(2002) Mark Pieth - Financing Terrorism-Springer

FINANCING TERRORISM
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Financing Terrorism
Edited by
MARK PIETH
University of Basel, Switzerland
Partly reprinted from European Journal of Law Reform Vol. 4, No. 2, 2002
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Contents
Editorial: The Financing of Terrorism – Criminal and Regulatory Reform

Mark Pieth 1
Articles
Globalization, Terrorist Finance, and Global Conflict – Time for a
White List?
Jonathan M. Winer 5
How Can Sound Customer Due Diligence Rules Help Prevent the
Misuse of Financial Institutions in the Financing of Terrorism?
Charles Freeland 41
Financing of Terrorism – A Predicate Offence to Money Laundering?

Armand Kersten 49
Obstacles in Company Law to Anti-Money Laundering International

Co-Operation in European Union Member States
Ernesto U. Savona 57
Terrorist Finance, Money Laundering and the Rise and Rise of Mutual
Evaluation: A New Paradigm for Crime Control?
Michael Levi and William Gilmore 87
Financing of Terrorism: Following the Money

Mark Pieth 115
Documentation
FATF Cracks Down on Terrorist Financing 129
FATF Special Recommendations on Terrorist Financing 131
Financial Action Task Force Guidance for Financial Institutions

in Detecting Terrorism 147
vi Contents
International Convention for the Suppression of the Financing

of Terrorism 161
Council Common Position of 27 December 2001 on the Application

of Specific Measures to Combat Terrorism 177
Customer Due Diligence for Banks 189
Wolfsberg Group Pledges Anti-Terrorism Support 211
The Suppression of the Financing of Terrorism – Wolfsberg Statement 213

Editorial: The Financing of Terrorism –
Criminal and Regulatory Reform
1. The first shock of 11 September, the disbelief and the emotional turmoil, led
many politicians and experts to conceptualize the events of that day as
something totally new, different from anything experienced thus far. Accord-
ingly, reactions had to be phrased in superlatives. The use of the imagery of an
all-out ‘War against Terrorism’ did not immediately generate the sceptical
reactions that the much abused formula of ‘War on Drugs’ is currently
provoking – especially amongst Europeans. And at least for a month or so after
the event, one even accepted a drastic step-up in security measures. Many
legislators hastily enacted new laws, some of which have primarily symbolic
value; others, however, will seriously restrict civil rights, especially those of
foreigners. Gradually over time, once things had settled down and ‘normality’
had been restored, it became evident that politics and political interest groups
took over the discourse on terrorism as they tend to do on all issues. It appeared
logical at first to fight terrorism with all available means including controlling
and blocking access to the financial markets and institutions. Eventually, it
became evident that fighting terrorism was to be set apart in a different category
from other topics of equal gravity. This became particularly apparent when the
US and some US-inspired international fora requested international support to
combat terrorism whilst, at the same time, the former attempted to block serious
efforts to create a standing International Criminal Court for war crimes and
crimes against humanity. Of course, all the issues at stake are much more
complex, yet the public discussion in the media does beg the question why one
should be tough on terrorism and rather less than consistent on genocide.
Returning to our topic concerning the financing of terrorism, the cracks in the
coalition against terrorism have become more and more visible over the last few
months. First, the states leading the fight against terrorism refused to give an
abstract definition of terrorism, instead they preferred to blacklist individuals
and organizations in an ad hoc fashion and solely on the basis of information
supplied by intelligence agencies, thereby by-passing any democratic discussion.
National financial supervisors mirrored this abstention by refusing to give
financial institutions appropriate guidance on what they regarded as terrorism:
M. Pieth (Ed.), Financing Terrorism, 1–3.

© 2002 Kluwer Academic Publishers. Printed in the Netherlands.
1
2 Mark Pieth
the banks have been required to carry the risks and distinguish between freedom
fighters and terrorists. To illustrate this with a complicated example, how – for
instance – should the banks deal with a charity fund for family members of
jailed IRA members? Is such a fund now to be considered support for a terrorist
cause or a legitimate charity? Refusing to give clear guidance and then to
criticize financial institutions for not having taken precautions seems unfair. The
Financial Action Task Force against Money Laundering (FATF), the UN, the
EU and other organizations have recently enacted binding instruments and
recommendations to combat the financing of terrorism; however, professional
bankers in particular are doubtful whether the ‘red flag’-lists are of any real
practical assistance.
Even if it is clear that money laundering and the financing of terrorism should
not be confused, one post-September 11 outcome has been the political
compulsion finally to enact legislation against financial crime and money
laundering even in countries and territories that have so far fallen short of
international standards. And here I am not only talking about the so-called ‘non
co-operative countries and territories’ defined by the FATF, but also the rather
reluctant countries within the FATF, like the US, who are now using the so-
called ‘Patriot Act’ to fill the gaps in their ‘KYC’-policy.
2. It is therefore no coincidence that this volume, in the context of the financing of
terrorism, addresses some of the traditional core issues established in 1990 to
combat money laundering with the emergence of the first set of rules by the
FATF. Just how far are the existing rules against money laundering helpful in
preventing the financing of terrorism?
Armand Kersten, Senior Compliance Officer of a bank that is active
worldwide, warns us that it would be unwise to mix the issues of the
financing of terrorism and money laundering. However, he does not doubt
the logic of identifying funds related to terrorism, and rightly points out the
difficulties of so doing when examining transactions.
Charles Freeland, Deputy Secretary General of the Basel Committee on
Banking Supervision and co-author of the new Customer Due Diligence
guidelines of the BCBS, rightly indicates that ‘CDD’ and ‘KYC’ procedures
are a key component in preventing the misuse of the financial sector by
terrorists. The package offered by the BCBS – a long outstanding supplement
to the AML standards – is an antidote to a broad array of risks confronting
the commercial banker.
Ernesto Savona, Professor at the University of Trento (Italy), founder and
director of Transcrime, focuses on another issue that for an astonishingly long
time was left on the back-burner: the use of ‘corporate vehicles’ (including IBC’s
and trusts) as a much-used means to evade identification of beneficial
ownership and a handy tool for money launderers to frustrate legal and
administrative co-operation in anti-money laundering investigations.
Michael Levi, Professor at the University of Cardiff (UK) and expert on
Editorial 3
financial crime, and Bill Gilmore, Professor at the University of Edinburgh,

critically explore the mechanisms of peer pressure (monitoring) that have
enabled the expansion of international standards on money laundering to the
world of financial centres over the last decade. Similar monitoring
mechanisms are now being used to enforce compliance with the rules against
the financing of terrorism within the world community.
Myself, I locate the reactions to September 11 within the development of
regulations in the financial sector and raise a few critical questions regarding
the direction that the most recent moves are taking.
Jonathan Winer’s text, the first in this volume, could also appropriately be
placed at the end. Even if the different aspects of macro-crime (e.g. organized
crime, terrorism, money laundering, grand corruption and embezzlement of
State funds by dictators) raise diverse legal issues, they are accurately set in
context. The standards gradually developed into a global body of rules,
attempting to regulate multinational financial institutions, since national
regulators are no longer able to oversee the worldwide business of
transnational corporations located in their territory. He offers a series of
concrete suggestions to be picked up in the current discourse on banking
regulation, sparked off by the BCBS, the FATF and also by a group of
private banks, the ‘Wolfsberg-Initiative’.
Mark Pieth
Globalization, Terrorist Finance,
and Global Conflict:
Time for a White List?
Jonathan M. Winer*
I. 11 September 2001: Global Financial Transparency

Under Construction
When the terrorists trained by Osama bin Laden destroyed the two World Trade
Center towers, their actions revealed both the globalization of terrorist finance, and
the potentially Herculean task facing governments seeking to combat both it and
other serious trans-border problems involving flows of money from illicit sources or
for illicit purposes. Relying on a mere 500,000 USD in total expenditures, nineteen
terrorists were able to enter the United States repeatedly, train as commercial pilots,
engage in intercontinental air travel, rent cars, establish personal bank accounts,
obtain ATM cards, and generally live adequately funded lives in the months prior to
the attack. After 11 September, some of the funds involved were traced to an account
in Dubai, a country that houses not only its own banks, but major US and European
banks, banks from throughout the Islamic world, purely Islamic banks, alternative
or underground remittance systems (hawalas), gold dealers, and myriad financial
institutions handling transactions to such States as Iran and Iraq.
While little had been done to implement the standards at the time, Dubai was
actually one of the very few countries in the Middle East (the others being Cyprus
and Israel) to have even basic money laundering legislation in place. In theory, since
the previous year, financial institutions in Dubai had been prohibited from taking
anonymous funds for anonymous accounts, which previously had been lawful. By
contrast, if one wanted to place funds for a terrorist from Saudi Arabia, for example,
or from Bahrain, Yemen, Malaysia, Indonesia, the People’s Republic of China, the
* The author was US Deputy Assistant Secretary of State for International Law
Enforcement from 1994 through 1999. He currently practices international financial
services law at the firm of Alston & Bird LLP in Washington, DC and can be contacted at
jwiner@alston.com. An earlier version of this paper was undertaken in late 2001 and early
2002 with the support of the Norwegian FAFO Institute in Oslo, Norway.

5
6 Jonathan M. Winer
Philippines, Nigeria, or Somalia, to name only a few, opportunities for anonymity

would be wide-open. In these countries, there were effectively no limits on the
anonymous placement of money, either in law or in practice, and indeed several of
them retained a legacy of large numbers of anonymous accounts that could be freely
traded as needed to practically anyone.
Sources of funds for terrorism were also little constrained. For Islamic terrorists,
vast sums were available to those carrying out charitable work, including militant
resistance, in Islamic outposts under siege – such as Bosnia, Kosovo, Kashmir, and
Chechnya – donated by wealthy Gulf State Muslims giving zakir. Further funding
was made available by siphoning off donations for more ordinary charitable work in
many other jurisdictions within Islamic communities. These funds merely added to
the seed money available on an ongoing basis from the proceeds of narcotics.
Alternatively, terrorists have had numerous opportunities to generate revenues
through fraudulent conversion of social benefits, migrant smuggling, document
fraud, stealing cars, gun-running, or even working for the money. Thus, money, the
life-blood of all kinds of organized crime, and regardless of its involvement in
terrorist deposits and withdrawals has coursed rather freely through the veins of the
global financial infrastructure.
Long before 11 September, other forms of financial scandal had demonstrated the
ease with which criminals, drug traffickers, illicit combatants, guerrillas, and other
persons and entities engaged in socially condemned behaviour have been able to
launder their money. And repeatedly, governments, regulators, law enforcement
agencies, and the most important and prestigious international organizations have
found themselves unable to trace illicit transactions after something goes radically
wrong.
Thus, terrorist finance can be seen from this perspective as a subset of a larger
problem, that of non-transparent movements of money in a system to which much of
the world has easy access. Financial non-transparency has facilitated not only
terrorism, but also many of the world’s more significant social ills, including civil war
and civic instability. For example, the laundering of the proceeds of crime is a
necessary means to carry out the trade in diamonds that has fuelled civil conflict in
Liberia, Angola and Sierra Leone, together with their accompanying arms deals and
payoffs. The narcotics trade has long been understood as a massive generator of
illicit money to be laundered, as well as a generator of corruption and weakened
governance. Drug trafficking is also closely associated with conflict, and one of the
enduring factors in such conflict is the fact that drug funds sustain combatants in
civil wars. It is no accident that each of the three countries which produce most of
the world’s opium and coca crops – Afghanistan, Burma, and Colombia – have
ongoing insurrections fuelled by drug money, in which terrorist acts (or their
equivalents) have become a common element of daily life.
The global attention focused on terrorism and terrorist finance as a result of the
11 September attacks on the United States provides a fresh vantage point on what
has become an increasingly longstanding, significant problem. As an increasing
number of significant global problems became linked to illicit finance, money
Globalization, Terrorist Finance, and Global Conflict 7
laundering was recognized in the 1990s as a global problem requiring a global

