, multipliedbythepricemovement,0.30,multipliedbythenotionalamount.Thus:$0.25 x100x0.30x10000=$75,000(loss).

TheothertradesareallocatedtotheBaccount,whichfollowingthesamecalculation

theoryofticksizemultipliedbythenumberofcontractsmultipliedbytheprice movementresultsinaprofitasfollows:$0.25x100x0.26x10000=$65,000(profit).

Theaccountcontainingthemoneytobelaunderedhasjustpaidout$75,000forthe privilegeofreceivingaprofitof$65,000ontheotherside.Inotherwords,the laundrymanhaspaid$10,000fortheprivilegeofsuccessfullylaundering$75,000.Sucha sumiswellwithintheamountofpremiumwhichprofessionallaunderersarepreparedto payfortheprivilegeofcleaningupsuchmoney.Asatransaction,itisperfectlylawful fromthepointofviewofthebroker.Hehasnottakentheriskofcreatingfalse documentation,whichcouldconceivablybediscovered,andeverythinghasbeendonein fullsightofthemarket.

Theabovementionedexamplesoundsverycomplicated,butthemechanismbehindthe transactionsisverysimple.Bearinmindthatthemainimpactofderivativeslaysintheir highleveragefactor.Thankstoderivativessmallmovementsinpricescanproducehuge transfersofmoney.Inourexamplethedifferencebetweenthemorningpriceandthe afternoonpricewasonthewinningsideonly0.26$.SoadifferenceofonlyoneCent moves2'500$.


8.BunchedordersorhowtheUSGovernmentmadeiteasytolaundermoneywith derivatives

Itisimportanttobearinmindthattheabovementionedprocedurecanonlybelegalifthe regulatoryframeworkofthederivativesmarketsallowssocalledbunchedorders.Thisis thecase,forexample,intheUnitedStates,butnotinGermanyaswellasinSwitzerland, wherebunchedordersGerman:OmnibuskontiorSammelkontenareforbidden. OmnibusaccountsarealsoallowedinItaly.HeretheItalianderivativesexchange,La cassadicompensazioneegaranziaallowstoregisterthepositionsofclearingmembers customersinanomnibusaccount.Afterareport,publishedbyanItalianretailtrader organisation,theConfcommercio,theMafiainvestedlasttenyearsabout20Billionsof SwissFrancsinexchangetrading.

Bunchedordertradingallowsaregisteredderivativesdealertobuyandsellcontractsat theexchangeinbuncheswithouthavingtoallocatethesinglecontractstoindividual clients.Concerningbunchedorders,commissionregulation1.35(a1)oftheUS derivativeswatchdog,CommodityFuturesTradingCommission(CFTC)statesthata derivativesbrokerdoesnothavetoidentifyhisclientsduringatradingsession.Onlyat theclosingofhisbooksattheendofthetradingdaymusteachcontractbeassignedto theindividualclientsaccount.Thisrulewasintroducedagainsttheobjectionsof differentantimoneylaunderingdivisionsoftheUSadministration.

Theintroductionofthebunchedorderswasdrivenbytheworldwidecompetitionfor highervolumesinderivativetrading.SincetheendoftheeightiestheUSderivative exchangeslostabigpartoftheworldwidetradedvolumes.Tenyearsagothreequarters oftheworldwidevolumeshadbeentradedintheUSA.Todayitisonlyaroundonethird. Lessregulationproduceslesstransactioncostsandhelpsthebusinessthisway.


9.Moneylaunderingwithderivativesisnoissue

Andgenerallythereseemstobenoneedforastrongcontrol,becausethemainissueof regulationisalwaystoprotectthebuyerandnotthefightagainstmoneylaundering.If thereisnoobjectionraisedagainstacompleteddealtheauthoritieswillnotinterfere.For exampletheEnglishSecuritiesandFuturesAuthorityisnotresponsiblefordetecting moneylaundering.Wedonotthereforehaveadatabaseformoneylaundering.Toquote thecomplianceofficer.

Butmoneylaunderingcanbeareasontointerfereifotherrulesarebroken.Threeyears agothecomplianceofficeroftheSecuritiesandFuturesAuthorityinLondoninformed meaboutamoneylaunderingcasehewasinvestigating,becausesomecommodityprices werebehavingverystrangely.Somemarketparticipantsinformedhimaboutpossible manipulationsandhereferredthecasetotheNationalCriminalIntelligenceService (NCIS).DrugmoneyascashhadbeenbroughtfromtheUnitedStatestosomeEastern State.Thereitwasinvestedintheproductionofaspecificcommodity.Becausethe producerofthisbasemetalhadadominantpositionintheworldmarket,theproducers couldinfluencetheupsanddownsoftheprice.KnowingtheUpsanddownsoftheprice movements,somebrokersconstructedderivativesontheunderlyingandmadealotof moneythatwastransferredtotheUnitedStates.

