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Commercial corruption

and money laundering:
a preliminary analysis
David Chaikin
Faculty of Economics and Business, University of Sydney, Sydney, Australia
Abstract
Purpose – The purpose of this paper is to analyze the relationship between commercial corruption
and money laundering. The challenge of corruption in the private sector and its relationship with
money laundering are neglected subjects. Corruption and money laundering often occur together
with the presence of one reinforcing the other. Corruption generates billions of dollars of funds that
will need to be concealed through the money laundering process. At the same time, corruption
contributes to money laundering activity through payment of bribes to persons who are responsible
for the operation of anti-money laundering (AML) systems.
Design/methodology/approach – Primary legal documentation, such as the United Nations
Convention Against Corruption, the Financial Action Task Force’s Recommendations on Money
Laundering, and National Legislation, as well as Unpublished Government Commissioned Reports, are
analysed in order to assess the links between corruption and money laundering.
Findings – Commercial corruption poses a threat to the integrity of the AML system, especially at
the placement stage of the money laundering cycle. Private sector reporting entities may be bribed to
actively collude in money laundering, refrain from lodging suspicious transaction reports, or tip off
clients that they may be subject to a government investigation. The recursive links between corruption
and money laundering suggest that policies which are addressed to fighting both corruption and
money laundering may have a mutually reinforcing effect.
Research limitations/implications – There is a lack of empirical data concerning private
corruption that suggests significant underreporting of this type of crime.
Practical implications – This paper is addressed to policy makers who are concerned with
corporate governance and the impact of corruption on AML systems. Future research would deal with
the enforcement aspects of anti-corruption laws.
Originality/value – The paper analyses commercial corruption for the purpose of understanding the
corruption/money laundering nexus.
Keywords Bribery, Corruption, Crimes, Money laundering, Private sector organizations
Paper type Research paper
Introduction
The problem of corruption is well publicised in academic writings and the media.
These publications emphasise corruption of public officials and the laundering of illicit
monies by political leaders. The challenge of corruption in the private sector and its
relationship with money laundering are neglected subjects. Yet, the private sector
plays a major role in the fight against money laundering, and commercial bribes are
laundered through the financial system. The complex relationship between commercial
corruption and money laundering has recently become a matter of increasing interest
to international organisations, such as the Financial Action Task Force (FATF), which
considers that anti-money laundering (AML) systems may be undermined by private
corruption (Chaikin and Sharman, 2007).
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1359-0790.htm
Corruption
and money
laundering
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Journal of Financial Crime
Vol. 15 No. 3, 2008
pp. 269-281
qEmerald Group Publishing Limited
1359-0790
DOI 10.1108/13590790810882865
A useful starting point is to conceptualise the meaning of the term commercial
corruption, which is sometimes called private corruption. Whereas, public corruption
usually involves anillegal payment to a public official, private corruption occurs when the
illegal payment is made to a private party. Since 1997, the International Chamber of
Commerce (ICC) has urged countries to take concerted action against private sector
corruption, arguing that private corruption distorts competition in the same way as
public corruption injures markets. The anti-competitive effects of commercial bribery are
onlyone of the possible objections tothis undesirable business conduct. Anexaminationof
national laws on commercial corruption indicates that there are several reasons why
countries criminalise commercial corruption. In the Anglo-American system of law,
commercial corruption has been criminalised on the basis of breach of duties owed by
employees, agents or fiduciaries. Insome countries, the protectionof corporate assets is the
key justification for criminalising commercial corruption. The different rationale for
criminalising commercial corruption has led to a large variety of national laws and
practices. The lack of uniform laws, coupled with a tendency in most jurisdictions not to
prioritise the criminal enforcement of anti-commercial corruption laws, is a significant
weakness in combating this crime.
Corruption and money laundering often occur together, with the presence of one
reinforcing the other. Corruption generates billions of dollars of funds that will need to
be concealed through the money laundering process. At the same time, corruption
contributes to money laundering activity through payment of bribes to persons who
are responsible for the operation of AML systems. The close linkage between
corruption and money laundering suggests that policies that are designed to combat
both crimes will be more effective.