response. Prior to 11 September, this response included new international
instruments, such as the 2000 United Nations Convention to Combat Transnational
Organized Crime and the Second Money Laundering Directive, issued by the
European Union in late 2001. It has also included the rapid movement of ‘name and
shame’ sanction programmes. Most prominent among these has been the Financial
Action Task Force (FATF) against ‘non-co-operative countries and territories’. In
the first two years that the FATF threatened to limit market access to jurisdictions
not meeting international standards, most of the nearly twenty targeted jurisdictions
enacted new anti-money laundering laws. A similar exercise against ‘unfair tax
competition’ undertaken by the Organization for Economic Cooperation and
Development (OECD) is having a similar impact on ring-fencing, the strategy by
which jurisdictions offer non-residents unregulated financial services, which they
deny to their own citizens.
Major self-regulatory organizations, such as the Basel Committee for Banking
Supervision (BGBS), the International Organization of Securities Commissions
(IOSCO), and the International Association of Insurance Supervisors (IAIS) also
focused on extending standards for international regulation to cover transparency
issues.1 The new standards were designed to respond to the major failures of existing
financial regulation to provide protection against illegal activities. Each organization
focused on major gaps in the international regulatory system that translated into
injuries to domestic supervision and enforcement. These gaps included:
Fragmented supervision within countries by sector and among countries by
national jurisdiction.
Exploitation of differences in national provisions for regulatory arbitrage to
circumvent more stringent national laws and international standards.
Secrecy laws which impede the sharing of information among countries and
between regulators and law enforcement.
Inadequate attention to electronic payments in existing anti-money laundering
supervision and enforcement, including ‘know your customer’ rules that focus
on currency, even as the world’s financial services businesses rapidly continue
their move into e-money.
The lack of international standards governing key mechanisms used in
transnational financial transactions, such as international business companies
(IBCs), offshore trusts, offshore insurance and reinsurance companies, and
offshore funding vehicles, including but not limited to hedge funds.
1
See, e.g., Statement of the G-7, 18 June 1999; ‘Strengthening the International Financial
Architecture’, Report of the G7 Finance Ministers, 18–20 June 1999; ‘Financial Havens,
Banking Secrecy and Money-Laundering’, UN ODCCP, New York, May 1998; and
numerous recent analytic documents of the Basel Committee available on the website of the
Bureau of International Settlements (BIS).
8 Jonathan M. Winer
Minimal due diligence by company formation agents, attorneys, and financial

institutions in the process of incorporating and licensing of new financial
institutions and shell companies and trusts owned by their affiliates.
In response, there has been a convergence in the standards of protection in many
countries against various simultaneous threats. In essence, the standards have begun
to require a form of ‘know your customer’ at both the front end and the back end of
any transaction. At the front end, bankers and other financial facilitators are now
required to know with whom they are dealing, and at some level, what their
customers have been doing with their money. At the back end, those permitting
withdrawals of funds need to know not only who has been getting the money but
also where it came from. That way, should something go wrong, it should be possible
to trace the funds.
Despite these efforts, the globalization of money makes tracing increasingly more
difficult.
Thus, the need to establish uniform standards, end bank secrecy, create
mechanisms for the exchange of information between national regulators and law
enforcement organizations with their counterparts, and the decision to ‘name and
shame’ jurisdictions that failed to adopt and live by the new rules. In 1989, when the
FATF was created, there was some scepticism about the ability of even OECD
countries to agree on common standards, let alone to live by them. A decade later,
when the FATF’s non-co-operative countries and territories initiative began,
common standards became comprehensive, and the consensus existed that they
should be made universal. Thus, by 11 September, the name and shame exercises
were well on the way to universality. Over time, the existing international initiatives
in response to these problems began to create a new global code articulating new
international standards for transparency. And yet, these initiatives failed to do much
to prevent the September terrorists from carrying out their plans.
One could argue that these regimes are too new and incomplete to have had an
impact, especially in a world where the proceeds of the world’s largest extractive
industry, oil, remained largely opaque despite all of the transparency initiatives. In
this view, objectives are long-term and the belated response to the globalization of
the financial infrastructure cannot be expected to fix long-standing problems
overnight, especially in such regions as the Middle East, which only began to adopt
the regulatory standards of more established international financial services centres.
However, it is also possible that the basic idea of a universal standard for all
governments, given our global diversity, is inherently flawed. Each of the new
initiatives has been based on the promise that national financial service regulators
have the capacity to determine whether their own ‘local’ institutions meet the
standards or not. Under the principle of consolidated supervision, the home-country
regulator of any international financial institution is solely responsible for exercising
oversight over the global operations of that institution. Over the past ten years, the
principle of consolidated supervision has proven helpful but far from infallible in
protecting safety and soundness by requiring multi-jurisdictional financial institu-
tions to take at least their home regulators very seriously. In turn, these home
regulators are increasingly subject to a common set of standards, such as those
established by the Basel Group of Bank Supervisors (Basel Group). Over time, these
standards have come to promote global financial stability by promoting good
practices for banks in their lending and investment practices. However, the same
system has to date demonstrably failed to do much to protect the world from money
laundering or terrorist finance.
II. The Capacity Problem
Can governments that stop at borders regulate financial activity that crosses borders
at the speed of light amid billions of electronic ones and noughts? Even if one does
not consider the special problems posed by terrorist finance and the inadequacy of
financial transparency regimes in the Middle East, there is mounting evidence to
justify questioning whether global banks, operating transnationally to move money
instantaneously across national borders, can be readily regulated or supervised by
any one country. While such financial institutions may have their headquarters
nominally based in a single country – typically one of the G–7 countries, the EU, or
Switzerland – they generate profits and carry out activities at a global level involving
dozens of UN Member States. As a result, they are for many purposes beyond the
capacity of any single state to police. The current ‘name and shame’ exercises have
had the salutary effect of forcing some of the world’s least-adequately regulated
jurisdictions to abandon traditional notions of bank secrecy, and to begin insisting
that their financial institutions carry out due diligence and know their customers.
But these exercises have not and cannot create any capacity at a national level to
assess the meaning and integrity of cross-border financial transactions. It is not
reasonable to expect a small jurisdiction that houses a subsidiary of a major
international financial institution to fully understand the cross-border transactions
engaged in by the subsidiary, let alone by its affiliates or far-away parent. In practice,
even the most sophisticated and best regulated financial centres, including those of
the G–7, European Union, and Switzerland, are similarly incapable of exercising
adequate oversight over the global enterprises they license.
In recent years, the proposed solution has been a mixture of public sector
regulation and private sector self-regulation. Self-regulation has been advocated
as a means by which private institutions subject to market forces will, as a matter
of good business, avoid transactions that are exposed on that institution or its
reputation to undue risk. However, it is not clear that this approach has been
effective. Indeed, the combination of both government regulation and self-
regulation has not to date effectively discouraged abuse of international financial
institutions by drug traffickers, terrorists, major financial criminals, corrupt
officials, arms smugglers, or sanctioned regimes, not to mention those engaged in
10 Jonathan M. Winer
local civil conflict, timber theft, or other criminal activity. Today, there is no list
that evaluates whether international financial institutions have complied with
basic rules of transparency or integrity. On the ‘name and shame’ side, there is no
compilation ranking major international institutions according to their involve-
ment in the laundering of proceeds from drug trafficking, corruption, terrorist
finance, illegal logging, toxic waste, human trafficking, or corporate fraud,
although such a ranking might be compiled from court documents, public
investigations and press reports. Nor has there been a list involving a ‘seal’ or
‘certificate’ system by which an institution can be endorsed as having put into
place a series of best practices to promote transparency.
Every year, many billions of dollars flow from international organizations and
international financial institutions through the world’s major international banks.
These public funds are deposited and held in these private-sector institutions without
considering if these institutions have put into place excellent transparency policies
and procedures, or minimal ones. Indeed, such funds are deposited and held in
private sector institutions that have had no due diligence or knowledge of a
customer’s principles, if they happen to be located in jurisdictions where such
principles are either not required or are minimally enforced. The value of such
deposits to the private sector financial institutions is substantial, generating not only
substantial fees but the ability to engage in further lending activities of their own,
due to the multiplier effect of bank deposits. To date, the only limitations placed on
those holding or benefiting from such international funds has been the obligation of
the institutions to account for the uses of those funds adequately. Broader
obligations, such as a requirement that a particular bank implement strong
guarantees of financial transparency or protective measures against money
laundering, have not been demanded of private sector banks by the international
organizations and international financial institutions that deposit their funds in such
institutions. Rewarding private sector institutions who agree to meet high standards
of transparency for the funds they process on a global basis could create a significant
incentive for banks, providing additional weight to existing national efforts.
At the same time, access to the international financial services infrastructure by
regions and institutions that have no controls on placement increases the world’s
vulnerability to terrorism. The post–11 September co-operation of Middle Eastern
and other Islamic countries in tracing the funds of particular terrorists represents an
important development in responding to the threat posed by terrorism in the
financial context. However, ‘back-end’ reconstruction of particular terrorist events
after they have taken place is vastly insufficient, so long as the front-door remains
wide open. Controls on placement, including rigorous ‘know your customer’
standards, are as essential as they are culturally unlikely in many countries.
Thus, carrots and sticks need to be developed to ensure that private sector
institutions in those regions have just as many incentives as do private sector
institutions in countries such as Switzerland where, despite a history of bank secrecy,
the need for financial transparency is now accepted. There is an obvious opportunity
in this for world policy makers. The question is whether they can accept the fact that
globalized money requires not only globalized standards, but also an agreement on
globalized incentives for the private sector not merely to adopt but to enforce these
standards as a means to ensure their own survival.
III. Structural Consequences of the Globalization of Money
It may be self-evident that globalization has changed many practical elements of

banking and financial services. However, the political consequences of globalized
financial services are often not spelled out.
Prior to Globalization
Money was local. Prior to globalization and since the days when money based on
something real, like shells or gold, was replaced by state-created ‘fiat money’, money
in circulation in most countries has generally been issued by sovereign states.
Alternatively, it has been issued by private sector financial institutions regulated by
the sovereign state in which the institution was based. The stored value that money
represents has been a value determined locally by the people within the jurisdiction
that issued the currency in relation to the value of other commodities traded in that
individual economy. Money was trusted locally to the extent that others would
accept it in the society. To the extent that the national currency was valued at a
distance by other countries, that currency would tend to be discounted, given that its
principal value for the purchase of goods and services was local.
Banks were local. Although international finance is certainly not a new
phenomenon, with international lending a substantial and familiar activity by the
third quarter of the 19th century, most banking prior to the era of globalization
and securitization was done at a local level by local banks. These local banks were
largely dependent on their local community, and vice-versa, with the respective
fates of the local banks and the local communities at least moderately
interdependent. To go beyond the community was potentially dangerous for a
bank, because of the substantial impediments to enforcing a financial obligation
at a distance.
Cross-border transactions were costly and slow. Prior to the establishment of
comprehensive electronic-payment systems in the last two decades, cross-border
financial transactions were largely conducted on paper that required physical
transport. For most transactions, the efficiencies of conducting such transactions
locally would outweigh the benefits of obtaining a broader market of buyers or
sellers, depositors or borrowers beyond the particular jurisdiction. In particular, uses
of the offshore sector, such as the Caribbean or the Channel Islands, were limited to
very large financial institutions for tax structuring and trade finance, or alternatively
to small-time operators specializing in tax and creditor avoidance schemes. Access to
the offshore sector was not something available to the ordinary business or citizen.
For corrupt heads of state, money moving abroad was typically hand-carried to
Switzerland.
Regulators could monitor local financial services. In an environment in which most
money was generated and spent locally, and not readily substituted for by other
currencies in other jurisdictions, regulators were free to develop local regulatory
regimes for local purposes. Some of these regimes were minimalist, others were
comprehensive, and few would have met what, today, constitute the basic standards
for safety and soundness. However, subject to local politics and the corruption
factor, the regulatory regimes were inherently enforceable as an expression of
national sovereignty. A financial institution definitively found to have engaged in
unacceptable misbehaviour could be fined, lose its license, and be closed. While bank
runs, bank frauds, and bank collapses remained an enduring part of the economic
life of any free-market jurisdiction, enforcement at a local level was possible, and a
recognized fact likely to have a substantial impact on market behaviour within the
regulated institutions.
Taxes were collected at borders. Prior to globalization, the preponderant
mechanism for governments to collect revenues was not by taxing income, but by
tariffs, levied on goods at point of sale and, especially, when crossing borders. In
such a tax regime, strong controls at the borders, including currency controls, were
vital to the survival of the state, as revenue collection required the border to be a
barrier before it could be a crossing. In this environment, barriers at the border,
including barriers to unregulated cross-border finance, were an essential element of
preserving and protecting national sovereignty.
After Globalization
Money is a global commodity. Although a government can give its currency a name
and a putative value, the actual value of a currency in a globalized world is
determined by global markets, private sector assessments of its value in comparison
with other forms of stored value. Similar valuation is given to any particular
currency the world over, regardless of location, making money a commodity whose
value can be affected by the actions of the government that issued it, but not
controlled by it. The loss of local control over money has meant that the valuations
given to it locally may be less relevant to its strength as a durable commodity – an
object that stores value – than the valuations given to it by those who have no
particular stake in that currency. Being a global commodity, money may also be less
susceptible to local control and regulation. As Alan Greenspan, chairman of the
United States’ Central Bank, the Federal Reserve, has observed: ‘In the international
arena [...] no overarching sovereign exists to decree what is money. Instead, a
myriad of private agents must somehow reach agreement.’ 2
2
‘The euro as an international currency’, speech given by Alan Greenspan before the Euro
50 Group Roundtable, Washington, DC, 30 November 2001.
Banks are international. Where local banks were once dependent on local
economies, international banks invest their capital wherever opportunities may
present themselves, whether they are in New York, Jakarta, or Moscow. Home
regulators cannot confine them, and indeed, neither can home regulation. If a local
regulation appears inconvenient, it can be avoided by structuring some of the
elements of the financial activity offshore. In many instances, transacting financial
services offshore is more efficient and less expensive than conducting similar services
on-shore. The offshore sector’s minimal regulation reduces transaction costs.3
Regulators cannot monitor international financial institutions. The principle of
home-country consolidated supervision notwithstanding, home-country regulators
do not in practice audit international financial institutions internationally. They
more largely rely on self-regulation and reporting by the institutions they regulate. A
financial institution that does not tell the truth to its regulator about its offshore
activities runs the risk of eventual exposure and punishment. In the meantime,
however, there is little effective supervision. As a consequence, there has been the
opportunity (and perhaps the market imperative) for financial institutions with
cross-border operations to behave with relative impunity, especially in the operations
they carry out in smaller, less fully regulated jurisdictions.
Borders do not block transactions. With tariffs largely gone and electronic money
able to move across the planet at the speed of light, control of money at the border is
largely anachronistic. Electronic currency is essentially incapable of cross-border
monitoring. Cross-border movements of currency can be monitored, and countries
can impose cross-border currency declaration requirements, but these requirements
can be readily circumvented through alternative remittance systems that substitute
netting for cross-border currency movements. To the extent that domestic
regulations impose burdens involving obligations to maintain certain levels of
liquidity, transparency, or payment of taxes, those with money may circumvent
domestic regulations entirely through capital flight. The ineffectiveness of borders
means flight capital need not truly flee. Russian oligarchs have vividly demonstrated
that after illicit proceeds have been laundered elsewhere, they can be readily brought
back into the home jurisdiction for reinvestment with no practical impediments to its
integration into the formal financial system.
3
For a detailed treatment of the development of globalized finance through the 20th
century, see Michael D. Bordo, Barry Eichengreen, and Doulas A. Irwin, ‘Is Globalization
Today Really Different Than Globalization a Hundred Years Ago?’ in Brookings Trade
Forum, vol. 2 (Susan M. Collins and Robert Z. Lawrence, eds.) (Washington, DC,
Brookings Institution Press, 1999), pp. 1–50; the short answer to the question in the study’s
title is ‘yes’.
IV. Practical Impact of Globalized Illicit Finance on Political

