Guyana: Anti-Money Laundering ...

2013

Guyana: Anti-Money Laundering and Countering the Financing of Terrorism and Proliferation
Road Map for The Way Forward

By

Professor Clive Y. Thomas

Memorandum Submitted to the Parliamentary Select Committee on Money Laundering. National Assembly, Guyana. October 2013

i Page

Guyana: Anti-Money Laundering ... 2013

Content
Page Section 1: Background and Context      Introduction Defining money-laundering in the Guyana context Money-laundering and political crimes Money-laundering goals Money-laundering process in Guyana - Placement - Layering - Integration Facilitating money-laundering Money-laundering methods Off Shore Financial Centres 1 1 1 2 3 3 4 4 5 5 6 7 9 9 13 14 15 15 15 17 22 22 23 25 25 26 28 28 35

   Section 2:

Origins of Money Laundering  Economic origins  Off Shore Financial Centres and Tax Havens  Three Streams The Regulatory Framework  Global - Financial Action Task Force - The Ruling International Standards  Regional - Caribbean Financial Action Task Force - Guyana and the CFATF Threats Money Laundering Pose to the Modern State  Threats  Global Empirics Strategic Road Map for the Way Forward  Guideposts  Markers

Section 3:

Section 4:

Section 5:

i Page

Guyana: Anti-Money Laundering ... 2013

List of Schedules
Page Schedule 1: Schedule 2: Schedule 3: Schedule 4: Schedule 5: Schedule 6: Schedule 7: Schema 8: Caribbean Money Laundering: Ten Most Reported Vehicles Ten Leading Financial Services Offered by Caribbean OFCs FATF Operational Framework (AML & CTF) Guyana’s Outstanding Core and Key Recommendation (2013) Guyana: Underground Economy (Faal’s estimates) Guideposts for a Strategic Way Forward Key Markers Road Map for a Strategic Way Forward 6 8 20 24 29 34 39 40

ii Page

Guyana: Anti-Money Laundering ... 2013 Section 1: Background and Context
Introduction This Memorandum is submitted to the Special Select Committee on Money Laundering, National Assembly, Guyana. It is hoped that it would form part of the considerations the Committee take into account as part of its dedicated deliberations on the Anti-Money Laundering and Countering the Financing of Terrorism and Proliferation (AML&CFT), (Amendment) Bill 2013.

1. Defining money-laundering in the Guyana context? To avoid ambiguity this Memorandum begins with some basic background information, which informs it throughout. The immediate concern is what is meant by money laundering in this Memorandum. In financial, economic, and legal theory, (as well as their current practices worldwide) money laundering is considered an extremely complex and complicated phenomenon. Not surprisingly, there are numerous definitions of it. Nonetheless, I have found the definition presented below the most suitable one for introducing the concept in a formal, yet easy way. That definition is: “Money-laundering represents illicit financial flows that are generated from crime, corruption, embezzlement and tax evasion and are then transformed into legitimate flows”. This definition is short, direct and simple, yet it is quite accurate when applied to Guyana. When examined closely, this definition is seen as referring to two separate processes, which while remaining distinct, yet meet at the common standard of constituting illicit flows. The first process focuses on those illicit flows that are from the very outset, generated from crime. These are therefore criminal in essence. “Crime, corruption, and embezzlement”, which are mentioned in the definition above, have the common characteristic of being generated through criminal acts. These activities of the first process are therefore, always intrinsically criminal in nature. However, the second process is not necessarily generated through crime, and therefore is not uniformly or inherently illegal from the outset. That process is tax evasion. Persons or businesses in Guyana can generate income and wealth legitimately; but it is only if subsequently a resort is

1 Page

Guyana: Anti-Money Laundering ... 2013
made to evade tax laws and regulations in the disposition of this income and wealth that illegality enters into the picture and therefore, the potential for illicit flows arises. Put another way, legitimately earned income and wealth become involved in money-laundering only when they are transferred outside Guyana’s jurisdiction in contravention to its relevant tax laws and regulations; such laws and regulations would of course include financial and foreign exchange control regulations.

It is important to remind Members of the Special Select Committee that there is a qualitative difference between tax evasion and tax avoidance. Tax evasion is a criminal offence, because persons or businesses evade the payment of taxes and other fees that are legally due to the state. Tax avoidance, however, is not a criminal act in Guyana because the persons or businesses use legal or regulatory opportunities available to them to avoid paying taxes and fees. This is an important distinction, although in practice it is difficult to observe and to enforce. The general working rule is that the weaker is the tax regime of a country or jurisdiction the harder it is to observe the distinction in practice. As shall be observed more fully later, arising out of this distinction “tax havens” have mushroomed across the world, leading to a “distinct” subset within the generic phenomenon known as money-laundering. As implied, tax havens specialize in creating opportunities for persons and businesses to evade tax laws and regulations. Basically they do this by offering zero or very low income and wealth taxes.

Money-laundering and political crimes Since the traumatic events of the September 11 attacks on the United States in 2001, a new dimension of political crime has entered into the lexicon of money-laundering. That is, the financing of terrorism and the proliferation of weapons of mass destruction. These are

politically inspired crimes. They constitute an added dimension to the criminal acts listed in the definition of money-laundering’s illicit flows provided above. This has become so important that, the regional and global regulatory oversight mechanisms for dealing with financial crimes are now identified as covering the combating of both money laundering and the financing of terrorism and proliferation of weapons of mass destruction.

2 Page

Guyana: Anti-Money Laundering ... 2013
It is not unusual, however, for jurisdictions where money-laundering thrives, to possess all three dimensions simultaneously: criminal activity, tax-evasion and terrorist financing and proliferation. In practice, however specialisations have emerged. Thus for example, in the Caricom region relatively little has been alleged about its role in financing terrorism. Indeed the specialisation for which the region is famous is tax evasion. Guyana, however, (and to a lesser degree Jamaica and Trinidad and Tobago) are well known for their links to criminal activity, especially organized crime in the form of drug-trafficking, trafficking in persons, gun-running, smuggling, and global cyber crimes.

The distinction between tax evasion and the other forms of criminal activity (including terrorist financing) is well observed when money-laundering is considered from a Caricom perspective. There are at least twelve (12) CARICOM jurisdictions, which are recognised worldwide as “tax havens” facilitating tax evasion and twenty-two (22) in the wider Caribbean area. The reputation of all tax havens is such that it carries the presumption they are complicit in tax evasion.

Money-laundering goals As the definition given above has indicated the ultimate goal of money laundering is to transform illicit flows into financial instruments and funds that are seemingly legitimate. In Guyana and Caricom, over the years this has become more and more the task of specialist groups of criminals (money launderers) who are distinct from the underlying class of criminals who generate the illicit funds in the first instance. This specialisation has made the task of both detection and regulation of money laundering extremely difficult. The present techniques needed to

accomplish this have become highly technical and complex.

Money-laundering process in Guyana At all levels (global, regional and national), money laundering has been the subject of considerable study in recent years, particularly in the fields of law, economics and finance. Most of these studies have been in response to its explosive worldwide growth and the consequent efforts of various authorities (at all levels) to regulate, and hopefully contain this phenomenon. The studies reveal broad agreement among analysts (and practitioners) that, for analytical

3 Page

Guyana: Anti-Money Laundering ... 2013
purposes, money-laundering can be conveniently categorized as a three-stage process involving: placement, layering and integration. Each of these is explained in turn below.

Placement and Smurfs Money laundering is aimed at converting “illicit flows of funds” into legitimate ones through placing them into legitimate financial institutions in such a manner that they cannot be traced as the proceeds of crime. This is perhaps the most difficult stage in the money laundering process and, as would be expected, it involves several complex procedures. To take an example, if the illicit sum to be laundered is large then it must first be broken down into smaller non-traceable amounts so as to avoid attracting attention. This requires multiple transactions.

Usually low-level criminals, (called smurfs) are utilized for this break-down of the funds into smaller amounts. In some instances the task is so huge and tedious that some researchers have suggested a “pre-wash phase” in the laundering of illicit funds. Placement involves the physical assembly of the illicit funds, before they are placed into a financial depository. This is required so as not to draw attention to the deposits as they are being made. In several countries an important instrument used in this phase, is the pre-paid money card. This card not only ensures anonymity, but it is also easily transferable within the country as well as easily convertible into other currencies. Guyana needs therefore to monitor this financial product.

Layering After having placed illicit funds into a financial depository, the risk of detection (and its consequences) does not end there. The money-launderers therefore continue to add several layers of transactions onto the initial deposit(s). This is usually accomplished through several wire transfers of the funds in a series of transactions designed to “distance” the funds from their source (or original deposit). This layering prevents audit trails in event of forensic investigations. Furthermore, because there is a large volume of wire transfers taking place on a daily basis in Guyana and worldwide, ready detection is very unlikely.