There are several global legal instruments and guidelines that deal with private sector
corruption, as well as public sector corruption. The most important international legal
treatyis the 2003 UnitedNations ConventionAgainst Corruption(UNCAC) that encourages
parties to criminalise active bribery and passive bribery in the private sector. This may be
contrasted with the 1999 Council of Europe’s Criminal LawConvention on Corruption that
imposes a mandatory obligation on parties to criminalise commercial corruption.
Concept of commercial corruption
A study of corruption faces the initial challenge that the term corruption has many
meanings, legal, linguistic and moral (Noonan, 1984). Corruption has a generic meaning:
that is, the abuse of a position of trust to gain an unfair advantage. Transparency
International – TI (2006), the leading non-governmental organisation (NGO), describes
corruption as the use of entrusted power for private gain. Corruption is frequently
denoted as bribery, which involves the payment of illegal compensation to a public
official or a private person. Although some commentators consider that the core of
corruption is an improper inducement to influence the proper performance of a public
function (Noonan, 1984, N. 2, p. xi), the modern approach does not distinguish between
corruption of a public and a private sectors actor.
The term“commercial corruption” is used interchangeably with other terms, such as
“private corruption”, “private-to-private corruption”, “commercial/private bribery”,
and “non-official corruption”. Commercial corruption usually involves a payment to or
an acceptance of a kickback or commission by a person in the non-government sector.
The object of the payment is to influence the conduct of the person who receives
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the bribe – who will act in a manner which is favourable to the briber, and not give
proper consideration to the interests of his/her employer, principal, fiduciary or client.
Commercial bribery is a widespread phenomenon in modern business life.
Consider the following reported cases:
(1) the executives of a major motor vehicle company receive cash and gifts worth
$50 million from automobile dealers in exchange for supplying additional
“hot-selling cars” and franchises;
(2) an employee of a geological exploration company steals confidential data from
his employer in exchange for a promised payment of a share of the profits from
a company set up to exploit the stolen information;
(3) an investment bank receives “kickbacks” in the form of higher compensation
from large investors/clients who receive preferential treatment in the allocation
of shares in initial public offerings in “highly prized new internet companies”;
(4) medical practitioners accept compensation from aggressive sales
representatives of a pharmaceutical company in return for agreeing to
prescribe the company’s branded drugs, instead of generic products; and
(5) members of a professional sports team accept substantial sums of money from
a bookmaker in exchange for under-performing in a competition.
The above examples illustrate the range of business activities that may be the subject
of a private bribe. Some cases may involve several crimes:, e.g. stealing confidential
information in exchange for a bribe. In many instances, criminality requires a breach of
a legal duty:, e.g. the payment of a kickback to the investment bank in return for
favoured treatment in a stock offering may amount to a commercial bribery if it can be
characterised as a dishonest breach of fiduciary duty. Criminality in other cases may
depend on the size and purpose of the payment:, e.g. doctors who receive gifts, such as
“free” first class travel and luxury accommodation to an overseas conference, from a
pharmaceutical company, may claim that this is legitimate compensation for
participating in an educational activity. Other examples may depend on whether there
is any criminal law governing the specific business:, e.g. not all countries have criminal
laws dealing with bribery of professional sports players.
Why criminalise commercial corruption?
There are several reasons why states may criminalise commercial corruption
(Argandona, 2003; Allidge, 2000). The social harm of commercial corruption is evident
when it involves an inducement of a breach of the civil law duty of loyalty owed by
employees, agents or fiduciaries. Criminalisation of deliberate violations of civil law
duties provides a blue line for distinguishing illegitimate and legitimate business
activity. The economic rationale of anti-commercial corruption laws is to protect
companies from unfair competition, in both national and international markets. Private
sector corruption imposes a major barrier to creating a level playing field in
international commerce. Another idea is that systemic commercial corruption may
have adverse consequences on the legal and political system. Official toleration of
private sector corruption creates a climate of illicit business behaviour that may
undermine the rule of law. The lack of enforcement of anti-commercial corruption laws
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may have a malevolent influence on public sector policy, for example, the misuse of
political lobbyists to weaken the AML and counter-terrorist financing standards.