Stability and on Areas of Conflict
The integration of electronic financial payments systems into a globally ubiquitous

network is of remarkably recent vintage, gathering speed in the 1980s and only
reaching widespread coverage at the consumer level with the rapid proliferation of
internationally linked automatic teller machines in the mid-1990s. The benefits of
this integrated payments system for international businesses and travellers have been
immeasurable. However, these same benefits have simultaneously worked to the
advantage of those exploiting the dark side of globalization.
The Money Launderer’s Common Financial Infrastructure. Global banking has
provided continuing technical services to a wide range of practical destabilizers.
Periodic eruptions of scandal have shown that drug and arms money launderers,
diamond and timber smugglers, traffickers in people, terrorists, and corrupt officials
chose a similar range of institutions to move and maintain their funds. These
institutions typically include (a) small international business companies or trusts,
established in jurisdictions of convenience, which establish (b) bank accounts at local
financial institutions, which have correspondent banking relationships with (c) major
international financial institutions, which (d) move funds willy-nilly throughout the
world without regard to the provenance of the funds. Thus, over time, a taxonomy of
scandals shows money laundering activity to have been facilitated, at one time or
another, by Bank of America, 4 the Bank of New York, 5 Barclay’s Bank, 6 Chase
Manhattan (now J.P.Morgan-Chase), 7 Citibank, 8 Crédit Lyonnais,9 Crédit Suisse,
(now CSFB)10 Daiwa,11 Deutschebank, 12 Swiss Bank Corporation 13 (now part of
UBS-AG), and Union Bank of Switzerland (now UBS-AG). 14 In some of these cases,
the financial institutions may have been acting knowingly or negligently. In other
cases, the institutions themselves did nothing wrong under existing laws and
4
Handled proceeds of money laundering for a suspect Antiguan financial institution.
5
Handled funds of Benex, which laundered billions of dollars from Russia, including some
for Russian organized crime.
6
Handled terrorist funds for Al-Qaeda.
7
Handled proceeds of Colombian cocaine trafficking.
8
Handled proceeds of Colombian cocaine trafficking, and drug-related funds from Mexico’s
Raul Salinas.
9
Involved in massive financial frauds in connection with French political scandal.
10
Involved in handling stolen funds from Philippines of Ferdinand Marcos; reportedly
indicted by the Swiss government in connection with its handling of the funds of Sani
Abacha of Nigeria 6 December 2000. See ‘CS to be indicted in Abacha inquiry’, Financial
Times, 7 December 2000.
11
Laundered funds in the Caribbean to cover trading losses.
12
Handling terrorist funds for Al-Qaeda.
13
Handling stolen funds from Philippines of Ferdinand Marcos.
14
Involved in handling stolen funds from Philippines of Ferdinand Marcos.
frameworks. The fault lay not in the institutions, but rather in a system of
international regulation that created neither legal norms nor regulatory mechanisms
to prevent abuse.
The infrastructure for non-transparent international finance has nodes that have
specialized in particular kinds of services. For example, until recently, the Bahamas
and the Virgin Islands have been among the world’s principal creators of anonymous
international business companies (IBCs). The Channel Islands, Gibraltar, and the
Dutch Antilles have been world-class centres for the establishment of trusts to hide
the true ownership of funds. A single firm in Liechtenstein laundered political slush
funds for ruling political parties in France and Germany; arms purchases for civil
wars in Liberia and Sierra Leone; drug money for Ecuadorian cocaine trafficker Jose
Reyes-Torres, and stolen funds for various West African dictators. 15 The
Liechtenstein example is not unique. Financial nodes that initially provide services
for one purpose, such as tax evasion, over time attract more sinister illicit purposes.
Case Study: Cyprus. Since World War II, Cyprus has provided trade finance and
related services for a variety of cross-border trade and commercial activities
throughout the Middle East and the Mediterranean. Many operating in this region
have had practical reasons to avoid regulations in their home jurisdictions, as well as
high taxes, bribes, the risk of nationalization, and political instability. Accordingly,
Cyprus developed a strong financial secrecy regime, available through banking
services, company formation, trusts, and related mechanisms. By the 1970s, this
system had come to be used by terrorist organizations, arms dealers. Middle Eastern
drug traffickers, Italian mafias, the Communist Party of the Soviet Union, and
Israeli criminals, among many others. By the mid–1990s, as Cyprus sought to put
into place a more transparent financial regime to prepare for entry into the
European Union, many of the traditional illicit interests left the jurisdiction. Even
then, elements of Al-Qaeda and much of the illicit finance that sustained Slobodan
Milosevic’s control of Yugoslavia and his sustained war in Bosnia and Kosovo
remained embedded in Cyprus’ financial institutions. Systems for transporting illicit
funds, once established, become difficult to close even for a jurisdiction with strong
incentives to do so.
Import and Export Fraud: Key Elements of the Financing of Illicit Timber and
Conflict Diamonds. Illicit exploitation of a country’s natural resources is a common
feature of jurisdictions experiencing serious failures of governance. Such cases
typically involve both failures of legitimacy and of capacity. The complex political
question of who has the right to control a country’s natural resources devolves into
the simpler question of who has the capacity to exercise such control in practice. The
power to gain access to natural resources, to strip them, to transport them out of the
country, and to reap the financial benefits becomes the major practical requirements
15
See, e.g., extensive material on money laundering allegations involving Liechtenstein,
including excerpts from a German government report, on website: < http://www.marcos-
billions.com >.
for those seeking to exploit them. The financial benefits are the major point of the
asset stripping. Given the weakness of national currencies in such jurisdictions,
obtaining money from beyond the jurisdiction, is the sine qua non of the entire
enterprise. Much of the money may, in turn, remain outside the jurisdiction,
functioning as a political slush or retirement fund, or returned to the jurisdiction to
pay for weapons, bribes, or luxury cars.
One of the most widespread mechanisms for laundering money is the use of false
import and export documentation. Through the technique of under-invoicing,
corrupt exporters declare a smaller quantity of the exported good, and then typically
share the proceeds of the additional ‘invisible’ export with their partner, usually
either the importer or the shipper. Through over-invoicing, a corrupt exporter can
pretend to ship goods that do not exist, as a cover for reimporting and legitimizing
previously earned profits from other illicit activities. Both techniques provide
effective mechanisms for facilitating trafficking in illicit commodities, such as
conflict or stolen diamonds and timber. The corrupt payments, false documentation,
theft of resources and evasion of controls, domestic and international, are an
integrated set of criminal activities. For example, in the logging of Burma’s frontier
forests, the chainsaws and woodsmen would have no business without the
simultaneous participation in the trade of corrupt officials and transnational logging
companies, who make substantial payments through financial institutions to pay for
the illicit timber.16 Similarly, money laundering is an integrated component of all
other major cross-border environmental crimes, such as CFC smuggling and toxic
waste dumping.17 Each component of the activities is essential to the success and
continuation of the overall enterprise. Thus, disruption of any element of the total
activity, including the ability to move funds in and out of the jurisdictions involved,
becomes a substantial impediment to its viability.
Case Study: Sierra Leone. It has been said that the point of civil conflict in
African countries such as Sierra Leone is not to win the war, but to ‘engage in
profitable crime under cover of warfare’, with the major opportunities involving
16
See, e.g., Bangkok Post, 26 March 1999, ‘Massive Kickbacks Alleged;’ ‘Business
Indonesia’, ‘Two Sawmills owned by General Assembly Member buys Illegal Logs’, 2
February 2000.
17
Within the US for example, smuggling of CFCs from outside the US into the US was
estimated by a US government study to amount to 60 million pounds of CFCs between
1994 and 1997 from such countries as Mexico, Russia and Venezuela. In a series of cases,
the US indicted the smugglers for money laundering violations, as well as environmental
crimes. See EPA Enforcement Actions Under Title VI of the Clean Air Act, ‘Texas Man
Arrested For Smuggling Freon Into US – Arrest Underscores Federal Crackdown on
Black Market in Ozone-Depleting Chemicals’, 24 June 1999. Currently, China and India,
both countries with essentially no money laundering laws, are the world’s major source of
illicit CFCs, especially to countries in the European Union, in violation of the Montreal
Protocol. Detailed information on the illicit CFC trade has been brought together by the
London-based NGO, the Environmental Investigation Agency.
diamonds, illicit timber, narcotics, and weapons smuggling. 18 As a consequence of