4 Page

Guyana: Anti-Money Laundering ... 2013
Integration The final stage of the process requires that after layering, the funds are integrated into the formal legal financial system in a manner where they become indistinguishable from legitimate funds and therefore free from inquiry and audit disclosure. At this stage it is expected that the funds cannot be traced back to its criminal origins. Some analysts have sought to add to this stage a further effort known as “legitimization”.

Committee Members would recognize by now that money-laundering is a highly skilled criminal endeavour. The chief skills utilized in this activity are those offered by lawyers, bankers, and accountants. These do not constitute the typical “run of the mill” criminal elements, which make these persons exceptionally dangerous. Their specialist knowledge and skills are placed at the service of criminal endeavours and not the promotion of national well-being.

Facilitating money laundering Analytical studies of money laundering in Caricom reveal certain definite patterns. First and foremost, these studies have revealed that the nature of the ruling political regime is a major consideration. It has been found that the more members of the political ruling class mix and comingle with those “reputed” to be linked to organised criminal endeavours (whether socially, through business dealings, or benefitting from political donations) the easier it is for “illicit flows” to carry “respectability by association”.

Secondly, the more lax and therefore, the weaker is the national regulatory regime in control of financial crimes, the more there are signs of money laundering. Thirdly, this is facilitated when insiders perceive that one or more financial depositories have been “captured” and placed under the discreet control of organized criminal agents. Indeed, the more pristine the “captured” businesses appear to the general public, the better for the money launderers. The general rule is, the less suspicious is the general public, the fewer are the public mutterings and therefore, the easier it is for scams to thrive.

However, these circumstances are extremely short-sighted since over the long run the chances of a country becoming a major offshore financial centre (OFC) able to entice tax avoidance funds to

5 Page

Guyana: Anti-Money Laundering ... 2013
commit tax evasion in its jurisdiction are hampered if the jurisdiction develops a reputation for lawlessness and links to organized crime. Such circumstances invariably invite the glare of global financial surveillance, which is not good for those involved in serious white collar crimes. Across the Caribbean OFCs are viewed as major development vehicles. Trinidad and Tobago, which had a couple of years ago flirted with this sort of criminalization has quickly recognized the error of its ways and is today advertising its full compliance with anti-money laundering agencies as the foundation on which it plans to build itself as the premier financial centre in the Caribbean, Central and South America.

Finally, another factor facilitating money laundering in Guyana and Caricom is that regional economies remain, by and large, heavily cash dependent. By this is meant that it is standard for transactions to be conducted primarily in cash; other financial instruments are rarely used. This provides an excellent economic environment for smurfs to operate in without drawing attention to their criminal actions.

Main Methods As advanced in this Memorandum Guyana’s money-laundering is directly rooted in crime from the very inception, while for most of the rest of the Caribbean this is not by any means the usual circumstance. In those other Caricom countries it has been principally founded on tax evasion. Based on region-wide studies the ten most reported money laundering vehicles are indicated in Schedule 1. Schedule 1 Caribbean Money Laundering: Ten Most Reported Vehicles Remittances 1. Stock Exchange 2. Lotteries 3. Automobile Dealers 4. Stage Shows 5. Money Carriers 6. Real Estate 7. Purchase of deposit accounts 8. Special Purpose Vehicles 9. 10. Control of Locally Incorporated Banks Source: Author’s calculations

6 Page

Guyana: Anti-Money Laundering ... 2013
Several observations should be noted about the information displayed in the Schedule. First and perhaps most importantly, all the money laundering vehicles listed there are distinguished by the fact that they either involve considerable cash (currency) accumulation in small forensically untraceable currency bills or have the potential for same. Second, it would be very difficult in most practical circumstances to distinguish legitimate cash (currency) transactions from those that are illicit. Indeed the law requires that there has to be the legal presumption that nothing illicit is involved, since an illegal transaction can only be legally established as such through due process.

Third, all of the listed mechanisms in the Schedule may not be significant factors in all Caribbean OFCs at all times or indeed at any time. Flowing from this observation, the further conclusion is that, the importance of the vehicles listed in Schedule 1 (both as a group and individually) varies among Caribbean countries.

Finally, Members should note that, some of the vehicles used in money laundering, which were prominent a couple of decades ago are not so anymore. A good example of this is a “fake or fictitious bank account”. This has been since replaced by the direct capture of banks or other depository financial institutions and fictitious corporate vehicles by organised groups of money launderers.

Off Shore Financial Centres In the majority of Caricom countries where as was pointed out tax evasion is the main driver of money laundering, these countries have evolved into fully fledged Off Shore Financial Centres (OFCs), and in almost all instances have also become known worldwide as attractive “tax havens”.

A wide range of enterprise structures operates in Caribbean OFCs. This variety has developed through time to accommodate to the requirements of those seeking their services. This includes corporations (whether they are branch operations, affiliates, or special purpose vehicles); partnerships; trusts; foundations; private businesses; and individuals. The consequence is that, while on the one hand, individuals may concentrate on wealth and asset management services,

7 Page

Guyana: Anti-Money Laundering ... 2013
insurance, securities trading, banking and the like; transport service corporations on the other hand, may be more interested in the ship and aircraft registry operations of Caribbean OFCs.

The leading types of financial services provided by OFCs are displayed below in Schedule 2. As can be seen some of these are easily understood from their descriptors: for example international banking, wealth management and insurance services. (As an aside, it should be noted that there has been remarkable recent innovation in all types of insurance services provided by Caribbean OFCs). Some of the descriptors however, such as structured finance and collective investment vehicles refer to more complex activities. Thus the range of collective investment vehicles is considerable, including: mutual funds, hedge funds, unit trusts, and joint ventures. Additionally it should be observed that some of the descriptors refer to real and not simply financial activity, as is in the cases of foreign direct investment (FDI), and ship and aircraft registration.

Schedule 2: Ten Leading Financial Services Offered by Caribbean OFCs 1. Collective Investment Vehicles 2. Asset holding and protection 3. Foreign Direct Investment (FDI) 4. Derivatives Trading 5. International Banking 6. Structured Finance 7. Insurance 8. Wealth Management 9. Headquarter Services 10. Ship and Aircraft Registration Source: Author’s calculations

8 Page

Guyana: Anti-Money Laundering ... 2013 Section 2: Origins of Money Laundering
Tax evasion is perhaps the most important single driver of money laundering globally, and specifically in the Caricom region (other than in Guyana and to a lesser extent Jamaica and Trinidad and Tobago) where other criminal pursuits are more apparent. Historically, the crime of tax evasion is reputed to have been first legally prosecuted by the United States Government as part of its fight against organized crime over eight decades ago (the famous Al Capone trials of the early 1930s). Money laundering however, as a major organized criminal endeavour first engaged widespread media coverage much later, in the 1970s and early 1980s. Indeed it was only in the early 1980s that the first legal cases against money launderers were prosecuted by the US authorities. It is clear that, from the outset, those cases were closely allied to official onslaughts on major organized crime including, murder for hire, racketeering, and trafficking in narcotics, arms, and persons.

Economic Origins There is wide consensus among financial, economic, and international legal analysts and historians that the origins of money laundering are rooted in two economic phenomena. One is the historic distortions that were still being perpetuated in the global economy during the 1960s and 1970s, well after the profound economic dislocations of World War II. And, the other has been the paradigm shift that was occurring (although not sufficiently recognised at the time) in the global economy where a new world order (with very different policy prescriptions than those that had been primary until then) was emerging in the form of globalisation and financialisation.

Underlying, the economic distortions was a severe global capital shortage, which was occasioned by the massive diversion of public and private savings to military expenditures arising from World War II and the subsequent Cold War. The ruling regulatory and developmental ideology of that time also prioritized state-led non-market-based approaches to economic policy formulation. Thus in the area of banking and financial regulation, market-based policies were not considered robust enough to be effective (for example, open money market operations, which are principally relied on today) and reliance was instead placed on direct controls. At the time these included foreign exchange controls (designed to contain international financial speculation); fixed exchange rates; mandated reserve requirements for banks; and regulatory controls on both

9 Page

Guyana: Anti-Money Laundering ... 2013
the interest rates, which banks could pay/charge, as well as on the specifications of the loans that banks could make (sectors, time profile, period of loan etc). It should be pointed out that these policy prescriptions were pursued eagerly in both rich and poor countries alike. It was indeed the politically correct approach of the time!

It was in these circumstances that the Euro-dollar (and later the Euro-currency) financial markets emerged laying the platform for the rise of Off Shore Financial Centres (OFCs) and the explosive growth of money-laundering. What is the Euro-dollar market? With restrictive

financial regulations in force, banks based in Europe soon realized that any US dollar denominated accounts, which they could obtain would be beyond the effective regulatory reach of the US Federal Reserve System. Under existing laws these deposits could be accumulated therefore, at a premium interest cost and then lent out to investors beyond the reach of either the United States jurisdiction or that of the National Authority where the bank was based! Thus was created the Euro-dollar financial market. To be sure the current formal definition of this market is one for “United States dollar-denominated deposits at foreign banks (or foreign branches of US banks).”