Corruption in the private sector may involve organized crime. In the USA, Congress
has issued a series of reports showing that bribery of private persons, such as bankers,
brokers and insurance companies, has been “widely used in highly organized criminal
efforts to infiltrate and gain control of legitimate businesses”[1]. Organized crime may
corrupt financial institutions in order to prevent detection of serious criminality and
facilitate the laundering of illicit monies (US Senate, 1995). The transnational
dimension of commercial corruption provides an additional reason for prohibiting
private bribery (Chaikin, 1997). The globalisation of business has provided new
opportunities for engaging in corrupt conduct and laundering corrupt payments and
the proceeds of such corruption. The bribery of corporate officials in a transnational
setting will frequently be accompanied by corruption of public sector officials in
several countries.
The distinction between public sector bribery and private sector bribery makes less
sense in the twenty-first century. Since the 1980s, the private sector has grown at a
remarkable rate, especially in countries in the former Soviet Union, but also in India
and China. In many countries, the private sector is larger than the public sector.
There has been a blurring of the distinction between the private and public sectors
because of market liberalisation, privatisation and/or outsourcing of governmental
functions, and the growth of public/private partnerships in infrastructure projects
(Hall, 1999)[2].
The strongest advocate of criminalising of private sector corruption is the ICC,
which is the most influential international NGO representing business enterprises.
Since 1997, the ICC has argued that there is no meaningful difference between
public and private bribery, in that they both undermine commercial dealings. The
ICC position has been fortified by the increase in privatisation throughout the world,
in both developed and developing countries, and the “increased complexity and
interaction between the public and private sectors in international transactions and
by an increase in the monetary value of these transactions” (Heine et al., 2003). This
view has been supported by Transparency International, and the UNODC (2004),
which is the guardian of the UN treaties relevant to financial crime, including the
UNCAC.
National laws prohibiting commercial corruption
While public sector corruption has attracted criminal sanctions for a considerable
period of history, private sector corruption has been criminalised in many jurisdictions
only in the last 130 years. In the Anglo-American legal system, the common law
offence of bribery was originally applied to judges and was later extended to public
officials and public functions, such as voting in political elections. The bribery offence
was restricted at common law to corrupt payments to persons who were performing
public functions or public duties. In the late nineteenth and early twentieth centuries,
many states in the USA, passed general statues that criminalised bribery of agents,
employees or fiduciaries, and/or enacted more narrow laws that criminalised bribery in
particular industries. Several states prohibited the bribery of persons in specific
occupations or professions, such as lawyers, physicians, accountants, architects
and appraisers. US federal statutes criminalised bribery in commercial contexts
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involving interstate trade or commerce, such as bribery in the procurement of
interstate transportation, and bribery of contestants appearing in television quiz shows
(Noonan, 1984, N. 2, pp 578-9; Harvard Law Review, 1932).
In the UK, the common law offence of public bribery was complemented by
legislation, such as the Public Bodies Corrupt Practices Act 1889, that criminalised
public sector corruption. It was not until 1906 that private commercial bribery became
a statutory offence. The Prevention of Corruption Act 1906 prohibits the offering or
giving, and the soliciting or receiving, of a bribe of an agent, which is defined as
including “any person employed by or acting for another”, covering both private
agents and public agents. The 1906 legislation was not intended to deal with
corruption generally, but was aimed specifically at the principal/agent relationship in
the commercial sphere (James, 1962; Nicholls et al., 2006). The British Legislation has
provided the model for similar legislation in Commonwealth countries, including the
states in Australia[3], Canada, Hong Kong, India, Singapore and New Zealand.
Laws prohibiting commercial bribery have become more commonplace. A joint
study by the ICC and the Max Planck Institute for Foreign and International Criminal
Law found that 10 of 13 OECD countries surveyed had commercial bribery statues[4].
The study noted that there were differing policy goals in those countries that had
criminalised commercial bribery. The legal interests protected by the criminal law in
relation to commercial bribery were characterised under three broad models: protection
of corporate assets, shareholder interests and property interests; penalising violations
of civil law duties, such as the duty of employees to employers, or agents to principals;
and curbing unfair or unfree competition. The report argued that the various
approaches taken by different national systems in defining private sector bribery have
resulted in substantial differences in the range of applications of the laws.