the work of the British non-governmental organization Global Witness and other
groups since December 1998, there has been widespread recognition that ‘conflict
diamonds’ were fuelling civil wars in Sierra Leone and Angola. When international
sanctions were put into place, the normal revenues from international trade for the
participants in each country’s civil wars were eliminated. Diamonds became the key
currency for the criminals. The value of the diamonds increased exponentially once
they were smuggled out of the region and into Western Europe for processing. Thus,
the laundering of the proceeds of the diamonds was an essential component in
sustaining the conflicts.
In response, a system has been established that requires a series of certificates to
follow diamonds as they are transported, in an effort to establish a chain-of-custody
that documents the legitimacy of such diamonds and thereby makes it more difficult
for diamond sales to support civil war and vice-versa. Yet, while it has been
recognized that the conflict diamonds have been largely purchased and processed in
Antwerp, Belgium, home to numerous international banks, there is literally no
public documentation on the nature of the money laundering involved in the conflict
diamond trade. What is evident, even in the absence of data, is that banks in Belgium
– not just banks in Western Africa – handled the proceeds of conflict diamonds
without impediment, thereby making the business viable. Were financial institutions
operating in Belgium effectively prohibited from laundering the proceeds of illicit
diamonds, the value of such diamonds in Antwerp would be necessarily reduced,
given the heightened risk to any financial institution processing the proceeds. The
money flows continued unimpeded until DeBeers, the largest buyer of the conflict
diamonds, determined that the risk to its reputation substantially exceeded any
profits from transactions, and moved to create impediments to the illicit business.
Money laundering regulation in Sierra Leone and Belgium, among other countries,
was so weak that it never became a factor in the suppression of the business.
Case Study: Liberia. The Liberia of Charles Taylor has sometimes been termed ‘a
criminal state’, in which the president, an escapee from an American prison, presides
over a series of criminal businesses that include indiscriminate logging, looting of
diamond mines, systematic theft of public funds, drug trafficking, and extortion. 19
Few substantial sources of revenue in the country have remained outside the control
of Taylor and his corrupt associates. Throughout Liberia’s civil war, Liberia has also
remained a tax haven, offering ‘flag of convenience’ services in a variety of sectors,
18
Ian Smillie, Lansana Gberie and Ralph Hazelton, ‘The Heart of the Matter: Sierra Leone,
Diamonds and Human Security’, Partnership Africa Canada, January 2000.
19
There is no authoritative estimate of Taylor’s illicit wealth, although it is widely understood
to come from the sale of iron ore and timber within Liberia, and diamonds obtained from
Sierra Leone. See, e.g., ‘Liberia stokes African gem war’, Financial Times, 10 July 2000.
The Sierrra Leone UN Expert Panel Report of 2000 describes Taylor’s use of diamonds
from Liberia as a source of personal revenue.
with the revenues being used to sustain control of the country by former dictator
Samuel Doe, and currently, by Taylor. Liberia’s commercial laws allow businesses
from anywhere in the world to register in Liberia, with no requirement they have any
physical presence in the country. Liberia’s financial regime included corporations
with no capital requirement, issuance of shares that need not be reported or recorded
in Liberia, companies with no obligation to file annual reports, tax forms, or audit
statements, bearer shares, and similar freedoms that in effect make the creation of an
entity in Liberia a guarantee of worldwide anonymity and non-accountability. The
US dollar is legal currency in Liberia. For years, Liberian diplomatic passports have
been advertised (and actually made available) on the Internet, reflecting a regime
that protects criminals outside of Liberia as well as within the jurisdiction.20 Liberia’s
connections with the international payments system broke down during its civil war
from 1991 through 1997. The most prominent non-Liberian financial institution,
Citibank, left the country. Settlements among Liberian banks, and movements of
funds from Liberia to other countries, were handled on an ad hoc basis. Yet
throughout this period, Liberia’s armies have been able to generate and use funds
from beyond the country, with President Charles Taylor accumulating substantial
personal wealth in the process. This phenomenon has continued to the present. For
example, in November 2001, the government of Singapore sought information from
the UN regarding financial and weapons transactions involving payments for
weapons deliveries that used the Chase Manhattan Bank in New York to transfer
some 500,000 USD to a Singapore arms trafficking company. Significantly, the firms
involved in the arms transfer have also been alleged to be involved in illegal
timbering in Liberia and Malaysia.21 Separately, in looking at the impact of Taylor’s
involvement in prolonging Sierra Leone’s civil war, the UN Panel of Experts
discovered that Liberia secured weapons and made payments for weapons destined
for Sierra Leone through accounts at the Standard Chartered Bank in Sharjah in the
United Arab Emirates.22
Case Study: Cambodia. Corruption in Cambodia is pervasive and systemic,
extending from low-level policemen to the top of the government. Important
criminals have close links to Cambodia’s government. For example, Theng Bun Ma,
Chairman of the Phnom Penh Chamber of Commerce and a major financial
supporter of Prime Minister Hun Sen, has been identified by the US as a major drug
trafficker. A second important criminal figure associated with the Prime Minister,
Yeay Phu, is chairperson of the Phea Pimech Company, Cambodia’s biggest salt
producer and most destructive logger.23 Cambodia’s own financial services sector is
20
Personal inquiry by the author in 1997, during his service in the US Department of State.
21
‘Singapore to probe alleged involvement of company in arms smuggling in Liberia’,
Singapore Business Times, 6 November 2001.
22
Sierra Leone UN Export Report, December 2000.
23
‘Cambodia’s Hun Sen embracing new tycoons’, Phnom Penh Moneakseka Khmer, 21
September 2001, pp. 1, 2 (Report by Chan Chamnan).
extraordinarily weak. Some money laundering in Cambodia nevertheless goes

through its rather specialized banking system: most of Cambodia’s banks are private
institutions, not open to the public, existing mostly to move and launder money.24
Other funds from illegal logging (as well as other criminal activities) are laundered in
Cambodia’s neighbours, particularly Thailand. Notably, Cambodian financial
institutions have correspondent banking relationships with major financial institu-
tions all over the world, including some based in Canada, France, and the United
States, as well as in Korea and Thailand.25
Case Study: Thailand. The impact on the larger society of illicit finance can
become broader than the illicit activity initially involved. In Thailand, illegal timber
sales have for many years been a substantial source of funds for both politicians and
corrupt law enforcement officials. Indeed, scandals involving such sales are
frequently reported in the Thai press, and are elements in Thai political jockeying.
In 1996, the government of Thailand began to recognize that non-drug money
laundering was creating problems, and the government introduced comprehensive
anti-money laundering legislation. For the following three years, the legislation
stalled over a single issue: the inclusion of illicit timbering as a predicate offence for
the prosecution of money laundering crimes. Finally, in 1999, Thailand’s
government reached a compromise and passed comprehensive money laundering
legislation. The price of compromise was the elimination of illegal timbering as a
money laundering crime, permitting corruption involving that activity to continue
without restriction.
Drug Money and Civil Conflict. Areas where opium and coca are grown include
regions where many of the world’s longest-enduring civil wars and internal conflicts
are taking place. Opium production has fuelled destabilizing guerrilla and
paramilitary movements in Afghanistan, Burma, Lebanon, Pakistan, and Turkey.
Coca has done the same in Bolivia, Colombia, and Peru. In each case, proceeds from
narcotics production and trafficking became a mechanism for relatively unpopular
governments, militia, or rebels to control the territory where the narcotics were
produced, thereby sustaining themselves and perpetuating conflict with other forces
in the jurisdiction. In each of these countries, the political and military forces have
systematically taken ‘tithes’ or regular payments as protection money for the illicit
crops, thereby gaining a resource advantage over any force that has not similarly
accepted drug protection money.
24
‘Paper: Banks in Cambodia involved in money laundering’, Phnom Penh Samleng
Yuveakchon Khmer, 30 March 2000, pp. 1,3 (Report by Sophal).
25
For example, the Cambodia bank Canadia, Ltd., has correspondent banking relationships
with the Bank of America, Republic National Bank, Standard Chartered Bank, and
Banque Nationale de Paris; the First Overseas Bank of Cambodia has correspondent
banking relationships with HSBC, which in turn has branches and subsidiaries around the
world. Given the absence of any controls on money laundering in Cambodia, it would be
difficult to imagine how such correspondent banking accounts could be protected against
laundering the proceeds of narcotics, illegal logging, and other criminal activities.
Case Study: Burma. In Burma, opium has perpetuated the rule of an entirely non-
democratic junta, while providing the means for ethnic warlords to arm their local
soldiers. At the same time, Burmese officials have used opium profits to invest in
partnerships in legitimate businesses in neighbouring countries, such as Burma,
Malaysia, Singapore and Thailand, reducing regional pressure for more democratic
governance. Burma’s repressive government has continued to generate international
sanctions and impede foreign investment. Yet Burmese banks are thriving and
experiencing rapid growth, fuelled primarily by funds generated from the opium
trade. Prominent among Burma’s 21 domestic banks are the Asia Wealth Bank,
whose chairman and vice chairman are alleged to be former drug lords; the
Mayflower Bank, established by Kyaw Win, a partner of the drug warlord Khun Sa;
and the Kanbawza Bank, closely tied to the ruling junta and alleged to launder the
proceeds of ruling party corruption. 26 Thus, the drug economy and the political
control exercised by Burma’s unelected leadership have proved mutually reinforcing.
In turn, this economy has been sustained by Burma’s ability to readily move funds to
and from the rest of the world. Despite the allegations of its ownership by drug lords
and its involvement in money laundering, the Mayflower Bank apparently maintains
correspondent relationships with the Marine Midland Bank and American Express
Bank in New York. 27 It is difficult to imagine that any US institution is not well
enough situated to assess the provenance of funds from the Mayflower Bank. 28 EU
sanctions against Burma were toughened in 2000, theoretically freezing the funds
belonging to members of the junta and those associated with them. However, the
state-owned Myanmar Foreign Trade Bank currently reports a network of over 120
correspondent banking relationships in 58 countries, so that ‘banking transactions
can be made with almost any country in the world’.29 Burma’s repressive government
retains access to international financial institutions, irrespective of the sources of
Burmese assets or international sanctions.
Case Study: Afghanistan. In Afghanistan, decades of tribal conflict have been
fuelled by opium funds, with each of the major forces, including the Northern
Alliance and the Taliban, taking drug money to finance their military campaigns.
Opium’s impact in acting as a regional destabilizer extends beyond Afghanistan.
Drug-related corruption has been an ongoing problem within the Pakistan military.
According to a recent French analysis, from approximately 1983 through 1998,
Pakistan’s military intelligence agency used heroin trafficking from Afghanistan to
26
‘Above it all, Burmese banks are thriving even as the country’s economy suffers its worst
slump in years’, Maung Maung Oo, the Irrawaddy, 2 February 2001.
27
For example, Hamsa Travels and Tours of Yanon, Myanmar, which offers tourist services
for Burma, currently specifies on its web-pages the use of these institutions to make
payment to its account at the Mayflower Bank from the US.
28
Existing US sanctions against Burma prohibit new investment but do not prevent financial
transactions for such purposes as tourism.
29
Myanmar Financial Structure and Exchange Arrangements, published by the Government
of Myanmar, < http:/www.myanmar.com/gov/trade/fin.html > .
fund secret operations aimed at destablizing India through Muslim rebellion in