Members of the Special Select Committee should note that it is only because of its origin in Europe that the financial market was termed the Eurodollar market. This name has no necessary connection to either the Euro as a currency, or to the Eurozone; indeed it pre-dated both. However, the functions which this market provided could be replicated elsewhere, and not surprisingly therefore, the market soon spread to other countries and territories many of which set about deliberately to replicate the opportunities for this type of market to thrive within their jurisdictions.

Parenthetically, Members should appreciate that the Eurodollar market quickly spread beyond the United States dollar and became morphed into the Eurocurrency market. This latter market includes any currency denominated deposit account offered by a bank to a customer, other than the currency of the jurisdiction of the country in which the bank is located. Thus for example, a British pound deposit, held by a bank in Guyana in British pounds would qualify as part of the Eurocurrency market.

10 Page

Guyana: Anti-Money Laundering ... 2013
The basic conclusion to observe is that banks saw the opportunity for attracting deposits, which were outside the jurisdiction of both local and foreign banking supervision and regulation through paying premium interest rates. However, the universal rule still applied: the less is the banking supervision (and regulation) in place, the greater is the risk these deposits are taking. Furthermore because financial markets adopted a no questions asked acceptance of Eurodollar and Eurocurrency deposits, these have become attractive to two groups of economic agents. One constitutes those countries and banking/financial venues outside Europe, which were prepared to compete with Europe for these deposits. And, the other is that group of economic agents seeking to move funds in a clandestine manner; that is, beyond national supervision and regulation.

It is these two incentives that spawned the worldwide emergence of OFCs and alongside these money-laundering on a world scale including in Guyana. At this stage Members would have come to realize that they cannot expect to form an intelligent appreciation of money laundering, and fulfil their Parliamentary responsibilities in regard to the several serious challenges Guyana presently faces in this regard, without, at the very least, a rudimentary appreciation of some related contextual issues.

Although OFCs were initially located in selected European countries, under competitive pressures these markets first spread to other countries within Europe and later beyond Europe as well. Among the latter grouping were a number of European principalities, protectorates, dependencies, colonial, and ex-colonial possessions. Of special note in the last regard there were a number of small territories and sovereign economies, which began to prepare their locations as potential venues for siting Eurodollar and Eurocurrency markets. This provided a secondary wave of off-shore financial centres (OFCs).

The connection these venues had to Europe (whether through geographical proximity or out of historical relations) was crucial for their successful development. Indeed this played a major, if not dominant role, in the evolution of OFCs, in places like: Luxemburg, Channel Islands, Cayman Islands, Bermuda, Bahamas, Singapore, and Bahrain. The European connection provided the degree of confidence in OFCs located outside Europe, which investors required. A case in point is that presently, well over 90 percent of the funds held by OFCs in the Caribbean

11 Page

Guyana: Anti-Money Laundering ... 2013
are located in “non-sovereign territories” like the Cayman Islands (73 per cent of the total amount) while most of the “sovereign states” individually hold amounts far less than onetwentieth of that total.

Europe also played very active roles in promoting the establishment of OFCs in these venues because the sector was seen (next to tourism) as the most potentially vibrant one for the development of small poor open economies. This policy preference was aided by the low startup costs of the sector. Consider the following information in support of this view: 1) this sector reduced the burden (costs) on European treasuries for promoting economic well-being in those territories it had responsibility for, as it only required Europe’s implicit endorsement to advance. Once investors were convinced Europe supported the OFC sector as a leading investment strategy, they felt confident in risking their funds in these locations. 2) While low or zero taxes would have constituted the prime attraction for potential investors, the economic benefits that otherwise came to a small economy in the form of hotel accommodation, travel, entertainment, and other services were, in the absence of tax benefits, ample for offering these economies diversified economic structures and good livelihoods. 3) Other supportive measures were also low cost; for example, passing laws and regulations regarding: bank secrecy and anonymity; minimal surveillance of financial transactions; a regime for banking regulation; and, tough laws deterring extradition of persons legally resident within the jurisdiction of OFCs.

Looking back on the developments described above, one factor that stands out in support of the growth of OFCs is the paradox of these centres being “designed” to thrive on illegality (tax evasion) yet themselves needing to be rooted in “trustworthy” legal and regulatory regimes. In practice OFCs had to go to great lengths to secure their basic legal/regulatory regimes, especially in regard to 1) the strict delineation of jurisdictions and jurisdiction-related matters 2) full and procedurally correct compliance with the laws and regulations empowering their local financial and legal authorities 3) ensuring the meeting of requirements in regard to reporting by businesses and individuals located within them 4) confidentiality 5) reporting and data-gathering requirements required by regional and international regulatory and oversight bodies.

12 Page

Guyana: Anti-Money Laundering ... 2013

OFCs and Tax Havens As earlier illustrated in this Memorandum the origins of money-laundering as a global phenomenon are closely tied to the international spread of OFCs and the opportunities these provide for the spread of tax avoidance and evasion; the latter being of course a criminal offence. At the early stages of this development OFCs were primarily seen as opportunities for tax avoidance because of their low tax status; their transition towards offering tax evasion came later.

As it turned out it was the European countries, which favoured the development of OFCs as an appropriate strategy for the diversification and development of its small open low income territories, dependencies, and ex-colonial possessions. The European connections to these jurisdictions provided investors with confidence in their political and social stability. Furthermore, shortly after this process started, the Group of Seven leading industrial economies (G7) also endorsed this strategy, especially for those OFCs located in small poor open economies.

As events unfolded however, more and more investors came to see these Centres as offering not only opportunities for tax avoidance, but for tax evasion as well. And, the Authorities in most if not all OFCs, either facilitated this transition or turned a blind eye to it. Very soon thereafter, the distinguishing feature of OFCs came to be their perception by investors as Tax Havens, always willing to facilitate tax evasion. In truth, at one period of time during the 1980s, OFCS and Tax Havens were treated in the financial literature as one and the same.

Following this outcome there was a radical shift if not reversal in European attitudes towards OFCs; going as far as public condemnation of their tax evasion practices by the G7. The situation rapidly deteriorated and by the end of the 1980s, the G7 was calling for global regulation and oversight of the financial services offered by OFCs. This finally led to the establishment at the end of the decade (during the G7 Summit in 1989) of the Financial Action Task Force (on Money Laundering) – FATF, headquartered in Paris.

13 Page

Guyana: Anti-Money Laundering ... 2013
Three Streams The emphasis this Memorandum places on the role of OFCs (Tax Havens) as a driver of money laundering is justified historically. Presently however, it should be emphasized there are two other drivers that are at the very least, of equal global and regional significance. One of these has accompanied tax evasion from its inception, while the other has emerged as a principal driver only since the early 2000s; the former is organized crime and racketeering and, the latter is the financing of terrorism and the proliferation of weapons of mass destruction. As a driver “organized transnationalized crime and racketeering” includes such heinous criminal endeavours as trafficking in narcotics, arms, persons, counterfeit artefacts, as well as illegal services (prostitution, gambling and blackmail information). Specifically, for our purposes it is to be stressed that is in this stream that Guyana’s money laundering is firmly located. All the crimes listed above typically involve cross-border transactions and are therefore founded on the existence of international markets for their wares. The anonymity, confidentiality and secrecy provided by laws and regulations serve to create an environment in which criminal practices do not only thrive, but the illegal proceeds thereby generated can be readily converted or “washed” in a manner such that they emerge as legitimate proceeds. The third driver, which is the financing of terrorism and proliferation emerged to the fore following the terrorist attacks on the United States (9/11/2001).

14 Page

Guyana: Anti-Money Laundering ... 2013 Section 3: The Regulatory Framework
Global A key proposition put forward at the end of the previous Section is that there have been three principal drivers pushing money laundering and related concerns to the level of massive global threats these now represent. To recall these three drivers are tax evasion; organized crime and racketeering; and terrorist financing and its proliferation. In actuality though, these three drivers comingle and are identified separately in this Memorandum solely for purposes of analysis and presentation. Experience worldwide shows that few, if any of the major criminal networks found to be involved in organised money laundering are motivated by one driver only. Despite this practice, it is still fair to assert Guyana’s money laundering is firmly located within the second driver; that is, organized crime and racketeering, while the rest of Caricom is, by and large, situated within the first driver; that is, tax evasion, which is directly related to their status as OFCs.