The significance of the diversity in national approaches to commercial corruption
is that it makes proof of such offences more difficult, especially when the offence
involves parties in different jurisdictions, and the corrupt benefits are laundered
internationally. National legislation to deal with one aspect of this problem is
evidenced in the 2001 amendments to the British Prevention of Corruption Act that
allow an expanded jurisdictional reach, so that UK nationals and companies
incorporated under UK law may by prosecuted for bribery offences, irrespective where
those offences take place[5].
Money laundering and corruption
Concept of money laundering
Money laundering is the process whereby the ownership or control of assets and
income is obscured or concealed from tax authorities, law-enforcement agencies or
private parties, who have a legitimate interest in discovering the true beneficial owner
or controller of such assets/income (Chaikin, 1992). Money laundering has two
inter-related processes. Firstly, anyone who hides the existence of money for improper
or illegal reasons is engaged in money laundering; for example, the drug trafficker who
salts illicit income in an offshore bank, the tax evader who hides earnings in a secret
investment, and the corrupt employee who conceals bribes in a property transaction.
Secondly, money is “cleaned” or sanitised whenever its true nature, source or use is
concealed. Creating a seemingly legitimate and persuasive justification for controlling
or owning funds and assets is the essence of money laundering.
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The objectives of AML laws and systems have been described as follows: to:
[. . .] provide a disincentive to crime by reducing its profit; provide a disincentive to crime by
reducing the pool of money available to finance future illegal activity; aid the detection and
prosecution of crime; protect the integrity of the financial system and its reputation; and
avoid economic and competitive distortions (Home Office, 2007).
Given that most financial crimes occur in the private sector, then AML law and policy
must be concerned with private sector corruption. International AML standards
recognise the importance of corruption as a financial crime. Countries are expected
to criminalise money laundering for all serious offences, including bribery and
corruption.
Corruption/money laundering links
The relationship between corruption and money laundering has several dimensions.
Corruption and money laundering often occur together, with the presence of one
reinforcing the other. Corruption generates enormous profits, the source and ownership
of which need to be concealed through money laundering. That is, money laundering
provides a get away vehicle for those engaged in corrupt activities; it allows criminals
to enjoy their corrupt earnings without fear of revealing the original source of the
funds. This link between corruption and money laundering is acknowledged in
international instruments dealing with money laundering (see further below). By
countries applying their money laundering laws to offences of corruption, AML
systems may be used to combat corruption.
On the other hand, corruption contributes to money laundering activity, through
payment of bribes to persons who are responsible for the operation of AML systems.
Both public and private sectors institutions play a key role in combating money
laundering. Bribes may be paid to government agencies, such as financial intelligence
units (FIUs), that collect and analyse suspicious transaction reports (STRs), or to
private individuals and enterprises, who are obliged to file such reports. Although
there is little empirical evidence to show that national FIUs have in fact been corrupted
by money launderers, the potential vulnerability of FIUs to corruption has been
recognised. For example, the World Bank together with the Egmont Group are
currently conducted a survey of 15 FIUs from each region of the world to assess their
strengths and weaknesses on governance issues, that are directly relevant to the issue
of corruption.
Money laundering cycle
The more significant problem appears to be the payment of bribes to financial
institutions and non-financial businesses and enterprises because they are at the front
line in combating money laundering. Private sector actors may facilitate money
laundering at the three stages of the money laundering cycle:
(1) Placement. The initial entry of illicit monies into the financial system, for
example, where cash from a drug deal or bribe is deposited in a financial
institution.
(2) Layering. Where the illicit monies are separated from their source by creating
complex layers of financial transactions, for example, the transfer of funds
through numerous jurisdictions, and deposit in multiple investment vehicles.
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(3) Integration. The final stage where criminals have access to or secret control of
illicit funds, which are camouflaged as funds from legitimate sources.
Corruption plays a potential role at every stage of the money laundering cycle, but has
its greatest opportunity at the placement stage. As the placement stage usually
involves face-to-face contact with financial institutions (who are required to verify the
identity of the customer and carry out a certain measure of due diligence of the
customer), there is increased risk of detection of criminality. Since money launderers
are more vulnerable to detection at the placement stage, they have a greater incentive
to bribe private sector actors. Employees in financial institutions may be corrupted so
as to facilitate the opening or operating of accounts in false names, ignore reporting
requirements to file STRs, or tip-off customers who may be the subject of STRs
(Chaikin, 2008). There is an additional risk that organized crime will target corrupt
financial actors to carry out crimes and launder illicit monies (US Senate, 1995, N. 7).