Kashmir.30 While much of the opium trade at the local level is cash-based, opium
money arriving to Gulf State financial institutions from Pakistan is then transformed
into electronic funds, which can be used not only to pay bribes further afield but to
support terrorist activity around the world.
Case Study: Colombia. For many years, the Colombian terrorist guerrilla group,
the Revolutionary Armed Forces of Colombia (FARC), has funded its military
attack on the Colombian government by taking protection money in coca-growing
areas. A map of regions controlled by FARC shows that they constitute rings just
outside and around each of the major coca-growing regions, thereby placing the
group in a position to exact a toll for the transit of the drugs by any route. The
FARC has used the drug money for arms purchases, as have the major Colombian
smuggling organizations. In turn, both the Colombian traffickers and the FARC use
the weapons funded by the drug trade to protect themselves in their respective
struggles against Colombia’s elected government, perpetuating the civil war in that
country. The traffickers have heavily penetrated Colombia’s financial institutions
and purchased a substantial number of legitimate businesses, facilitating their ability
to corrupt elements of the Colombian government and reducing the efficacy of the
government’s efforts to enforce Colombia’s laws. As drug influence increases and
government capacity is weakened, the legitimacy of the Colombian government is
further eroded, in turn providing a greater base for political support by disaffected
Colombians for the guerrillas and the civil war. Again, as with drug money from
Afghanistan and Burma, Colombian drug money exercises a negative political
impact well beyond Colombia itself. For example, both Manuel Noriega of Panama
and the military junta that ruled Haiti in the mid–1990s sustained control of their
respective governments through drug-related corruption.
International Money Laundering and Grand Corruption. The world’s kleptocrats,
whether Marcos, Mubuto, Abacha, or Sukarto, have used a common financial
services infrastructure to steal national wealth.31 Grand corruption has been a
prominent feature of political and social conflict or civic breakdown in Albania,
Argentina, Burma, Cambodia, Congo (Zaire), Colombia, Haiti, Indonesia, Iran,
Liberia, Nigeria, Panama, Pakistan, Peru, the Philippines, Romania, Sierra Leone,
Yugoslavia, and Zimbabwe, among other jurisdictions. In each case, the looting of
30
1998–1999 Report on Drug Trafficking in Asia published by the Observatoire Geopolitique
de Drogues or OGD, a French academic institute. Separately, former Pakistani Prime
Minister Nawaz Sharif told the Washington Post in 1994 that Pakistan’s army chief and the
head of its intelligence agency had proposed a detailed blue-print for selling heroin to pay
for the country’s covert military operations in early 1991. See ‘Heroin Plan by Top
Pakistanis Alleged’, Washington Post, 12 September 1994.
31
This phenomenon has been labelled ‘indigenous spoilation’ by N. Kofele-Kale, who defines
this act as an ‘illegal act of depredation which is committed for private ends by
constitutionally responsible rulers, public officials or private individuals’, in the International
Law of Responsibility for Economic Crimes (Kluwer Law International 1995) at p. 10.
government treasuries has involved funds or resources residing within these countries
being moved from the countries to other jurisdictions through the world’s major
international banks. In some cases, the theft of national treasuries has been
accompanied by other harmful activities, whose proceeds have been laundered by the
same mechanisms. These include costly or illegal arms deals (Angola, Colombia,
Liberia, Sierra Leone, Somalia, Sudan), the smuggling of diamonds used to purchase
arms deals in civil wars (Angola, Liberia, and Sierra Leone), grand-scale theft of oil
and timber (Burma, Cambodia, Nigeria, Russia, Thailand), illegal dumping of
environmental toxics (Guyana, Suriname), and embezzlement or other abuses of
funds lent by international financial institutions such as the World Bank (endemic).
Countries that during the 1990s saw their national wealth disappear to other
jurisdictions at the direction of ruling kleptocrats include (from A to Z):
Albania, decapitalized by a pyramid scheme that moved its funds to Italy and
Western Europe;
Angola, whose immense national resources vanished amid the ongoing civil
war between President Dos Santos and Jonas Savimbi;
Burma, where funds generated by narcotics, jewels, and illicit timber were
exported for covert reinvestment in more business friendly environments, such
as Singapore and Hong Kong, by people working with the junta;
Cambodia, which featured similar characteristics of first generating illicit funds
and then having them become flight capital under Hung Sen;
Estonia, which found substantial amounts of its national wealth apparently
transferred to Russia in the mid-1990s in a pyramid scheme arranged by a
prominent banker with close ties to Latvia’s then government;
Gabon, whose oil revenues were sent offshore and handled by US financial
institutions on behalf of the senior leaders who had stolen the proceeds;
Indonesia, where billions of dollars disappeared offshore in connection with
grand corruption under former dictator Suharto, with some 9 billion USD
ending up in a nominee account maintained at an Austrian bank;
Kazakhstan, where funds from oil revenues were laundered offshore for the
benefit of senior leaders;
Mexico, where the brother of president Carlos Salinas, Raul Salinas, was found
to have moved hundreds of millions of dollars, representing either stolen
government funds, bribes, or the proceeds of narcotics trafficking, to Switzerland;
Nigeria, where General Sani Abacha stole billions that were then stored in
major banks in Luxembourg, the U.K., Liechtenstein, Switzerland and the
Channel Islands, among other locations;32
32
See, e.g., ‘Swiss banks criticised over Nigerian funds’, Associated Press, 5 September 2000,
describing findings of the Swiss Federal Banking Commission regarding the handling of
some 670 million USD of funds stolen by Sani Abacha and his ‘entourage’ from Nigeria
and held by 19 Swiss banks. According to the article, the Government of Nigeria says the
total funds stolen by Abacha amounted to some 3 billion USD, some of which remained in
other accounts in Belgium, Germany and France.
Pakistan, where military rule replaced democratic civilian rule after hundreds
of millions of the proceeds of corruption were found in Swiss banks,
discrediting the elected Prime Minister and her family;
Russia, whose financial system collapsed in 1999 amid massive money
laundering overseas through the Caribbean, the South Pacific, New York,
and London;
Serbia, whose wealth was converted to the control of Slobodan Milosevic and
his wife through such jurisdictions as Cyprus and Lebanon, while Serbia was
subject to global sanctions by the United Nations;
Ukraine, where substantial stolen assets of the state under the control of a
former prime minister were found to have been laundered to the United States,
after being handled by a number of Swiss banks; 33
Zaire (Congo), whose national wealth was exported by the late dictator
Mobuto to Swiss banks.
Thus, a wide variety of serious problems of governance have been facilitated by illicit
finance, which in turn leads back to the problem of the 11 September terrorist
attacks, where money from apparently legitimate sources, such as wealthy Muslims
in the Persian Gulf seeking to support Islamic charities, was turned to horrific ends
after passing invisibly through the pipes of the world’s global financial service
infrastructure.
V. Terrorist Finance and Civil Conflict
International terrorism represents an obvious threat to global security, just as

domestic terrorism does to many individual nations. In every case, terrorist
organizations need to generate, store, and transport funds, often across borders.
While not every domestic terrorist organization needs to launder money through
cross-border transfers, over time, many such organizations choose to locate portions
of their infrastructure at some distance away from planned terrorist activities. To do
so, they establish cells to operate in jurisdictions separate from those where their
political base is or where their operations will be carried out. In recent years,
multinational movements of terrorist funds, involving the use of major international
financial institutions, have been traced to terrorist movements based in Afghanistan,
Burma, Chechnya, Colombia, Israel, the Palestinian Territory, Kosovo, Lebanon,
Northern Ireland, Pakistan, Papua New Guinea, the Philippines, Somalia, Sri
33
See US v. Lazarenko, Northern District of California, superceding indictment, 23 July
2001, describing Lazarenko’s use of SCS Alliance, Banque Populaire Suisse, Crédit Suisse,
Crédit Lyonnais (suisse), and European Federal Credit Bank in Antigua to launder 21
million USD stolen from Ukraine.
Lanka, Sudan, and Turkey. Although the terrorist organizations based in each of
these countries have some level of minority popular support, their power and
effectiveness have been leveraged by their ability to hide, invest, and transport their
funds through the world’s international financial institutions. A summary of the
nations whose banks have been used to handle funds for Al-Qaeda’s attacks on the
US is instructive in this regard. Available public sources show Al Qaeda and related
groups to have been able to move funds to institutions in the following countries:
Albania, Australia, Austria, the Bahamas, Belgium, Canada, the Caymans, Cyprus,
France, Germany, Greece, Hong Kong, Indonesia, Iraq, Italy, Kosovo, Kuwait,
Libya, Macao, Malaysia, Malta, Mauritius, the Netherlands, Nigeria, Panama,
Pakistan, the Philippines, Poland, Qatar, Saudi Arabia, the Seychelles, Singapore,
Somalia, South Africa, Sudan, Switzerland, the United Arab Emirates, the United
Kingdom, the United States, and Yemen. Significantly, where these jurisdictions are
used by Al Qaeda, they also tend to be used by other criminals and corrupt officials,
as the case of the United Arab Emirates demonstrates.
Case Study: United Arab Emirates. The UAE houses the Middle East’s most
sophisticated financial services sector, which is intensely competitive and lightly
regulated. It is also a cash-intensive society, with Dubai constituting the regional
gold centre. Cash transactions at restaurants, hotels, nightclubs, money-exchange
houses, and investment firms remain common and effective mechanisms to launder
money throughout the world from the UAE.34 Trading in precious metals, especially
gold, has been simultaneously implicated in tax frauds, money laundering, organized
crime, and the smuggling of stolen cargo from the UAE. 35 Islamic banks, once a
conservative mechanism for relative low-cost entry into the international financial
system, have expanded rapidly, remaining little regulated beyond the requirements of
Islamic shari’a. Alternative remittance houses, such as hawalas, have been abundant,
and scarcely regulated. The results for global security were evident in the 11
September terrorist attacks. One hawala based in Somalia, Al Barakaat, with major
offices in the UAE, was found to have been heavily involved in funding Al Qaeda’s
global operations. Another unnamed money changer was found to have transferred
funds to Marwan Al-Shehhi, a UAE citizen who was the suspected pilot of United
Airlines Flight 175, the second plane to hit the World Trade Center on 11
September.36 In addition, funds were allegedly wired between three of the terrorist
attackers and one of Bin Laden’s financial chiefs, Shaykh Said, also known as
Mustafah Muhammad Ahmed, who resided in Dubai until 11 September, according
to numerous press accounts.37 Subsequent press accounts traced the funds to the Al
34
‘Dubai Police Study on Money Laundering’, Khalij Times, December 10, 1999.
35
‘Duped banks get wise to crime’ Lloyd’s List, January 8, 2001.
36
‘UAE Central Bank Withdraws License of Money Changer’, Wall Street Journal, 2
November 2001.
37
See, e.g., ‘In Emirates, An Effort to Examine Bank System’, New York Times, 15 October
2001; ‘$100,000 trail links hijackers to Al-Qaeda, sleuths say’, Dubai Gulf News, 12 October
2001.
Ansari Exchange branch in Abu Dhabi.38 Another account cited an unnamed US

intelligence official as stating that two of Bin Laden’s sisters used the UAE as a
transit point for shuttling cash to Bin Laden and his hide-out in Afghanistan.39
Long before the 11 September terrorist attacks, the UAE’s financial system was
repeatedly linked to terrorist finance. Al Qaeda also used the Dubai Islamic Bank as
a mechanism to process funds used in the bombings of the US embassies in Kenya
and Tanzania in 1998.40 UAE financial institutions were central to the 11 September
terrorist attacks on the US financed by Osama Bin Laden and Al-Qaeda. UAE
institutions were also reportedly used by other Bin-Laden terrorist finance
operations based in Malta. 41 This terrorist finance infrastructure overlaps
substantially with other money laundering operations. For example, the same
networks in the UAE have been used to launder drug money42 and to handle the
proceeds from Russian criminal activity, in one account, laundering some 300
million USD in Russian funds in the month of January 1999 alone.43 The UAE has
been home to the Russian arms merchant Viktor Bout, implicated in black market
weapons sales to Rwanda, Sierra Leone, and Angola. False end-user certificates were
delivered from the UAE to provide a veneer of legality to Bout’s illicit arms sales,
according to a United Nations report. Bout’s illicit arms shipments were carried out
from the UAE through his UAE-based air transport company, Air Cess, whose
operations would clearly require financing through the UAE.44 Even as Bout
engaged in smuggling activities to these jurisdictions in conflict, UAE financial
institutions handled the proceeds to finance terrorist and criminal activity. For
example, Al Qaeda used diamonds purchased in Sierra Leone, the Democratic
Republic of the Congo (DROC, the former Zaire) to fund its activities, in turn
laundering these commodities through Dubai.45
Ironically, throughout this period the UAE had one of the Middle East’s best
anti-money laundering regimes, as well as a good reputation for co-operation in
particular cases arising from investigations in other countries, including the US. Yet
38
‘UAE Central Bank Withdraws License of Money Changer’, Wall Street Journal, 31
October 2001.
39
‘United Arab Emirates emerges as key link in money trail that led to attacks’, Knight
Ridder Washington Bureau, 2 October 2001.
40
‘UAE Bank Sources Deny Knowledge of Bin-Ladin Dealings’, London Al-Sharq al-Awsat
(in Arabic), 9 July 1999, p. 5.
41
‘Malta’s Central Bank Asked to Investigate Possible Bin-Ladin Financial Assets’, London
Al-Sharq Awsat, 16 November 2000.
42
Financial Times, 24 February 2001.
43
‘Capital Flight, Money Laundering Eyed’, Moscow Noryye Izvestiya (in Russian), 5 March
1999.
44
‘The Great Small-Arms Bazaar’, Cox News Service, 6 July 2001; ‘UN Report: Former
Russian KB Officer Arming African Rebels’, London Guardian, 23 December 2000.
45
‘Al Qaeda’s Road Paved With Gold, Secret Shipments Traced Through a Lax System in
United Arab Emirates’, Washington Post, 17 February 2002 (Douglas Farah), citing US
and European intelligence sources and investigators.
the rules had proven to be largely helpful in reconstructing money laundering or