As was pointed out earlier, while the G7 Group of Leading Industrial Economies had initially supported, if not encouraged, the proliferation of OFCs in the Caribbean, during the latter half of the 1980s the Group had become quickly disenchanted, if not hostile to this development. And, at the G7 Summit of 1989, the Group established a Financial Action Task Force (FATF), situated in Paris, France to remedy this situation.

Financial Action Task Force About a year after the FATF was established (1990) that organisation came out with an Action Plan. That basically set out Forty (40) Recommendations to deal with the money laundering situation, as it perceived this at the time. FATF declared the Forty Recommendations were aimed at preventing the misuse of financial systems by persons laundering drug money. Members of the Select Committee should observe that this stated aim combines the first two drivers of money laundering listed above. Six years later (1996), FATF revised the Forty

Recommendations. It stated at the time, the main purposes of the revision were two-fold: 1) to update the Recommendations in order to reflect “evolving money laundering trends and techniques” and 2) to broaden the focus of FATF in order to cater for threats to the international financial system “well beyond drug-money laundering”. And later, after the horrendous terrorist

15 Page

Guyana: Anti-Money Laundering ... 2013
attacks in the United States on 9/11/2001, the FATF hurriedly expanded its mandate to deal with matters related to the financing of “terrorist organisations”. For this purpose Eight Special Recommendations were announced in 2001, and later in 2004 a Ninth Special Recommendation was added to the eight on terrorist financing.

Seven years after the first revision of the Forty Recommendations (in 1996), these Recommendations were again revised and published in 2003. These Forty Recommendations have been since endorsed by more than 180 countries and after later revisions these presently represent the definitive international standards to guide regulatory supervision and enforcement of anti-money laundering measures and combating the financing of terrorism and proliferation.

Over the years several affiliated bodies from different regions around the world have joined FATF. These are described as FATF-style Regional Bodies (FSRBs). Among them is the Caribbean Financial Action Task Force (CFATF). Other bodies have also attained observer status as Observer Organisations; these include the International Monetary Fund (IMF), World Bank, and United Nations special agencies. In 2012, following on the FATF’s third round of mutual evaluations of Member Countries, FATF reviewed and updated their Recommendations (Mutual evaluations are a central feature of FATF’s operations. These evaluations are undertaken in order to ensure each Member State participates in the activities of the organisation, thereby ensuring it fulfils its obligations in regard to every Member State playing a role in the assessment of the performance of every other Member State). This topic will be re-visited later in regard to Guyana’s present situation.

FATF had declared the aims of the 2012 revision as: 1) addressing new and emerging money laundering, terrorist financing and proliferation threats 2) clarifying and strengthening existing obligations 3) maintaining stability and rigour in the Recommendations. For the last item its great concern is risk and the adoption therefore of risk-based methods of assessment and control at the international and national levels was stressed. Members should note that this revision was undertaken with the full participation of FSRBs and Observer Organisations).

16 Page

Guyana: Anti-Money Laundering ... 2013
A summary therefore of FATF’s main tasks today would include: 1) examining money laundering techniques and trends, because this is a fast changing area of criminal endeavour and in order to be able to effectively regulate it, the Authorities need to be one or more steps ahead of the criminals 2) setting international and national standards, 3) effectively implementing the legal, regulatory and operational measures for anti-money laundering and combating the financing of terrorism (AML&CFT) as well as the proliferation of instruments of terror, mass destruction and related threats to the international financial system, and 4) working collaboratively with international, regional and national stakeholders.

The Ruling International Standards What are the ruling international standards today? As was noted the original publication of the Financial Action Task Force (FATF) Forty Recommendations in 1990 had been later revised in 1996 and again in 2003. In between these two years, and following on the terrorist attacks in the United States on 9/11/2001, Eight Special Recommendations were added to the Forty, and shortly thereafter the Eight was expanded to Nine. Following on the Third Round of Mutual Evaluations among its Members, the FATF in collaboration with the FATF- style Regional Bodies (FSRBs) and Observer Organisations thoroughly revised and updated these Recommendations and released them in 2012. This 2012 FATF document details the definitive International Standards for combating money laundering, the financing of terrorism and proliferation of weapons of mass of destruction. The 2012 update has taken into account those new and emerging threats it could identify and has therefore sought to strengthen the Recommendations in this regard. The FATF has also focused very heavily on risk and the area of terrorist financing along with the proliferation of weapons of mass destruction.

The International Standards produced by the FATF are organized into seven major groupings. These are: Policies and Coordination; Money Laundering and Confiscation; Terrorist Financing and Financing of Proliferation; Preventive Measures; Transparency and Beneficial Ownership of Legal Persons and Arrangements; Powers and Responsibilities of Competent Authorities and Other Institutional Measures; and finally, International Cooperation. The main items addressed in each of these groupings are briefly described below, in the order indicated.

17 Page

Guyana: Anti-Money Laundering ... 2013
Policies and Coordination Under this grouping of international standards, the main items that are dealt with include 1) the identification and assessment of risks which Members should routinely undertake, 2) the need for their continuous assessment of these, and 3) the follow up actions that should be taken by the Authorities and financial institutions. This grouping also details the required levels of cooperation and coordination of national policies (both internally and externally) on anti-money laundering and combating terrorist financing (AML&CFT).

Money Laundering and Confiscation A standard that FATF emphasises is the requirement that money laundering is comprehensively criminalised on the basis of the Vienna Convention and the Palermo Convention. Based on these two Conventions, and together with the Terrorist Financing Convention, the Competent

Authorities should have power to freeze, seize and confiscate property that is money laundered; the proceeds from (and or connected to) money laundering offences; as well as the proceeds from (and or connected to) terrorist financing. These should be allowed to take place with or without a criminal conviction along with the offender being required to demonstrate the lawful origin of the property alleged to be liable for confiscation.

Terrorist Financing and the Financing of Proliferation FATF adopts as its basis for criminalising terrorist financing, the Terrorist Financing Convention. This requires countries to fully and promptly implement targeted financial sanctions regimes required to comply with United Nations Security Council Resolutions on the subject. In similar vein they are required to respond to Resolutions in regard to proliferation. It also directs countries to establish the adequacy of their laws and regulations in regard to non-profit organisations so that these do not become unwitting conduits for criminal and/or terrorist activities.

Prevention Measures This grouping addresses the longest list of items, as it covers 19 of the 40 FATF Recommendations. The grouping includes 1) the treatment of financial institutions secrecy laws in relation to FATF Recommendations 2) obligations in regard to customer due diligence and

18 Page

Guyana: Anti-Money Laundering ... 2013
record keeping 3) the treatment of politically exposed persons 4) the handling of cross-border transactions (including correspondent banking, money transfer services, wire transfers and “new” financial products appearing in the market place) 5) internal controls and foreign branches/subsidiaries 6) activities in designated “high risk countries” and 7) reporting of suspicious transactions (including tipping-off and confidentiality). The grouping also deals with the treatment of related non-financial businesses and professions (lawyers, accountants, business consultants).

Transparency and Beneficial Ownership This grouping addresses measures to prevent the misuse of legal persons and legal arrangements for purposes of money laundering and terrorist financing. This requires that there is “adequate, up-to-date and timely information” on beneficial ownership and control of legal persons/arrangements in both financial businesses and related non-financial businesses and professions.

Powers/Responsibilities of Competent Authorities This grouping addresses the central issue of the powers of enforcement and regulation by the Competent Authorities. It speaks to their required regulatory and supervisory functions and explicitly deals with the powers of Supervisors, the Financial Intelligence Unit, Law Enforcement, as well as other Investigation and Detection bodies (police, revenue, control of narcotics). It also addresses the collection of comprehensive statistics relevant to AML&CFT operations across the board. The Recommendations also deal with guidance and feedback, as well as the use of United Nations mandated sanctions to enforce compliance.

International Cooperation As would be expected, this final grouping addresses the issues of international cooperation. It lays the foundation for cooperation through requiring countries to become immediate Parties to the full implementation of the Vienna Convention (1988); Palermo Convention (2000); UN Convention Against Corruption (2003); the Terrorist Financing Convention (1999); the Council of Europe Convention on Cybercrime (2001); the Inter-American Convention Against Terrorism (2002) and the Council of Europe Convention on Laundering, Search, Seizure and Confiscation

19 Page

Guyana: Anti-Money Laundering ... 2013
of the Proceeds from Crime and the Financing of Terrorism (2003). It also provides for mutual assistance among countries, especially in relation to such issues as information exchange; assets seizure and confiscation; extradition; and other forms of cooperation that might arise. For the convenience of Members of the Select Committee, these groupings together with the summaries of the key items, which are included within each are presented in the Schedule below: Schedule 3 FATF Operational Framework (AML & CTF) Targeted Areas 1. Policies and Coordination Selected Items of Concern Risk assessment; risk-based approaches; national policy; and, institutional cooperation and coordination. Fixing offences; corresponding penalties & measures. The related offences; proliferation and sanctions; and, the treatment of non-profit organisations. Secrecy; record-keeping; customer due diligence; politically exposed persons; cyber transactions; other suspicions transactions; and, related matters (tippingoff, disclosure, investigation) With special reference to legal persons and legal arrangements. In regard to regulation and supervision; licensing; enforcement; data gathering and analysis; investigation and financial intelligence. International legal instruments; mutual assistance; extradition; asset freezing and confiscation; and, other forms of global cooperation.