At a more sophisticated level, corrupt senior managers of financial institutions may
assist money launderers to avoid detection by AML compliance systems. Corruption of
senior management in the private sector is more likely in countries where there is
systemic corruption. Individuals with political power that wish to conceal their illicit
income may bribe management of financial institutions so as to prevent the discovery
of their bank accounts. Senior public officials (often described as politically exposed
persons) may use their contacts with management in financial institutions to block
AML investigations, impede the suspicious transacting reporting system, and
undermine good governance standards.
It is not only financial institutions that are vulnerable to corruption. Lawyers,
accountants, and trust and company service providers, have specialised knowledge
and skills to create and organise money laundering schemes assistance may include
the layering or integration of financial transactions, by using a complex maze of
corporate entities in offshore havens, and the concealment or destruction of records to
avoid detection. A key element of these money laundering services is anonymity in the
ownership or management of private sector entities. The OECD and other international
bodies regard anonymity of corporate transactions as inconsistent with the
fundamental obligations of good corporate governance[6].
Any analysis of the relationship between corruption and money laundering should
recognise the limits of that relationship. The links between corruption and money
laundering do not exist in every case. As Levi (2001) has noted:
Without money laundering, there would still be corruption, but bribes would have to be paid
(and held) in cash or readily movable valuables such as gold, diamonds and art. Not all bribes
received have to be laundered: some cash can be redistributed as “grease” payments or
simply spent. Corrupt public and corporate officials, as well as other criminals, often use
laundering agents, relying on them to show discretion in handling funds – and to be
uncooperative in any criminal investigations that might arise.
Although corruption and money laundering do not always occur together, they are
linked in the most significant cases, especially where there is involvement of organized
crime or corrupt political elites. Money laundering services are required because of the
size of illicit income generated by organized crime and the insecurity of corrupt
political elites in developing and transitional countries. The illicit gains are likely to be
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laundered through the global financial system, thereby ensuring that the linkage
between these two crimes will continue to be important.
International instruments dealing with commercial corruption and money
laundering
Private-to-private corruption (ICAC, 2007) is a matter of international concern for both
governmental and NGOs. In 1977, the ICC published its Rules of Conduct to Combat
Extortion and Bribery, the first international code prohibiting commercial corruption
(ICC, 1996). The ICC Rules make no distinction between private and public corruption.
Article 1 of the ICC Rules requires “enterprises” to prohibit bribery and extortion at all
times, in whatever form, whether direct or indirect. This prohibition applies to
payments made to public officials, political parties, and directors, officers, employees
and agents of a private enterprise, for the purpose of obtaining or retaining business or
other improper advantages.
Subsequently, and especially since the 1990s, several regional and international
organisations have incorporated prohibitions on private-to-private corruption in their
international instruments. Examples include:
.
United Nations Convention against Transnational Organised Crime, 2000,
entered into force on 29 September 2003 (requirement of states to consider
establishing as criminal offences other forms of corruption, in addition to
corruption by public officials);
.
UNCAC 2003, entered into force on 14 December 2005 (comprehensive provisions
dealing with private sector corruption) (see below);
.
Council of Europe’s Criminal Law Convention on Corruption 1999, entered into
force on 1 July 2002 (mandatory obligation on states to criminalise active bribery
in the private sector (Article 7) and passive bribery in the private sector
(Article 8));
.
Council of Europe Civil Law Convention on Corruption 1999, entered into force
on 1 November 2003 (mandatory obligation on states to provide remedies for
victims of private corruption (Articles 1 and 2));
.
Framework Decision of the Council of the European Union on Combating
Corruption in the Private Sector 2003 (requirement for states under Article 2 to
criminalise both active and passive corruption in the private sector, within both
profit and non-profit entities); and
.
African Union Convention on Preventing and Combating Corruption 2003
(requirement under Article 5 for states to establish as offences conduct within
Article 4, that is, active and passive corruption in relation to a private sector
entity).