terrorist finance after a crime had taken place, rather than deterring it in the first
place. Moreover, the UAE had a wide range of financial links to other jurisdictions,
from Pakistan to Iran, that had essentially no anti-money laundering regimes in
place, making it easy for illicit funds to be placed elsewhere before moving through
the UAE and into Western Europe, North America or Asia. Further, Dubai, the
most developed financial centre in the UAE, was the world’s centre for trading in
gold, as well as a central component of the hawala alternative remittance system.
With gold trading, drug-money launderers and terrorist financiers alike could move
funds through the UAE. With hawalas, the same interests could move money to
wherever they needed it without the funds ever having to move across international
borders.
VI. The Commingling Problem
The world’s networks of non-transparent financial services not only commingle licit
with illicit funds, thus rendering the illicit funds more difficult to detect, but also
provide vessels for the intermingling of different forms of illicit activity, which have
the common element of being both destabilizing and involving similar persons and
institutions. The ubiquity of offshore havens such as the Caymans, Channel Islands
and Liechtenstein for common use by drug, arms, and people traffickers as well as
kleptocrats is reasonably well understood. The interconnections between Al Qaeda’s
terrorist finance and the illicit sale of diamonds mined by rebels in Sierra Leone is
less obvious, although increasingly well-documented and tied to other terrorist
finance of groups such as Hezbollah. Within the region, the diamonds are
transferred to the terrorists in return for weapons or for cash. The terrorists then
transport the diamonds to diamond processing centres such as Belgium, and thereby
launder their funds anew for further terrorist activity. 46 Neither the diamond dealers
of Antwerp nor the financial institutions that serve them currently have in place any
trip-wires that would alert them to the possibility that either the diamonds, or their
owners, were involved in funding destabilizing conflict in western Africa or global
terrorism.
The problem is not necessarily one of witting intention on the part of the parties
who populate the vast infrastructure supporting many of the world’s most
destabilizing illicit activities. Rather, the global money-laundering problem is a
structural consequence of globalization, putting bankers, banks, and banking
accounts in constant contact with people and businesses that they do not know.
46
‘Al Qaeda Cash Tied to Diamond Trade’, Washington Post, 2 November 2001 (Douglas
Farah), citing US and European intelligence officials.
Instead of having relationships with people they trust, these institutions have
accepted the notion that they should trust only in the money itself, with no further
obligation.
Twenty years ago, the risks posed by ‘no-questions asked’ banking practices were
not universally evident. Now the need for greater transparency, accountability, and
traceability of financial transactions, regardless of their provenance, destination, or
the mechanics of their movement, is widely accepted. Within the past two years
many countries, in some cases threatened with possible loss of access to major
financial centres, have enacted comprehensive measures to combat money
laundering and to promote financial transparency. These countries have included
Antigua, Austria, the Bahamas, the Channel Islands, Israel, Japan, Liechtenstein,
Panama, Russia, and the United Arab Emirates. The 11 September terrorist attacks
on the United States have led to a further wave of legislation and regulation. The
result has been closer financial scrutiny of many Gulf States, a number of countries
in Southeast Asia, and of the placement of funds in jurisdictions in the Americas and
Europe. This new scrutiny has included the first comprehensive efforts to
understand, register, and regulate alternative remittance systems or hawalas.
Yet, governments whose jurisdictions begin and end at their own borders may be
poorly placed to exercise effective oversight of private sector financial institutions
whose activities may extend through many dozens of jurisdictions. If individual
nations are incapable of exercising authority over the global operations of the
financial institutions they license, there is an obvious question as to who is in a
position to exercise such authority. One answer – the market shall rule – is clearly
incompatible with other important social, economic and political goals. A second
answer, that the institutions will regulate themselves, has to date not proven very
effective. Soft standards (typically guidelines), imposed by self-regulatory organiza-
tions such as the BCBS, IOSCO, and the IAIS, have given national regulators
responsibility to decide on sanctioning cases of institutional misbehaviour, and this
too has not proven very effective.
Each of the many exercises seeking to improve international financial regulation
and to oppose illicit finance has adopted one core principle, a principle of particular
import in an age of globalization. This principle, sometimes summarized as ‘know
your customer’, suggests merely that the obligation of knowing with whom you are
doing business, a matter of prudence in a local economy, becomes even more essential
in a global economy. There is no disagreement on this core standard, only a clear
failure to date to impose it on a universal basis. Assessing the existing and potential
mechanisms for implementing this principle take up the remainder of this paper.
VII. Existing Initiatives
As Brookings Institution economist Robert Litan has recently stated, successful

international efforts to regulate cross-border finance generally only emerge in
response to crises.47 The sheer scope of the existing anti-money laundering initiatives
provide some evidence of the depth of the global financial transparency crisis.
The major financial services jurisdictions, including the countries of the G–8, the EU
and Switzerland, have already begun to implement financial regulatory regimes based
on the premise that the best possible protection against being victimized by financial
crime of any kind is to know the true identity and business of any party to whom one is
exposed in a transaction, from one’s customer to one’s correspondent bank. This
principle is embedded in the work of the G–7 Financial Stability Forum, of the EU’s
Second Directive on Money Laundering, agreed to in October 2001, and in the USA-
PATRIOT Act, enacted by the US to counter terrorism and terrorist finance in the
wake of the 11 September attacks. These new legal regimes no longer treat all bank
accounts as inherently equal, but require those who handle the funds of others to know
who the beneficial owner of an account is, regardless of the nature of the account. In
cases where an account is established through a jurisdiction that is inadequately
regulated or designed to hide beneficial ownership, these regimes would shut off access
entirely, as the new law in the US has required them to do since the end of 2001.
Know Your Customer. The principle of ‘know your customer’ is now true not only
for banks but for all financial intermediaries engaged in transnational financial
activity, especially that which is electronic. In the age of the Internet, no other
approach is workable. If merely banks are regulated, and their non-bank
competitors are not, the competitors will engage in unregulated bank-like activity.
To be effective, the ‘know your customer’ requirements of the original Basel
Committee recommendations of a decade ago are now slowly being updated and
broadened to cover those who offer banking-like services. Jurisdictions that lag
behind in undertaking this approach, either through self-regulation, government
regulation, or a mixture of the two, are finding themselves and their financial
institutions at risk of having reduced access to other jurisdictions. The result has
been a jurisdictional regulatory ‘race to the top’, instead of a race to the bottom.
Nevertheless, the emerging new international instruments, standards, and initiatives
have yet to have a substantial impact in reducing global conflict.
Naming and Shaming Jurisdictions. A common feature of the major initiatives
undertaken to date by governments, international organizations, and non-govern-
mental organizations, such as Transparency International, has been a focus on
reforming governments, and through the reform of the governments, enhancing
regulation and oversight of the private sector. Existing international instruments to
combat money laundering include the 1988 United Nations Vienna Convention
47
Litan, id, p. 197.
Against Illicit and Psychotropic Drugs, the 2000 United Nations Convention
Against Transnational Organized Crime, the 1998 OECD Convention Against Illicit
Payments (covering bribery), and numerous instruments enacted by the Council of
Europe, the Organization of American States, and other regional groupings. Over
time, these international instruments have come to create a body of international
standards, embedded in the increasing number of mutual assessment mechanisms.
The first and most successful of these remains that undertaken by the FATF and its
progeny. In recent years, failures to meet these standards have even come to have
consequences, as specific jurisdictions have been named, shamed, and in effect forced
to change their laws in order to avoid risks to their economies, political regimes and
reputations. However, in many countries, governments simply do not control the
private sector, and globalization has made cross-border control inherently
impossible even for the most powerful governments. International regimes that
direct governments to regulate private sector institutions that may be more
sophisticated, more international, wealthier, and larger than the governments
purporting to regulate them have inherent practical limits.
The nature of these limits is already visible, as the name and shame exercises have
taken hold. While individual jurisdictions have been forced to change their rules,
individual institutions have been able to continue to engage in regulatory arbitrage,
pushing their riskiest and least attractive transactions to jurisdictions that require the
least transparency. For example, during the last half of 2001, the tiny Channel Island
of Jersey was found to house millions of dollars stolen from investors in the Gulf
States by a Hong Kong-based investment company;48 200 million USD allegedly
looted from Brazil in a major political scandal, deposited in a branch of Citibank; 49
and some 300 million USD in accounts belonging to the late Sani Abacha, his family
and entourage. Jersey was in compliance with all of the FATF anti-money
laundering criteria, and most of the obligations required by the OECD tax haven
exercise. Yet the persistence of Jersey’s use to conceal financial crime reflected the
reality that anyone who deliberately structured their transactions across multiple
jurisdictions was still able to protect their illicit activities from scrutiny for a very
long time. The problem may not in fact be with Jersey’s ability to enforce its anti-
money laundering regime, but with the inadequacies of regulators and law
enforcement agencies the world over to keep track of the transnational activities
of the private sector entities that they purport to oversee.
Just as globalization has caused even the smallest, local financial jurisdiction, such
as that of Jersey or Liechtenstein, to be accessible for use by any and all of the
world’s businesses, legitimate and illegitimate, the same phenomenon has required
the extension, bit by bit, of regulation from its initial application to limited problems
in limited sectors to universal problems in all sectors, as the evolution of the FATF
and the OECD Harmful Tax Practices initiatives have demonstrated.
48
‘UAE: Investment Firms Defraud Investors’, Dubai Khalej Times, 21 August 2001.
49
‘Brazil scandal hits Citibank’, The Observer,9 September 2001.
The Financial Action Task Force. The FATF was established during the French
presidency of the G-7 in 1989 in response to the G-7’s recognition of the threat posed
to banking and financial systems by drug money laundering. At the time, drug
money laundering in the Americas emanating from Colombia were fresh in the
minds of policy-makers, following the crisis between the US and Panama that ended
with the removal and arrest of General Manuel Noriega. The FATF’s initial
mandate was to examine the methods used to launder criminal proceeds and to
develop recommendations for combating them. These 40 Recommendations,
developed during the FATF’s first year, in turn, became the basis for what was
then an innovative system for implementation. The FATF, which had a tiny
secretariat and was not a chartered international organization but only a voluntary
association, initiated a system for self- and mutual assessment. Under this system,
each member of the FATF would first assess its own compliance with the FATF’s 40
recommendations. Then, other FATF members would visit the jurisdiction, question
authorities from the assessed jurisdiction, and reach their independent determination
of where the jurisdiction was failing to meet the standards of the 40 recommenda-
tions. This approach had several ground-breaking aspects. First was the notion that
technical experts could develop standards which over time would bind their countries
in practice even in the absence of their entering into a formally binding international
agreement. Second was the concept of mutual evaluation, in which a country would
submit to peer review as a means of improving its domestic capabilities. Each of
these developments faced potentially substantial risks. For example, the withdrawal
of any FATF member from consensus on the standards could have had the impact of
undermining both the legitimacy and effectiveness of the entire initiative. Similarly,
the politicization of the mutual assessment process, either to exculpate unfairly or to
criticize unfairly any jurisdiction, could also have fatally impaired the FATF’s
legitimacy. Both risks were avoided largely because of the technocratic nature of the
staffing of the FATF by member governments. The FATF process was driven by
technocrats from finance ministries, regulators, and law enforcement, not by foreign
ministries or political figures. Its standards were neutral, and its judgments, initially
confidential, were recognized to be fair. Moreover, the FATF proceeded slowly, first
evaluating jurisdictions with robust regulatory and enforcement regimes, criticizing
them, and only then moving to jurisdictions that diverged further from the 40
recommendations.
The FATF moved forward steadily but slowly during the 1990s, in the process
taking on two major changes to its original mandate. In 1996, under the US
Presidency of the FATF, the organization expanded its mission beyond reviewing
capacities against narcotics money laundering to cover all money laundering
involving all serious crimes. It also agreed to take on new developments in money
laundering trends, especially those involved with electronic fund transfers. Secondly,
the FATF decided that the ability of its member jurisdictions to protect themselves
against money laundering would be undermined if non-member jurisdictions did not
adopt and implement its 40 recommendations as well. Accordingly, it chose to move
beyond its initial mandate to assess its own members to develop a ‘black list’ of other
countries whose practices were deemed to facilitate money laundering and therefore
be ‘non-cooperative’ with the objectives of the FATF. The development of a black
list reflected a dramatic change in approach by the FATF, necessitated by the
growing recognition of the interdependence of the global financial infrastructure,
and the inability of any jurisdiction to protect itself in the face of bad practices in
other jurisdictions.
Both the FATF’s standards and its selection of non-cooperative jurisdictions
illustrate the nature of transnational money laundering and the practices most likely
to facilitate it. Core FATF standards include:
1. Criminalizing the laundering of the proceeds of serious crimes and enacting
laws to seize and confiscate them.
2. Obliging financial institutions to identify all clients, including all beneficial
owners of financial property, and to keep appropriate records.
3. Requiring financial institutions to report suspicious transactions to
competent national authorities and to implement a comprehensive range of
internal control measures.
4. Putting into place adequate systems for the control and supervision of
financial institutions.
5. Entering into agreements to permit each jurisdiction to provide prompt and
effective international co-operation at all levels, especially with regard to
exchanging financial information and other evidence in cases involving
financial crime.50
In general, these standards have been little changed since their development in 1990.
Nevertheless, they remain incompletely implemented internationally, prompting the
FATF to develop in 2000 its list of ‘Non-Cooperative Countries and Territories’.
Four of the countries on the original list, Bahamas, Cayman Islands, Liechtenstein,
and Panama, enacted comprehensive money laundering regimes rather than face the
risk of possible loss of market access to FATF Member States if they failed to take
action. Others, such as Israel and Russia, enacted legislation, but failed to put in
place an anti-money laundering system sufficient to meet FATF standards. To date,
the FATF has threatened a number of jurisdictions with the sanctions of facing
enhanced scrutiny or greater regulatory barriers, but has imposed them on none. The
simple threat has been enough to cause any country targeted with immediate action
to change its laws, as Austria, the Seychelles, and Turkey demonstrated even prior to
the Non-Cooperative Countries and Territories initiative.
Currently, 19 countries and territories are on the FATF black list, facing the risk
of potential sanctions, termed ‘countermeasures’ by the FATF in the near future.
The list of these jurisdictions, with annotations by the author about the type of
money laundering involved, is as follows:
50
The full text of the FATF’s 40 Recommendations is available at the FATF’s website online
at <http:/www.oecd.org/fatf>.
1. Cook Islands, used by Russian criminals to loot Russia.