2. 3. 4.

Confiscation Terrorist Financing and Proliferation Prevention

5.

Transparency//Beneficial Ownership

6.

Powers and Responsibilities of Competent Authorities

7.

International Cooperation

Mainstreaming Three important observations should be noted in regard to this structure of FATF’s international standards. Firstly, and perhaps most importantly, the FATF has now fully integrated the Nine Special Recommendations on the financing of terrorism and the proliferation of weapons of mass destruction discussed earlier with its original Forty Recommendations. As a consequence of this

20 Page

Guyana: Anti-Money Laundering ... 2013
the Nine Recommendations no longer stand separate and apart from the Forty Recommendations. In other words, the countering of the financing of terrorism and proliferation of weapons of mass destruction are now fully mainstreamed into the Forty Recommendations. Secondly, as part of its revision process, the FATF has set about deliberately and systematically to incorporate the global financial oversight and regulatory frameworks of both the International Monetary Fund (IMF) and the World Bank into the assessment methodology it now requires Member States to follow.

And, finally as part of the above mentioned far-reaching changes, the FATF has also set about to be inclusive in devising these changes. This has meant the systematic involvement of other stakeholders in its mission and operations; the principal stakeholders that were engaged are from civil society, the private sector, professional bodies, and academia.

While such developments are no doubt quite striking, they should not lead Members of the Special Select Committee to forget the original set of considerations that impelled the formation of the FATF, as these still apply. To recall, the leading industrial regions and organisations (that is Europe, North America, G7 and OECD) while initially strongly promoting Off Shore Financial Centres (OFCs) as a major development vehicle for small poor open economies, this attitude was radically revised when it came to be realized that OFCs not only threatened to, but were indeed undermining their economies, and in particular the fiscal capacities of their states, by becoming tempting opportunities for tax evasion, financial crimes, and organized criminal endeavours, (particularly narcotics trading). As events turned out also, shortly thereafter the financing of terrorism and the proliferation of weapons of mass destruction came to be added to the threats this new situation represented for the leading industrial economies.

From the very outset of this public change in attitude by the G7 and OECD, the OFCs had strongly protested against it. However, the sad reality was that, whether separately or collectively, the OFCs could not command enough economic clout to prevent the FATF from marching forward. As we shall see later, the FATF countries also adopted strong-arm tactics against them. I shall return to this topic when I address the formation of the Caribbean Financial Action Task Force (CFATF).

21 Page

Guyana: Anti-Money Laundering ... 2013
For our present purposes the key overall conclusion Members should draw from this presentation on the 2012 FATF international standards is that the regional operations of the CFATF, (which is designated a FATF-Style Regional Body (FSRB)), fall entirely under the rubric of FATF International Standards. Indeed it would be fair to assert that, with or without the CFATF, Caribbean/Caricom Members of FATF (including Guyana) would still have been expected to fully implement the FATF International Standards. In a real sense therefore the existence of the CFATF is in part attributable to the need to soften the blunt reality of the FATF.

As indicated earlier the FATF standards are applied to Member States through a rigorous mutual evaluation procedure, which has already been described. This procedure, as we have seen, is conducted on the basis of an assessment methodology that is applied universally. Indeed in order to avoid ambiguities and uncertainties arising from differences in local and regional situations, the FATF has supplemented its written international standards with the following: 1) interpretive notes 2) definitions and a glossary of terms 3) worked examples, and 4) guidance/best practices papers and other similar documents.

Regional Caribbean Financial Action Task Force CFATF emerged out of the national indignation and outrage the OFCs felt on the announcement of the formation of the FATF. That organisation was portrayed by them at the time as an outright betrayal of poor countries by rich ones. Politically, and ideologically, these initial responses by the OFCs were explicitly anti-colonial and anti-imperialistic, and the governments of OFCs set about to mobilize their populations to resist this bullyism and aggression by the rich nations. Regrettably, however, the dynamics of the circumstances at the time were such that these protestations were quickly overwhelmed by the sheer asymmetry in economic and geo-political clout between the relatively few rich countries and the larger number of smaller and poorer OFCs. It is important to note that the rich countries were quick to employ a battery of strong-arm economic tactics to bring the OFCs to heel.

These strong-arm tactics included black-listing countries that did not cooperate and/or naming and shaming those in a public list of deemed OFC offenders. They also resorted to a number of

22 Page

Guyana: Anti-Money Laundering ... 2013
fiscal and financial regulations designed to negate the attractiveness of OFCs. These included: 1) not allowing deductions to non-compliant jurisdictions 2) withholding taxes on payments to residents in non-compliant jurisdictions 3) stiffening the reporting requirements of noncompliant jurisdictions and also terminating tax treaties with these. Broader economic restrictions were also applied in some instances, such as refusal to grant aid; technical assistance; maintain special surveillance; as well as placing additional charges on transactions involving non-compliant jurisdictions.

Caricom countries were perhaps the most vocal opponents of the FATF actions at the time. This did not last long, as under the pressures from the leading industrial powers they felt compelled to fold. As matters have turned out the Caribbean area, led by Caricom was the first to establish a FATF-style Regional Body (FSRB) - the CFATF. Ironically, today this body that originated in protest now epitomizes regional self-driven efforts aimed at becoming the “best” executing regional agency (FSRB) dedicated to the fulfilment of FATF’s mission!

CFATF comprises 29 Caribbean Member States and is headquartered in Port-of-Spain, Trinidad and Tobago (Notably, Cuba is not a Member, but there are initiatives currently underway to secure this). CFATF has several Observer Organisations, attached to it including the Commonwealth Secretariat; European Commission; IMF; World Bank; IADB; and several United Nations special agencies dealing with organized crime, drugs, terrorist financing, and proliferation. There are also a number of Cooperating and Supporting Nations. As the first FSRB, the CFATF is presently celebrating its 20th Anniversary.

Guyana and the CFATF Guyana became a Member of the CFATF in 2002. It had its first Mutual Evaluation Report (MER) conducted in 2006 as part of the CFATF’s second round of those evaluations. MERs are based on the laws, regulations and the other materials supplied by the country under review (in this case Guyana) as well as the information derived by the CFATF Team during its on-site visit (Guyana). Among other things, on-site reports seek to review 1) the institutional framework 2) the relevant anti-money laundering and countering terrorist financing (AML&CFT) laws,

23 Page

Guyana: Anti-Money Laundering ... 2013
regulations, guidelines and other requirements, as well as the capacity, implementation, and effectiveness of the regulatory and other systems in place. Guyana’s last on-site visit by the CFATF Team arising from its MER was in 2011 and the resulting Report was adopted by the CFATF’s Council of Ministers the same year (2011). As a result of that Report, Guyana was placed on expedited Follow-Up and required to report at every CFATF plenary. A Third Follow-Up Report was presented towards the end of 2012. Later a Fourth Post-Plenary Final Follow-Up Report was presented in 2013. The Fourth Report summarized Guyana’s progress as follows: 1) Anti Money Laundering and Countering the Financing of Terrorism (Regulations) was enacted. (This was designed to supplement the existing law by focussing on identification, record-keeping, reporting and training procedures) 2) the Anti- Money Laundering and Countering the Financing of Terrorism (Amendment) Bill of 2013 was laid in the National Assembly on April 22, 2013 (this was one week before its deadline for implementation- April 30, 2013). The Bill is designed to meet MER recommendations. Additionally, the Financial Intelligence Unit (FIU) started

training programmes for relevant agencies in order to heighten their awareness and understanding of their responsibilities and legal obligations. The resources of the FIU (human/physical/financial) were also augmented in order to build its capacity. As a result of the enhancement of the FIU, two of Guyana’s outstanding Recommendations (10 and 19) were deemed as met in its Fourth Report. The outstanding Core and Key Recommendations for Guyana are indicated in the Schedule below. With reference to its Other Recommendations that is, Non-core and Non-key, Guyana was rated partially compliant in 10 and non-compliant in 17.