ThecomplianceofficeralsoinformedtheCityMetropolitanPoliceofLondonanda DetectiveSuperintendentconfirmedthewholestory.TwoyearslaterIphonedtheCity MetropolitanPoliceaskinghowtheinvestigationwasgettingon.Stillpendingtheytold me.AndinthemeantimetheresponsibleSuperintendenthasretired. Solawenforcementlagsbehind.AcompilationofalldecisionsmadebyUSfederal courtsinterpretingUSfederalmoneylaunderingstatuesfromFebruary3,1997fromthe USDepartmentofJusticecontainsnotasinglecaseinvolvingderivatives.TheFBIhas thesamerecord.InMarch1998theFBIdatabaseinWashingtoncontainednomoney launderingcasesinvolvingtheuseoffinancialderivatives.

Insummer1998IhadameetingwiththeSeniorAdvisertotheUSUnderSecretary Enforcement,MichaelD.Langan,andwithdifferentrepresentativesfromthetreasury departmentsasIRS,drugenforcementandsoon.Afterthediscussionssomemonthlater Mr.Langanconfirmedinawrittenemailstatement:Yourtheoryisinteresting.But usingderivatives,seemstobeanoverlyworkintensivewaytolaundermoney.Ifwehad evidencethatmoneywasbeinglaunderedthecircumstanceswouldbeinvestigated.Mr. LanganitseemedtomedidnotknowtheFATFTypologyReport.Ifaxedhimthe reporthewasastonished.

InTheNationalMoneyLaunderingStrategyfor1999,publishedinSeptember1999,it wassuggestedtoconveneahighlevelworkinggroupthatwillexamine:whatstepsare neededtoassurethatbankingmechanismssuchasconcentrationaccountscannotbeused toobliteratethemoneytrailofparticularaccountholders.Aconcentrationaccountisto quotetheUSreportabankingmechanisminwhichfundsfromavarietyofsourcesare placedinasingleaccountduringthebankingdayandpaidfromthataccounttoasimple

payeeattheendoftheday.Bunchedordersarenotmentioned.Thehighlevelworking groupshouldhavesubmittedrecommendationstotheSecretaryoftheTreasuryandthe AttorneyGeneralwithin90days.Tomyknowledgenothinghappeneduntilnow.Ithink Mr.Langanwillalsoberetiredandwillbelookingforhisgrandchildren.

Allthisdoesnotnecessarilyindicatethattherearentsuchcases.Itmaybethatthe judgesandtheFBIjustdidn'tseethem.Discussionswithseveralinternationalanti moneylaunderingagenciesinSwitzerland,theUnitedKingdomandtheUSAhavemade itclearthatthesestateagenciesactonthebasisofwhattheyconsidertobesecured knowledge.Researchonthisissue?IaskedMr.AlanBeverly,responsibleforthenew guidelinesonmoneylaunderingfromtheEuropeanCommissionwhattheirintentionsare aboutthissubject?Ofcourseheknowsaboutthepossibilitythatmoneyisbeing launderedwithderivatives.TheCommissionalsohadahearingwithPeterQuirkfromthe IMF.ButtoquoteAlanBeverlythereisnomoneyforresearchonmoneylaundering withderivatives.

Andtheindustryitselfwillnotdoanythingaboutit.ToquotetheFATF:"Forfearof scaringoffinvestors,thereis...noincentivefortradersonthemarkettoasktoomany questions.Thislackofrigorousgovernmentcontrolmakesthederivativesmarketeven moreattractivefromtheperspectiveofamoneylaunderer."

ToconcludemyshortoverviewletmetellyouajokeaboutKariDllenbach.Kari DllenbachwasawellknownfunnyburgerorcitizenofBern.Oneeveningpeoplesaw himwalkingupanddownunderastreetlamp.Theywonderedwhathewasdoingand askedhimiftheycouldhelphim.Hesaid:"IhavelostmypurseandIcannotfindit." "Wherehaveyoulostyourpurse?"hewasasked.Karigrumbled:"Ontheothersideof thestreet.""Butwhydoyousearchonthissideofthestreetwhenyouloseyourpurseon theotherside."Kari:"Ontheothersidethereisnolamp."