2. Dominica, providing false identities, passports, and banking services to
Russian criminals and drug traffickers.
3. Egypt, a centre for financial fraud and possibly terrorist financing; has had
no transparency or anti-money laundering laws, so data is extremely limited.
4. Grenada, false identities and banking services to financial criminals and drug
traffickers.
5. Guatemala, exploitation by drug money launderers.
6. Hungary, comprehensive banking secrecy exploited by Russian organized
crime involved in trafficking of women, alien smuggling, and contraband
smuggling.
7. Indonesia, money laundering for illicit timber, massive corruption and fraud.
8. Israel, money laundering for Russian organized crime, including trafficking
in women.
9. Lebanon, laundered funds for sanctioned regimes including Libya and
Serbia, as well as for various terrorist organizations; handles proceeds of drug
trafficking from Middle East.
10. Marshall Islands, used by Russian criminals.
11. Myanmar (Burma), wide open to narcotics money laundering, arms
trafficking, illicit timbering, precious gems smuggling, and the funding of
private armies.
12. Nauru, principle launderer for theft of Russian national resources.
13. Nigeria, drug money laundering, major financial crime, terrorist finance.
14. Niue, handled Russian money laundering.
15. Philippines, laundered funds for Al Qaeda.
16. Russia, wide open to money laundering by Russian, Colombian, and Italian
organized crime, including the proceeds of corruption, theft, drug trafficking,
trafficking in women, people smuggling, stolen motor vehicles, intellectual
property crime, extortion, and massive fraud.
17. St. Kitts and Nevis, handled drug money laundering.
18. Ukraine, laundered proceeds of corruption, trafficking in persons, theft of
national resources, drugs.
Notably, none of these jurisdictions is as yet isolated from the world’s major
financial markets, although a few, especially those in the South Pacific, no longer
have relationships with some large international financial institutions since the
exposure of the Bank of New York/Benex scandal in the fall of 1999.
The OECD Harmful Tax Practices Initiative. As of the late 1990s, the growing
recognition that lack of transparency was creating substantial problems even for the
most affluent countries as a result of globalization began to embrace the area of
taxes. Finance ministries of the OECD countries had come to conclude that they
were losing exceptionally large amounts of revenue due to individuals and companies
engaging in systematic tax evasion through structuring their activities cross-border
and taking advantage of banking secrecy regimes. Previously, the OECD had
focused on eliminating regulations that could impede international trade or impose

market distortions. Its senior officials came to see what it termed ‘tax poaching’ as a
practice increasingly undermining the revenue base of governments throughout the
world, reducing their ability to raise revenues and provide fundamental services. In
short, the OECD saw that globalization led to tax evasion and, in turn, undermined
fundamental governmental capacities to govern. As the OECD studied the problem,
it also came to recognize that international tax evasion was linked to a host of other
serious threats to the global system. In the words of OECD’s Secretary General,
Donald J. Johnston, ‘there are strong links between international money laundering,
corruption, tax evasion, and other international criminal activities. These illegal
activities are widespread and involve such sizeable sums that they can pose a threat
to the stability of the global system of finance and even the global trading system’.51
Notably, the OECD was not focused on weaker jurisdictions involved in civil
conflict, but on the impact of financial secrecy in the tax arena on the world’s
strongest jurisdictions.
In May 1998, the OECD governments issued a report on ‘Harmful Tax
Competition’, which led to the creation of a ‘Forum on Harmful Tax Practices’, a set
of ‘Guidelines for Dealing with Harmful Preferential Regimes in Member
Countries’, and finally, a series of Recommendations For Combating Harmful
Tax Practices. The initiative was built, in many ways, on the parallel work of the
FATF, and, in particular, three elements of FATF’s approach. First, the OECD
developed a set of agreed standards to combat a set of agreed problems; secondly,
the OECD put into place a system for the multilateral assessment of each
jurisdiction’s implementation of the agreed standards; thirdly, the OECD adopted a
‘name and shame’ approach, creating a black list of jurisdictions that would face loss
of market access or other sanctions if they did not take action. Despite vigorous
protests from smaller jurisdictions that had been engaged in ‘ring-fencing’, the
practice of promising little or no regulation and taxation of funds from overseas, as
distinct from the regulation and taxation of the funds of their own citizens, targeted
jurisdictions rapidly enacted new regimes. To avoid being placed on a prospective
black list, six prominent tax avoidance jurisdictions, Bermuda, Cayman Islands,
Cyprus, Malta, Mauritius, and San Marino, committed themselves in June 2000, in
advance of their assessments, to embrace international tax standards for
transparency, exchange of information and fair tax competition prior to the end
of 2005. It may be useful to list the fundamentals of the OECD standards, as each of
them applies to the lack of transparency common to all money laundering, not
merely those pertaining to tax crimes:
1. Ensuring that information is available on beneficial (that is, actual) ownership
of companies, partnerships and other entities organized in the jurisdiction.
51
‘Introductory Remarks of the Honourable Donald J. Johnston, Secretary-General of the
OECD, High Level Symposium on Harmful Tax Competition’, 29 June 2000.
2. Requiring that financial accounts be drawn up for companies organized in

the jurisdiction in accordance with generally accepted accounting standards,
and that these accounts be appropriately audited.
3. Putting into place mechanisms so that the jurisdiction is able to share
information pertaining to tax offences with corresponding authorities in
other jurisdictions.
4. Ensuring that its regulatory and tax authorities have access to bank
information that may be relevant for the investigation or prosecution of
criminal tax matters.
The OECD’s insistence that such fundamental, common sense principles be adopted
has produced substantial controversy in many historic tax havens, including a
number of smaller jurisdictions in the Caribbean and South Pacific. The resistance to
their universal adoption is itself evidence of how badly their adoption is needed, and
of the degree to which basic elements of financial transparency have yet to be put
into place at the international level.
The Wolfsberg Principles: A Private Sector Alternative. Abuses of private banking
by corrupt officials became substantially exposed in the late 1990s, in the course of
changes of government and exposures of individual kleptocrats as described above.
In each of these cases, highly-placed political officials were found to have laundered
inexplicably large sums of cash through major international financial institutions
that had been, at the least, incurious as to whether the sources of the funds involved
were legitimate. In response, twelve of the largest international banks and the anti-
corruption organization Transparency International (TI) undertook an initiative in
2000 that led to their development and adoption of ‘Global Anti-Money Laundering
Guidelines for Private Banking’. These guidelines, endorsed by the participating
global banks in October 2000,52 were intended only to apply to private banking, that
is, to the accounts of the extremely rich, those with deposits of 3 million to 5 million
USD. Lacking any oversight mechanism, they were to be self-regulatory guidelines
to which each subscribing institution would adhere. The lack of an oversight or
assessment mechanism for the Wolfberg Principles has led to some criticism.
However, the eleven Wolfberg Principles established for the private banking sector
by the twelve international banks are themselves of great significance, illustrating
both potential solutions and aspects of the nature of the continuing problem in
discouraging the criminal and the corrupt from taking advantage of world’s global
financial infrastructure. They are:
1. Adopting client acceptance procedures so that the banks accept ‘only those
clients whose source of wealth and funds can be reasonably established to be
52
The participating banks, known as the Wolfsberg Group, consist of ABN Amro N.V.,
Banco Santander Central Hispano, S.A., Bank of Tokyo-Mitsubishi, Ltd., Barclays Bank,
Citigroup, Crédit Suisse Group, Deutsche Bank AG, Goldman Sachs, HSBC, J.P. Morgan
Chase, Société Générale, and UBS, A.G.
legitimate’. These procedures are supposed to include: (a) taking reasonable

measures to establish the identity of its clients and beneficial owners before
accepting money; (b) demanding adequate identification before opening an
account; (c) determining the source of wealth, the person’s net worth and the
source of the person’s funds; and (d) requiring two persons, rather than just
one, to approve the opening of an account.
2. Engaging in additional diligence or attention in cases involving the use of
numbered or alternative name accounts, high-risk countries, offshore
jurisdictions, high-risk activities, or public officials.
3. Updating client files when there are major changes in control or identity.
4. Identifying unusual or suspicious transactions, following them up, and then
deciding whether to continue the business relationship with heightened
monitoring, ending the relationship, or advising authorities.
5. Monitoring accounts through some means.
6. Developing and implementing a ‘control policy’ to insure compliance with
bank rules.
7. Establishing a regular method of reporting on money laundering issues to
management.
8. Training bank employees involved in private banking on the prevention of
money laundering.
9. Requiring the retention for at least five years of bank records that might be
material to anti-money laundering matters.
10. Establishing an ‘exception and deviation procedure that requires risk
assessment and approval by an independent unit’ for exceptions to the
previous nine principles.
11. Establishing an anti-money laundering unit at the financial institution.
The head of TI, Peter Eigen, introduced the principles at the time of their
adoption in terms that highlighted the historic problem of bankers being willing to
handle the proceeds of corruption, describing the creation of the Wolfsberg Group
as a ‘unique event’ because ‘few would expect the leading anti-corruption
organization and the leading banks to be standing on the same platform’. Dr.
Eigen further stated that the Wolfsberg Principles ‘state unequivocally that banks
agree they should not be used by corrupt crooks and that it is fully incumbent on
individual banks to put into place fully effective systems to ensure that their
institutions are not money laundering vehicles. The language is blunt. The burden
for monitoring the implementation and day-to-day operations of the guidelines rests
squarely on the banks. Their reputations are at stake’. 53 In short, the Wolfsberg
Principles would have an impact because an institution that had subscribed to it
would have its reputation hurt if it failed to then meet its public commitments.
53
Opening Statement, Dr. Peter Eigen, Chairman, Transparency International, 30 October
2000, available at < http://www.transparency.org > .
The universal adoption of each of the above principles, with the exception of
number 10, would contribute to making it harder for corrupt officials or drug
traffickers to establish accounts with funds of unknown provenance. Yet in
specifying their agreement to adopt these principles, the signatory international
banks are necessarily implying that, previously, such principles may not have been
adopted by them on a universal basis, although each has already been either
expressly or implicitly required by the 40 recommendations of the FATF.
Notably, the banks subscribing to the Wolfsberg Principles did not commit to
applying them to all of their accounts, but only to their private banking departments.
Moreover, principle number 10, exceptions and deviations, contemplates the
possibility that such principles as knowing the customer, reporting suspicious
transactions, or maintaining records might not be followed if the bank decided there
was an appropriate reason for ignoring the rule. Left outside the parameters of the
Wolfsberg Principles entirely are such other areas as correspondent banking
involving high-risk jurisdictions. Also left outside the parameters of the Wolfsberg
Principles are the hundreds of large international banks that have yet to endorse
them, as well as the thousands of mid-sized financial institutions with multi-
jurisdictional operations. Important components of the world’s financial services
sector are also missing from the members of Wolfsberg Group, which does not
include a single institution based in China, Russia, Latin America, Africa or the
Middle East. The absence of outside assessment or oversight for the Wolfsberg
Principles and its members, illustrates the limits of this initiative, and the distance yet
to be traveled before there is general acceptance of universal anti-money laundering
standards among the world’s interlinked financial institutions. 54
Nevertheless, the Wolfsberg Principles remain an important development: lacking
the mutual assessment mechanism and the comprehensiveness of the FATF
mechanism. They demonstrate that, in the absence of globally-applicable agreements
by private sector institutions, even widely accepted principles such as those of the
FATF may remain incompletely adopted. So long as regulatory arbitrage remains
available on an international basis, general agreement among most countries to
adopt standards does not prevent private institutions from adhering to the standards
54
See, e.g., editorial of the Financial Times, 30 October 2000, ‘Banks Clean Up’, stating that
‘it may be surprising that 11 of the world’s biggest banks should find it necessary to declare
that they are opposed to the use of their networks for criminal purposes. Yet a series of
scandals has shown how corrupt politicians and other criminals have found it easy to
launder their loot through the international banking system[. . .]The bad publicity
stemming from such disclosures has persuaded the 11 signatories that the damage to
their reputations of becoming involved, however inadvertently, in money-laundering is
greater than any financial benefit[. . .]but ending the flows needs the involvement of the
whole financial services industry including the host of other institutions whose transactions
can help hide criminal plunder. The next step is for the financial regulators to adopt the
Wolfsberg principles for the organizations they supervise and closely monitor their
enforcement’.
only in those jurisdictions that require them. Broader, global adoption of the
standards requires commitments from the private sector institutions that these
standards apply everywhere, not merely where there is a good local regulator.
A set of mandatory rather than optional principles, adopted by the world’s major
financial institutions on a global basis, would have the potential of transcending the
limits of individual national regulators, especially were it to become applicable to all
financial service sector operations, rather than only to private banking, and to
become subject to assessment and oversight mechanisms by outsiders on a global
basis. Indeed, the UN already relies on the principal of private sector implementa-
tion and co-operation in its handling of sanctions. 55
VIII. Global Standards for the Private Sector: Adopting A