Schedule 4: Guyana’s Outstanding Core and Key Recommendations (2013) Recommendations 1, 5, 13, SR. II, SR. IV, 3, 4, 23, 26, 35, 36, 40, SR. I, SR. III, SR. V
Note SR= Special Recommendation Source: CFATF, 2013

24 Page

Guyana: Anti-Money Laundering ... 2013 Section 4: Threats Money Laundering Pose to the Modern State
The end of the last Section carried a brief description of the current situation of Guyana in regard to the CFATF. The next Section will be devoted to addressing the way forward in light of the present impasse with regard to the proposed new anti-money laundering legislation and Guyana’s broader relations with CFATF. Members however need a broad indication of the

scale and extent of money laundering at the international level, in order to appreciate the highly significant threats this phenomenon presently poses to the functionality of the modern state and operations of the global economy. This is provided in this Section.

Threats While the threats posed by the financing of terrorism and the proliferation of weapons of mass destruction are in a sense, vividly self-evident, it is therefore important that readers do not as a consequence underestimate the systemic threats which, the growth of money laundering poses to the modern state. Four of these threats are indicated below.

First tax evasion lies at the heart of all forms of money laundering, and therefore, in so far as it thrives, this systematically erodes the fiscal capacity of states. And, with less revenue at their disposal, modern states are less able to afford all types of expenditures, ranging from social services and public infrastructure to national and personal security.

Second, tax evasion linked to money-laundering incentivizes criminal endeavours. And if successful, more illicit proceeds are turned into legitimate income and wealth than would otherwise be the case. Such processes would inevitably undermine the rule of law and democratic institutions. And, as it has been observed worldwide, this also exposes state functionaries to the temptations of corruption and other serious malpractices.

Third, when crime becomes deeply interwoven into everyday transactions, markets invariably become distorted. Market signals (prices), which are central to buying and selling among economic agents consequently become unreliable and their role in ensuring “economic efficiency” fails. Market distortions occasioned by criminal practices therefore, undermine the

25 Page

Guyana: Anti-Money Laundering ... 2013
market’s presumed advantages for the efficient accumulation of income and wealth in marketbased economic systems.

Fourth, the negative impacts of these criminal-led distortions of markets are not only felt among economic agents, but through them on the economic regulators as well. Thus to take an everyday example, the heavily relied on open market macroeconomic regulation of the modern economy becomes fatally disrupted when criminally motivated transactions become significant. This has been revealed in situations where a criminally-led underground economy drives the production of economic livelihoods thereby resulting in the market regulation of the formal/legal economy becoming largely ineffectual.

The four cases described above reveal the gravity of the threats, which money-laundering potentially poses to the modern state. Indeed, one can further argue that these threats strike at the core of the dynamic governing the extended reproduction of the capitalist economy. Members can from this observation therefore, better appreciate why in the 1980s the leading industrial nations reversed so rapidly from promoting OFCs as a development vehicle towards efforts to contain their growth to the strict provision of legal and legitimate financial services only. The global size and scale of money laundering (discussed below) also shows how deeply embedded it is in cross-border transactions in the present international economy. Indeed the Canadian authorities have estimated the cross-border impact of tax evasion transactions in their country to be about 80 to 90 percent!

Global Empirics What do the data reveal about the present size and scale of money laundering globally? Because money laundering is a crime there can be no definitive measurements of this phenomenon. The range of estimates most commonly cited by analysts is that offered by the International Monetary Fund (IMF) of 2-5 percent of global GDP, which in 2012 stood at 72 trillion United States dollars.

Significantly, the FATF has declined to offer estimates of the size of money laundering on a global scale, because it argues, as indicated above, due to its criminal nature the truth can never

26 Page

Guyana: Anti-Money Laundering ... 2013
be known. However organizations associated with the FATF have offered estimates. Thus the United Nations Office on Drugs and Crime has estimated criminal proceeds at 3.6 percent of global GDP and money laundering per se at 2.9 percent of global GDP. This is within the IMF range.

Currently, the annual value of global money laundering most commonly reported is at least US$1.6 trillion. The United Nations (2010) has estimated that, in the decade 2001-2010, the annual money laundering outflow rate from poor states averaged 8.6 percent. This compares to their real GDP growth rate of 6.0 percent over the same period. Of note these estimated outflows combine both proceeds from crime and legitimate funds transferred outside the jurisdictions of states in contravention of their tax laws and/or incurring breaches of exchange control regulations. Of great concern losses of poor states from tax evasion have been estimated at ten times larger than the overseas development assistance (foreign aid) they had received over the same period.

The Third World Economics (2013) cites a joint study produced by the African Development Bank and Global Financial Integrity, which revealed that while Africa is the most aid-dependent region in the world, with ODA inflows approximating US$50 billion annually, yet over recent decades (1990-2009) about US$1.5 trillion illicitly left Africa. This huge outflow is linked to tax evasion, corruption and money laundering. Strikingly, much of this “dark money”, as it has been termed, has originated from among natural resources rich (mainly mineral) economies such as Nigeria, Libya, South Africa and Angola. A key feature of this is that Western banks have been the main facilitators of this particular outcome!

In conclusion it would be appropriate to remind Members of the Special Select Committee of two earlier observations: 1) the existence globally of 24 hour international financial markets and 2) the sheer volume of electronic transfers. Together these make financial transactions extremely difficult to monitor. This therefore adds enormous difficulty to the tasks of anti-money laundering regulatory and oversight bodies.

27 Page

Guyana: Anti-Money Laundering ... 2013 Section 5: Strategic Road Map for the Way Ahead
Guideposts This Section portrays a strategic road map for the way ahead in light of the current impasse in Guyana’s relations with the CFATF. There are four principal guideposts that should govern the way ahead, namely: 1) The size and scale of the money laundering threat to Guyana 2) The assessment of government’s strident demands for the immediate passage of the legislative amendments before the Special Committee 3) The dimensions of Guyana’s money laundering situation and 4) The core weaknesses of Act №. 13 of 2009, which the proposed legislative amendments seek to address. These are considered in turn below.

Guidepost 1: Size and Scale The most important consideration for devising a strategic way ahead is the magnitude of the threat posed by money laundering and related concerns. The FATF (and by extension the CFATF) has adopted the position that since these matters are criminal in nature, no one can measure their true magnitude. While strictly speaking this is correct, the use of proxy indicators combined with personal judgements still have useful roles to play in providing estimates. As was earlier indicated, several renowned international organisations have offered such estimates; for example, the IMF and several United Nations’ “specialized agencies”. Further, there are a number of studies that have attempted to measure the size of the underground economy in Guyana, a phenomenon closely related to money laundering.

One of those studies is by Faal (2003). This covered the period 1970-2000. In that study Faal had stressed tax evasion as the driving force behind Guyana’s underground economy. This is significant since tax evasion is also perhaps the most important driver of money laundering. Faal’s estimates are shown in the Schedule below. These reveal that for the decades of the 1970s, 1980s, and 1990s to 2000, the average size of the underground economy in Guyana was 40, 76, and 47 percent respectively of its official GDP. Thomas, Jourdain and Pasha (2011) have also applied Faal’s techniques (adjusted) to Guyana for the period 2001-8 and obtained an estimate of 61 percent as shown in Schedule 5 below.

28 Page

Guyana: Anti-Money Laundering ... 2013
Schedule 5: Guyana: Underground Economy (Faal’s estimates) Period 1970s 1980s 1990-2000 2001-2008 Average size (% of official GDP) 39.70 76.00 47.18 61.00

Source: Thomas, Jourdain and Pasha, Transition, Issue № 40, 2011

These proxy indicators suggest the size and scale of the money laundering problem in Guyana is considerable. This assessment also confirms to my personal professional experiences. Pertinently, a recent Kaieteur News Editorial (September 29, 2013) under the caption “Guyana and the drug trade” states: “The drug trade is pervasive ... the authorities would complain they cannot get information ... but we could catch the most serious drug dealers on tax evasion ... we have so far failed to hear or read about anyone being prosecuted”. The Editorial goes on to assert bluntly: “Money laundering is the order of the day and those tasked with correcting the situations are weaker than could ever have imagined”. Although the Editorial does not provide numerical estimates, Members of the Select Committee would realize that it represents a fairly commonplace perception among the Guyanese public.

Guidepost 2: Crying Wolf! Another important guidepost for the strategic road map on the way forward is to determine whether speedy implementation of the actions demanded by the CFATF should override a more methodical and deliberate approach to reform. In other words, the real issue is whether or not to accept the publicly stated fears of the government that, if the legislative amendments before the National Assembly are not passed by November this year, then the CFATF (in consort with FATF) will visit Guyana with massive sanctions, thereby seriously disrupting its cross border financial transactions, trade and investment flows. However, if this position is not accepted, then there is little doubt the government is crying wolf with two main objectives in mind. One is to pressure the parties that comprise the majority in the National Assembly to act speedily, even as

29 Page

Guyana: Anti-Money Laundering ... 2013
the government itself has been dealing with these matters since the 2000s, while these parties have not! Crying wolf also allows the Governmental to represent to CFATF that delays and deficiencies in Guyana’s fulfilment of its Recommendations are due to present local politics, or worse (better!) the “irresponsibility of the Opposition”.