UNCAC and private sector corruption
The UNCAC contains several provisions dealing with private sector corruption. Article
12 (1) provides that:
Each state party shall take measures, in accordance with the fundamental principles of its
domestic law, to prevent corruption involving the private sector, enhance accounting and
auditing standards in the private sector and, where appropriate, provide effective,
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proportionate and dissuasive civil, administrative or criminal penalties for failure to comply
with such measures.
Article 12 recognises the importance that the UNCAC places on the prevention and
penalisation of corruption in the private sector. It details a range of measures to achieve
this aim, including several provisions that will facilitate AML objectives, for example,
the promotion of transparency in the “identity of legal and natural persons involved
in the establishment of corporate entities” (Article12(2)(c)), the imposition of internal
auditing controls to detect acts of corruption (Article 12(2)(f)), the falsification or
destruction of records (Article 12(3)), and the prohibition on tax deductibility of private
bribes (Article 12(4)).
The most significant anti-private sector bribery provision is Article 21 of the
UNCAC that reads:
Each state party shall consider adopting such legislative and other measures as may be
necessary to establish as criminal offences, when committed intentionally in the course of
economic, financial or commercial activities:
(a) The promise, offering or giving, directly or indirectly, of an undue advantage to any
person who directs or works, in any capacity, for a private sector entity, for the person
himself or herself or for another person, in order that he or she, in breach of his or her duties,
act or refrain from acting;
(b) The solicitation or acceptance, directly or indirectly, of an undue advantage by any
person who directs or works, in any capacity, for a private sector entity, for the person
himself or herself or for another person, in order that he or she, in breach of his or her duties,
act or refrain from acting.
The language of this provision is broadly worded in that it covers cases of active
corruption, whereby the supplier of the bribe (the briber) is criminalised (Article 21(a)),
and passive corruption, whereby the person who demands the bribe (bribee) is
criminalised (Article 21(b)). Article 21 mirrors the illegitimate practices that the ICC
has condemned. Although Article 21 does not oblige states to criminalise private sector
corruption, it is a useful starting point in encouraging states to criminalise commercial
corruption. It is complemented by Article 22 that calls on states to criminalise the
embezzlement of property by person working in the private sector. Article 22 would
apply not only to obvious cases of theft by private employees but also to cases where
there is an “unwarranted use for the benefit for oneself or others, of goods or services
that are entrusted to an individual” in the private sector (UNCAC, 2006).
FATF recommendations and money laundering
The FATF is the key international organisation that establishes global standards
governing money laundering. Although the FATF 40 Recommendations (R) of Money
Laundering are not legally binding, they have had a powerful influence on national
laws, with more than 170 countries agreeing to comply with the FATF R by
establishing AML laws and systems.
The FATF 40 R were enacted in 1990 to counter the problem of drug money
laundering. The object of the FATF R was expanded in 1996 to combat the laundering
of the proceeds of serious offences, not just illicit drug trafficking offences (Gilmore,
1999). FATF R 1 provides that countries should “apply the crime of money laundering
to all serious offences, with a view to including the widest range of predicate offences”.
It is further provided that “each country should at a minimum include a range of
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offences within each of the designated category of offences”, that includes “corruption
and bribery”. The designation of offences may include public sector corruption but
does not necessarily extend to commercial corruption offences.
Originally, the FATF R applied only to financial institutions and certain non-bank
financial institutions. In 1996, the FATF R were amended so as to encourage national
authorities to apply AML standards to the “conduct of financial activities as a
commercial undertaking by businesses or professions which are not financial
institutions”. In 2003, there was a further revision imposing an obligation on countries
to apply the FATF R to “designated non-financial businesses and professions”
(DNFBPs). The FATF Glossary defines DNFBPs as: casinos (including internet
casinos); real estate agents; dealers in precious metals; dealers in precious stones;
lawyers, notaries, and other independent legal professionals and accountants; and trust
and company service providers.