At this juncture the earlier assessment of the CFATF needs to be recalled. The main inference from that assessment is, I believe, the intrinsic ambiguity of that body. While arising out of anticolonial and anti-imperialist rhetoric in defence of the sovereignty of small Caribbean states, as was observed CFATF now zealously pursues the main Mission of FATF. Because of this ambiguity I believe CFATF would lean towards supporting Caribbean states, save and except where it is amply demonstrated their non-compliance with the Forty Recommendations (2012) is extreme, flouting, and in blatant disregard and disrespect of that body. The position taken here is supported by the following considerations: 1) In regard to Guyana’s compliance, CFATF has rightly distinguished between the legislative and non-legislative elements of its

Recommendations to Guyana. CFATF appears to have accepted the latter elements are being satisfactorily addressed and 2) there is absolutely no intended automaticity to CFATF’s required actions against Guyana, if the legislative element is not fulfilled. First, CFATF has executive discretion over the steps it can take if the legislation is not passed by November. Second, CFATF’s call to its Members is: “to consider implementing counter measures to protect their financial systems” (my emphasis). This is a discretionary call. And thirdly, a fter the call “CFATF will consider referring Guyana to FATF’s International Cooperation Review Group” (my emphasis). Again, this is also discretionary.

The truth of the matter is that the current stalemate over the legislative amendments with the Special Select Committee is only the proximate cause and not the real cause behind Guyana’s problems with the CFATF. These problems have been germinating for years, due to Guyana’s protracted tardiness in dealing with its domestic money laundering situation, which as was observed has been ongoing for years and is now caught up in the dynamics of the criminalization of the Guyana state.

30 Page

Guyana: Anti-Money Laundering ... 2013
Guidepost 3: Dimensions Recognizing that thus far the Special Select Committee would have focused on the legal aspects of the proposed legislative amendments before that body, Members should however realize that the reform of the Anti-Money Laundering and Countering the Financing of Terrorism Act 2009 cannot be reduced to a task of legal drafting.

Money-laundering challenges in Guyana are inherently multi-dimensional. The challenges are political, in the sense that successful challenges to money-laundering require political will on the part of the government; trust and cooperation among the government and Opposition; as well as transparency and inclusiveness in the process of tackling this, in order to ensure citizens willingly engage in a social contract whereby they give sustained support towards creating a sound framework for anti-money laundering and countering the financing of terrorism efforts. An indispensable ingredient in the pursuit of this is public awareness of the gravity of the threats these pose. Without that awareness the Select Committee will find little public support for its efforts. The challenges are also economic because money laundering is a considerable part of Guyana’s underground economy. A substantial number of livelihoods are dependent on the illegal workings of money laundering. Moreover, econometric studies on money laundering reveal its negative impacts on economic growth; financial stability (increased risk of fraud, reputational risk, trust and speculation); the financial sector/systems and institutions; and, on capital formation. These econometric studies also reveal that money laundering promotes capital flight, the underground economy, as well as corruption and other such forms of criminal activity.

The challenges are also cultural and behavioural, mainly because wide swathes of Guyanese society have come to accept (and or tolerate) evidence of this pathological degeneration and deviance in societal norms. There are whisperings about inequality and obvious displays of income and wealth with no publicly identifiable sources for this generation, but that is as far as public concern goes.

31 Page

Guyana: Anti-Money Laundering ... 2013
As the Editorial quoted earlier reveals, the Authorities do not seek explanations of sudden displays of wealth and neither does the public clamour for this to be done. As my extended essays on Guyana: the Criminalization of the State argue, the nexus between political elites and organized criminal groups has created a cabal that systematically utilizes its combined influence, power, authority, and resources to make the state progressively a vehicle for the pursuit of criminal endeavours.

For this and other reasons, I had gone as far as to suggest this phenomenon represented a new state typology, while bearing resemblance to several other modern state deformations. This guidepost therefore, highlights the reality that tackling money laundering and related challenges in Guyana is simultaneously a political, cultural, economic and social transformative task. This is not for the faint-hearted and non-visionaries. Guidepost 4: Core Weaknesses of Act № 13, 2009 The fourth guidepost requires the Committee to take its bearings from the core weaknesses of the present Anti-Money Laundering and Countering the Financing of Terrorism Act, 2009. Several systemic weaknesses have been widely acknowledged.

The first of these is that banking, legal and other analysts with whom I have discussed this problem have estimated that at least 70 percent of the terms and conditions of that Act (which was unanimously passed in the National Assembly) have not been applied! Moreover, there has been little display of a political will to apply it. There is therefore, strong support for the view that there is a significant implementation deficit as far as the 2009 Anti-Money Laundering legislation is concerned. The assessment is that Act, has been under-enforced and underimplemented (executed), whether by accident or design.

Second, that Act has also failed to adequately diagnose the prevailing regulatory, oversight, and governance environment in Guyana. Thus the Act places abundant responsibilities in the Offices of the President and Ministers as well as other bodies (Revenue, Crime, Law enforcement and so on) including the Financial Intelligence Unit (FIU) but “outside political leadership” of these bodies has routinely trumped their functional autonomy and independence.

32 Page

Guyana: Anti-Money Laundering ... 2013
Consider the following examples: 1) In addition to lacking functional autonomy and independence those bodies are understaffed and under-financed 2) With the penetration of criminal elements into the workings of the state, it has become well nigh impossible to design a system for regulating the identified regulators in the Act. The fact that the Executive does not presently control the National Assembly makes that body an attractive location for “oversight functions”. That body does not have however, to overload itself by seeking to perform all these functions itself, but should seek to create what hopefully could become delegated independent bodies. A good example is the Bank of Guyana, which already performs its banking oversight role with a reputation for integrity and independence.

Thirdly, the one body established in the Act that is dedicated solely to combating money laundering is the Financial Intelligence Unit (FIU). From the outset this has lacked the capacity required to fulfill its tasks. As a result the FIU is distinguished by having no great track-record of effective enforcement of the law; no asset seizures; weak cooperation with other nations; and, little impact on addressing citizens with the legal status of “politically exposed persons” as written into that Act.

Fourthly, the Act does not read (to laypersons) as if it is strategically focused on the areas of vulnerability for money launderers. These are the so-called “choke points” identified earlier as 1) The point at which the illicit cash enters Guyana’s financial system (point of “placement” as earlier defined) 2) The points at which transfers are made to and from the legitimate financial system and 3) Cross-border transactions (flows). The Guyana dollar is not worth physically smuggling abroad and this reduces the problem somewhat, but on the contrary, the widespread “currency substitution” that takes place in Guyana compounds the difficulties of tracing laundered funds.

The conclusion presented above conforms to the underlying premise of the guideposts, which is that continued criminalisation of the Guyana state:   Increases the size and scale of the money laundering problem Impels the government to “cry wolf” as the Opposition deliberates on the legislative amendments

33 Page

Guyana: Anti-Money Laundering ... 2013
  Drives the increasingly complex multi-dimensionality of money laundering challenges and Highlights the systemic weaknesses of the original Act, Number 13, 2009.

The Schedule below highlights the key features of the guideposts for a strategic way forward that is designed to address the current impasse facing Guyana and the Caribbean Financial Task Force (CFATF) as together they seek to contend with the legislative part of Guyana’s outstanding obligations the CFATF (and by extension the global Financial Action Task Force FATF). These guideposts provide dynamic guidelines for not only resolving the immediate stalemate but also providing the basis for a strategy designed to reform anti-money laundering and combating the financing of terrorism and proliferation over the medium-term into the longterm.

In summary these guideposts are rooted in the acknowledgement of 1) The considerable scope and scale of the money laundering threat in Guyana 2) The profound multi-dimensionality of that threat, covering as it does political, economic, social, cultural and behavioural spheres of life 3) The tension, which exists between the Government and the Opposition due to call for immediate action by the former over the perceived threat of external sanctions by the CFATF and FATF 4)The core weaknesses of the current money laundering legislation (Act 13 of 2009). Schedule 6: Guideposts for a Strategic Way Forward
Item Magnitude of Threat. Dimension. Indicators Numerical estimates of proxy indicators & informed opinion Manifestations in economic, political, social, cultural, behavioural spheres Outstanding Recommendations (Core, Key, Other) (Compliant/Partially compliant/Non-Compliant) Prescription/Assessment Highly significant

Profoundly multi-dimensional

Guyana - CFATF Relations

Core and key = 15 Non core and Non key = 25 (partially 10) and (noncompliant) (15) Carefully revised legislative amendments, in light of Guideposts & Markers (presented below)

Act # 13, of 2009

Core Weaknesses (implementation deficit; lack of independence of designated Authorities; systemic weaknesses of FIU; not focused enough on choke pints.

Source: Author’s Summary of Text

34 Page

Guyana: Anti-Money Laundering ... 2013
Following on these guideposts, the next consideration is specific markers Members of the Special Select Committee on Money Laundering should apply to the legislative amendments before them. The first set of these markers should focus on incentivizing the frontline regulatory/oversight bodies and others that are engaged in countering money laundering and combating the financing of terrorism and proliferation.

Marker 1: Earmarking Seized Assets for Frontline Bodies Key among the glaring weaknesses observed with the existing intelligence and enforcement authorities in Guyana are the limited resources they have to fulfil their functions. It is therefore, recommended that the Committee should consider in detail, and then apply, a legislative schedule for rewarding those bodies (and their personnel) with part of the proceeds of assets seized form money launderers and terrorist financiers. This will not only incentivize the frontline bodies, but it will help also create a supplementary basis for the sustained financing of these bodies.

However, it should be made clear however that this is a recommendation aimed at generating supplementary resources for the frontline agencies and personnel. It would be ill-advised to depend on this for providing the regular resources of public bodies. Indeed it is vital for personnel of the regulatory and oversight regime to be principally motivated by their professional training and obligations to protect the rule of law and stamp out financial crimes.

Marker 2: Earmarking Proceeds for the General Public The second marker directly follows on the first, and its rationale is basically the same. Members of the public, or persons who “tip off” the Competent Authorities, should be similarly incentivized out of the proceeds from seized assets. It goes without saying that for both Markers 1&2, legislative rules, and not executive discretion, should be the basis for rewarding those who fulfil their civic responsibilities in this regard. Legislation is preferred over executive discretion, since the rules governing the disposition of part of the proceeds from seized assets to those directly engaged in anti-money laundering, and combating terrorist financing should be lawgoverned, and not the product of executive fiat. This is recommended to protect against abuse, which can readily occur if the process is not defined in law.

35 Page

Guyana: Anti-Money Laundering ... 2013

Marker 3: The Technology Gap The second set of markers the Committee should keep in mind relates to the likelihood (for all sorts of reasons that directly or indirectly relate to available resources) of a widening gap in IT technology available to money launderers and financiers of terrorism as against Guyana’s Competent Authorities. Worldwide this tension between the capacity of states and criminals generally plays a central role in determining criminal outcomes.

Criminals seek to harness innovation and ingenuity to their cause because they recognize that these attributes enhance their ability to game the Authorities. The Authorities therefore cannot risk falling behind and allowing a significant technology gap to emerge. And, since the best general motivating force making for the availability of skills is willingness to pay, the Authorities have to be in a position to recruit these skills for themselves. Here again the proceeds from assets seizure can help.

Marker 4: Cost of Compliance versus Non-Compliance The general economic expectation is that those affected by regulatory regimes would, if they were rational, weigh the probabilistic cost of their compliance against the costs of their noncompliance. Committee Members therefore, need to weigh the outcome of this calculation as they proceed to approve legislation. The more definite are the penalties and costs of noncompliance, the more likely economic agents are to seek to comply; the risk-reward relation is not skewed in their favour. This therefore, means as a general rule the less ambiguous the rules and regulations are and indeed the more precise and certain are the penalties for non-compliance, the greater is the likelihood of compliance.

Markers 5 & 6: Regulators and the Regulated There are two major markers under this heading. First, legislative and other proposed reforms should give priority to the requirement of avoiding, at all costs, a progressively widening gap between the rules (as defined in the legislation and its regulations) and the enforcement of those rules (by the various Competent Authorities). It would be foolhardy however, to seek to prevent such a gap from occurring by in effect seeking to dilute one of these (say the rules) in order to

36 Page

Guyana: Anti-Money Laundering ... 2013
match the growth of the other (the Competent Authorities capacity to enforce the rules). Based on worldwide experiences of modern public policy management it would be safe to prescribe here that the credibility of rule-making and policy-making bodies is essential to the successful pursuit of policy changes, including reforms.

Second worldwide experience also reveals that there is always one potentially fatal threat facing all regulatory regimes. That is, “regulatory capture” of the regime by those it is established to regulate. With the large amount of estimated sums laundered in Guyana, this is indeed a very real risk, which the reform recommendations should consider.

The flip side to the coin of regulatory capture is the real danger that the legally defined regulatory bodies are unable to display functional autonomy and independent action. Many factors can affect this outcome, not least of which is the professionalism of those who are called upon to Head those bodies. These appointments therefore, should not be made by the Party in Government alone or its Ministers they should be subject to the approval of the National Assembly.

Marker 7 & 8 Socio-cultural political dynamics Again there are two principal markers under this heading. Legislation of the scope before the Select Committee can only succeed if it emerges out of a process founded on trust and consultation with the key stakeholders. Given the size, scope and multi-dimensional nature of money laundering in Guyana; this will never be successfully implemented, if there is political and social discord over the law. It is therefore, recommended that the Committee deliberately seeks wider involvement other than simply inviting the submission of memoranda from the public during a limited time-frame. Even someone like me who has academic familiarity with the subject could not get this Memorandum out by the publicly announced end date. My expectation however, has been that the Committee could not properly do the job that is required in the previously announced time frame.

The second marker is much more sensitive. That is, how to treat with those that are described as “politically exposed persons” in the Act. As noted earlier, public bodies in Guyana are subject to

37 Page

Guyana: Anti-Money Laundering ... 2013
intense “outside political leadership”. In such an environment “political persons” are able to deter regulators and are therefore allowed to act with considerable impunity. The main recommendation I have here, is to let “peer pressure” work by devising a mechanism for naming (and in so doing shaming) those suspected of infringements and irregularities. Those names can be forwarded to the Integrity Commission.

Markers 9-11 Reporting Requirements The next set of three markers all relate to the reporting requirements of the bodies listed under the Act. Three of these requirements are of principal concern. The first marker is clearly to whom the various Competent Authorities should report. While this would have to be defined in terms of the specific bodies, the principle that should rule is for reporting to finally reach the National Assembly. It is my view that if all Members of the National Assembly are given these reports that would help ensure their adequate circulation to the general public.

The second marker is that reporting should be mandatory and automatic for all bodies obligated to do this. The law should use the verb “shall” and not “may” as it is now frequently does under Act #13, 2009 where reporting is concerned,

Thirdly, to underscore the mandatory requirements for reporting, the legislation should affix appropriate penalties for all those bodies and defaulting personnel required as determined under the law.

Marker 12: Other Governance Changes The final marker is the status of the reform process in closely related rule of law areas of operation in Guyana, in particular improvements in the areas of procurement, financial accountability for state assets, information access, the work of bodies concerned with the oversight of integrity, the Ombudsman, and so on. Already there is on record one Party of the National Assembly publicly declaring it will not support the legislative amendments before the Special Select Committee unless the Procurement Commission is established. This clearly shows the linkage between money laundering (and related concerns) and corruption, misgovernance, and crime in the wider society. Schedule 7 below summarizes the Key Markers.

38 Page

Guyana: Anti-Money Laundering ... 2013

Schedule 7: Key Markers Number 1 2 3 4 5&6 7&8 9-11 12 Markers Earmarking Seized Assets for Frontline Bodies Earmarking for the General Public Technology Gap Compliance Vs Non-compliance Costs Regulators and the Regulated Socio-Cultural- Political - Dynamic Reporting Requirements Related Governance Changes

Source: Author’s construction

For the convenience of Members of the Special Select Committee, the Schema presented on the next page offers a visual guide of the strategic road map for the way forward, in regard to the money laundering situation in Guyana.

39 Page

Guyana: Anti-Money Laundering ... 2013
Schema 8: Road Map for a Strategic Way Forward

G

Item Magnitude of Threat

Indicators Numerical estimates proxy indicators, & informed opinion

Prescription/Assessment Highly significant

U

Dimension

Manifestations in economic, political, social, cultural, behavioural spheres

Profoundly multidimensional

7 Markers: 1 2 3 4 5 6 7 8 9 10 11 12

I
Guyana CFATF Relations Outstanding Recommendations (Core, Key, Other) (Compliant/Partially compliant/Non-Compliant) Core and key = 15 Non core and Non key = 25 (partially 10) and (noncompliant) (15)

D

Key: 1
2

= Earmarking Seized Assets for Frontline Bodies = Earmarking for the General Public = Technology Gap = Compliance Vs Non-compliance Costs

E

Act # 13, of 2009

P

Core weaknesses (implementation deficit; lack of independence of designated Authorities; systemic weaknesses of FIU; not focused enough on choke pints).

Carefully revised legislative amendments, in light of Guideposts & Markers

3 4

5&6 = Regulators and the Regulated 7&8 = Socio-Cultural-Political-Dynamic 9 to11 = Reporting Requirements

O

S

12

= Related Governance Changes

T

40 Page