Many of the FATF R have specific relevance to individuals and organisations
located in the private sector. The FATF R that apply to financial institutions and
non-bank financial institutions include customer due diligence (R.5, 6, 8 and 9), record
keeping (R.10), complex unusual transactions (R.11), suspicious transaction reporting
and compliance (R.13, 14 and 15), and enhanced customer due diligence (R.21). Under
R.12 and R.16 the above mentioned FATF R are applied to DNFBPs, subject to certain
qualifications. For example, R.16 states that the suspicious transaction reporting
obligation applies to lawyers who engage in financial transactions in relation to certain
specified activities in R.12(d): that is buying and selling of real estate; managing of
client money, securities or other assets; management of bank, savings or securities
accounts; organisation of contributions for the creation, operation or management of
companies; creation, operation or management of legal persons or arrangements; and
buying and selling of business entities. There is an overriding exception to the
reporting of suspect transactions by lawyers, where the relevant information was
obtained by lawyers “in circumstances where they are subject to professional secrecy
or legal professional privilege.”
The FATF R do not directly deal with the nexus between corruption and money
laundering. There is, however, an underlying recognition in the FATF methodology for
assessing whether countries have complied with the R, that an effective AML system
requires structural elements to counter corruption. For example, financial institutions
are required to engage in corruption-proof measures, by screening employees to ensure
high-ethical standards.
Conclusions and future research
Corruption and money laundering are phenomena that often occur together and the
presence of one reinforces the other. Corrupt actors require money laundering
mechanisms to hide their illicit earnings, while corruption provides a significant
facilitative activity to support money laundering. Private sector corruption poses a
threat to the integrity of the AML system, especially at the placement stage of the
money laundering cycle, in that reporting entities may be bribed to actively collude
in money laundering, or turn a blind eye to their reporting obligations.
This paper is a preliminary analysis of the relationship between commercial
corruption and money laundering. There are many other problems that are relevant to
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an analysis of corruption from an AML perspective. Future research may examine
issues, such as:
.
What is the significance whether a country has comprehensive criminal laws
dealing with commercial corruption? For example, from the viewpoint of
developing countries, how important is it to focus on commercial corruption?
.
Does the phenomenon of private sector corruption place different demands on
money laundering services, as compared to public sector corruption?
.
What is the relationship between the enforcement of public sector corruption
laws and private sector corruption laws?
.
How would the application of anti-bribery standards to the private sector
(e.g. financial institutions and professionals) assist in promoting AML systems?
An exploration of these research issues may further illuminate the linkages between
corruption and money laundering. The intimate relationship between these phenomena
suggests that policies that are addressed to fighting both corruption and money
laundering have a mutually reinforcing effect. Improving AML systems will assist in
the prevention and detection of corrupt activities, while the effectiveness of AML
systems will be enhanced if their vulnerabilities to corruption are identified, managed
and reduced.
Notes
1. See Congress reports cited in Perrin v. United States, 444 US 37 (1979).
2. Hall (1999) provides empirical evidence for his argument that “the incidence of corruption is
closely connected with contracting-out, concessions, and privatisation, where multinationals
based in OECD countries stand to gain profitable business”.
3. The Australian law is discussed in Lanham et al. (1987).
4. The countries surveyed were the Czech Republic, England and Wales, France, Germany,
Italy, Japan, Korea, The Netherlands, Poland, Spain, Sweden, Switzerland, and the USA
(Rose, 2003).
5. See Section 1(4) of the Prevention of Corruption Act inserted by Section 108 (2) of the
Anti-Terrorism, Crime and Security Act 2001. Section 1(4) provides that for the purposes
of the Prevention of Corruption Act “it is immaterial if – (a) the principal’s affairs or
business have no connection with the United Kingdom and are conducted in a country or
territory outside the United Kingdom, (b) the agent’s functions have no connection
with the United Kingdom and are carried out in a country or territory outside the
United Kingdom”.
6. For the use of corporate nominee shareholdings to avoid compliance with regulatory laws,
see Chaikin (2006, 2005). See generally, OECD (2001) and FATF (2006).
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About the author
David Chaikin, BCom (Accounting and Finance)/LLB (UNSW), LLM (Yale), PhD (Cantab), is a
Barrister and Senior Lecturer in Banking Law in the Faculty of Economics and Business at the
University of Sydney. He is a senior legal consultant with a number of governments, and was an
Expert Consultant to the Financial Action Task Force and Asia/Pacific Group on Money
Laundering in 2006-2007. His comments do not commit any government or international
organisation. David Chaikin can be contacted at: d.chaikin@econ.usyd.edu.au
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