White List Regime
The largest financial institutions of the world operate in dozens of jurisdictions. Even
smaller financial institutions are networked in practically all jurisdictions. This
networking appears to be largely viable, even when countries face international
sanctions, as either sympathetic jurisdictions or financial institutions provide
ongoing financial services to those theoretically sanctioned and off-limits.
The largest international financial institutions remain the most important nodes
in the world’s financial service infrastructure. Yet to date these institutions and those
competing with them have continued to take advantage of the substantial regulatory
and enforcement arbitrage afforded by the differences in government laws and
capacities to launder the illicit proceeds of the world, and thereby to facilitate the
circumvention of national laws.
Each of the major existing initiatives to promote financial transparency fails in
part to address this problem. The FATF and OECD exercises focus on jurisdictions,
not institutions, and create black-lists, but no ‘white lists’ of jurisdictions that have
met the highest standards of best practices. Even if every country and territory in the
world were to agree upon their standards, local failures of governmental capacity to
regulate or to enforce would preserve the ability of private sector financial
institutions who were so inclined to circumvent the standards. The Wolfsberg
Principles focus directly on financial institutions, but are limited in scope to private
banking, in membership to twelve banks, in principles to basics only, and in
enforcement to self-regulation. The Wolfsberg Principles create an implicit ‘white
list’ of subscribing institutions, but without any mechanism for outside audit or
assessment, reducing the pressure for comprehensive implementation.
55
The Targeted Financial Sanctions Project of the Watson Institute for International Studies
at Brown University, < http://www.WatsonInstitute.org/tfs > contains extensive evidence
for this proposition, as a member of the research team on the project, Professor Sue Eckert,
has observed.
The foregoing initiatives have been innovative and recent. The question remains
whether they will be sufficient, or whether additional mechanisms should be
developed that combine their best features into a regime which further attenuates
regulatory and enforcement arbitrage, holds the private sector financial services
infrastructure accountable, and provides incentives to institutions that adopt best
practices.
The World Bank, and the other International Financial Institutions (IFLs) are
each among the most important international institutions operating in the world
today, controlling many billions of dollars in resources that are, in turn, allocated for
lending around the world. These institutions each have a large number of
correspondent banking relationships and deposit funds for use in recipient countries,
not only in central banks but in commercial ones. Similarly, the United Nations and
its constituent elements direct substantial sums in development assistance, which also
are necessarily deposited in banks in the countries where the activities are carried
out. Trade finance activities undertaken by government-sponsored entities such as
export/import banks also rely on private sector banks to handle the funds. National
and international development programmes place their funds in private banks. And
government and international organizations alike, when they borrow and issue
notes, also select international banks to act as agents and issuers.
Today, financial transparency is not a criterion for the selection of one financial
institution over another to be the holder, processor, or handler of the funds of
governments, development organizations, international financial organizations, or
the United Nations. An international bank that is involved in numerous money
laundering scandals or terrorist financial transactions has approximately the same
chance of obtaining a lucrative source of government resources as does an
international bank that has imposed the highest standards of transparency and
anti-money laundering policies and procedures. Despite the existence of the FATF,
OECD, and Wolfsberg models, there is no ‘white list’ to which governments,
international organizations, or non-governmental organizations that wish to foster
transparency can turn as a principled means of selecting a bank to handle their
funds.
The lack of such a white list may constitute a missed opportunity. As Robert
Litan has observed, these institutions, especially the IFIs, have ‘accumulated power
akin to a domestic sovereign government’, and have the means to enforce terms of
their agreements with other countries.56 With such power in relationship to sovereign
states, these institutions surely have equal power should they care to exercise it in
relation to private sector institutions. Creating an additional incentive for financial
institutions to adhere to a comprehensive, global code of conduct to combat money
laundering and protect against illicit finance would seem to be a logical goal for an
international community increasingly focused on the risks created by financial
56
Litan, id, at 199.
secrecy. It would supplement the work of nations by asking institutions that operate
in many jurisdictions to adhere to the same standards in all of them, even in cases
where the governments themselves have little ability directly to regulate or enforce
these standards.
To make a white list system work, the United Nations could, for example, take
the recommendations previously made by the FATF, OECD and Wolfsberg Group
and ask financial institutions to agree to adopt them on a global basis throughout
their institutions. Such institutions could further agree to be assessed by a
multinational team of experts who would make reports on the implementation of
the principles by those institutions they assess. An institution that has agreed to an
assessment and passed it would be credentialed and rewarded with a preference for
selection in processing the funds controlled by the UN and by other international
organizations. Other, non-white listed institutions would not be denied the
opportunity to handle the funds of international organizations. However, they
might well be limited to handling such funds in areas where there is no ‘white list’
institution available. To insure the integrity of the system, the white list would need
to be updated regularly, with periodic inspections and reviews of any institution
placed on such a list.
Such a system would retain the mutual assessment and oversight elements of the
FATF and OECD exercises, while adding the universality promised by the
Wolfsberg Principles, and combating the problem of regulatory arbitrage. Each
white-listed institution would be required to agree to maintain its know-your-
customer and other anti-money laundering policies and procedures regardless of
whether it was located in a well-regulated jurisdiction or one with a lax regime. It
would accept the principle of having others conduct period external assessments of
its compliance with the standards and the publication of comprehensive reports
describing how it had met the standards. To ensure fairness and the opportunity to
improve anti-money laundering programmes over time, white-listed institutions
would be given a period allowing them to correct following each evaluation before
being placed at risk of losing white-list status. Other institutions, not white listed,
would be given the ability to sign up to the white list at any time by providing a
public specification of their methods of complying with the standards, and
agreement to submit to an outside assessment at the earliest convenience of the
multilateral experts group.
Given the magnitude of the potential commercial benefit to white-listed financial
institutions, it would be important to have the standards appropriately tailored by
sector, size of operation, and nature of risk. This approach would be similar to that
currently undertaken by the Basel Group in the area of risk-based capital standards
for financial institutions. To be effective, anti-money laundering regimes need to be
structured so as to account for the actual mechanisms by which failures of
transparency are most likely to be exploited. Effective tailoring of a white list would
require further development of money laundering typologies by the FATF and other
organizations. However, even a base-line set of standards, based on those already
adopted by the FATF, the OECD, and reflected in the Wolfsberg Principles, might
provide a suitable place to begin. A white-listed institution might still find itself being
used to transport terrorist funds. But it would have powerful incentives for
preventing such use in the first instance and for swiftly responding to abuses upon
discovery incentives that today, with all of the name and shame exercises and the
terrible costs of financial crime (including the financing of terrorism) to civilization,
nevertheless remain largely absent.
How Can Sound Customer Due Diligence Rules
Help Prevent the Misuse of Financial
Institutions in the Financing of Terrorism?
Charles Freeland*
When the author first joined the Basel Committee Secretariat in 1978, the idea that
bank supervisors had a role to play in the prevention of money-laundering would
have been greeted with astonishment. Some ten years later, when Basel first
discussed the topic in earnest, there was still a body of opinion that this was a matter
for law enforcement and supervisors should stick to the core tasks they were charged
with. Nonetheless, the Basel Committee (BCBS) agreed, principally at the insistence
of the United States, to issue a statement alerting banks to their ethical
responsibilities in the prevention of the criminal use of the banking system. At
that time the principal concern was to make it more difficult and costly for drug
gangs to launder the proceeds of their crimes. That statement, 1 relatively short by
today’s standards, laid down four principles that banks should follow:
Identify their customers
Refuse suspicious transactions
Co-operate with law-enforcement agencies
Train their staff and introduce compliance procedures.
This statement exerted quite wide influence at the national level in the major
industrialized countries and was additionally one of the triggers for the formation of
the Financial Action Task Force (FATF). With the creation of the FATF, the BCBS
took the view that the baton could be passed over to a body with the necessary wider
competencies. Although invited to participate in the FATF, the BCBS declined on
the grounds that its views could be adequately represented by the individual bank
supervisors who became members.
But times change. In 2000, one of the BCBS’s specialist task forces, the working
* Deputy Secretary General, Basel Committee on Banking Supervision. Charles Freeland is

writing here in his personal capacity. The views expressed in this article do not necessarily
represent the views of the Basel Committee or the Bank for International Settlements.
1
The prevention of the criminal use of the banking system (1988).

41
42 Charles Freeland
group on cross-border banking, decided to revert to the issue principally as a result of

a series of scandals involving banks' relationships with corrupt dictators such as
Abacha and Salinas (now termed ‘Politically Exposed Persons’ (PEPs)) as well as with
the Russian Mafia. The working group on cross-border banking is something of a
hybrid animal – it was originally created as a joint working group of the BCBS and the
Offshore Group of Banking Supervisors (OGBS) to discuss issues relating to the
implementation of the Basel Concordats that govern the responsibilities of bank
supervisors in their supervision of international banking groups and their cross-border
establishments. As a result, it is co-chaired by the OGBS chairman, Colin Powell, and
the author. Its deliberations focus mainly on practical issues such as exchanges of
supervisory information, cross-border inspection rights and corporate structures that
impede banking supervision. A key product of this work, which will be reconsidered at
the end of this article, is the creation of a platform for information exchanges between
bank supervisors that is designed to improve supervisory coordination and enable
home-country supervisors to exercise consolidated supervision. Such information
exchanges have always been impeded by bank secrecy legislation and practices that
are regarded by some private banking centres as a competitive necessity in order to
prevent information on customer accounts in cross-border entities from being passed
to home-country tax authorities. Hence, the supervisory Concordats developed by
the Basel Committee have had to balance the need for adequate gateways with the
need for adequate protection of information received.
The reason why the cross-border group became concerned about the risks to
banks in this area was not only its concern about PEPs (initially called ‘potentates’).
A survey of know-your-customer (KYC) standards around the world revealed that,
despite the FATF’s successful initiatives in its member countries, many countries still
had no KYC standards at all. The BCBS has the ability to set rules for banks and
bank supervisors that, through its influence as a standard-setter and with support
from the IMF and World Bank, can have a much broader reach than the FATF. In
addition, the FATF’s focus is on criminal activity, in its early years especially those
activities involved in laundering the proceeds of drug sales, whereas the BCBS is
concerned with the risks to banks from a much wider range of unsuitable customers
– the PEPs issue is a case in point. Moreover, the BCBS saw a need to respond to the
call by the G-7 to strengthen defences against abuse of the financial sector by
producing a benchmark for Customer Due Diligence (CDD) standards for banks, as
well as a need to act on requests from many emerging market supervisors for
guidance in this area.
The BCBS’s working group on cross-border banking’s expertise in offshore
centres and international banking meant that it possessed the qualifications for
identifying the risks being posed to international financial institutions. Several of its
members are FATF participants. The BCBS therefore agreed with the group’s
proposals that it address KYC rules for banks. This title was subsequently amended
to Customer Due Diligence (CDD) standards to reflect the wider and continuous
duties of the banker in protecting a bank’s good name.
The working group was producing a draft set of standards at exactly the time that
Misuse of Financial Institutions in the Financing of Terrorism 43
the Wolfsberg Group‘s first document was being prepared. In each case, the
principal trigger was the Abacha affair. The BCBS’s consultative paper2 did not
address money-laundering or suspicious transaction reporting directly. Rather its
focus was on risk management for banks in their customer relationships. The paper
focused on four specific risks; reputation risk, legal risk, operational risk and
concentration risk (essentially liquidity/funding risk). Plainly, the most sensitive of
these is reputation risk. A key distinction was drawn between initial identification of
each new customer and ongoing monitoring of existing account activity.
The reaction of the supervisory community to the BCBS’s draft was wholly
supportive, including enthusiasm from some countries that one would not have put
high on the list of those interested in probity. The FATF was also supportive and the
Wolfsberg Group provided constructive comments. But some banks and banking
associations were less enthusiastic. They raised two principal concerns that we
sought to address in the final version of the paper that was issued in October 2001.
One was the regulatory burden issue – and that is a very justifiable concern. We tried
to respond to that by introducing a risk-based approach – identifying higher-risk
customers or customer activities that merit heightened due diligence, and reducing
the burden of monitoring the identities and activities of ‘ordinary’ retail clients.
Indeed, the paper makes clear that while customer identification procedures are
needed, they should not be so restrictive as to deny banking services to people who
are financially or socially disadvantaged – and the same for ongoing monitoring. A
second concern related to the clause requiring banks to backdate their customer
identification procedures to existing clients. This could be very burdensome for
banks serving small retail customers. Although there is still in the final version a
requirement to undertake regular reviews of existing records and to monitor the
activities of long-standing clients, there is now no obligation for banks to demand
customer identity documentation from existing customers.
So what has all this to do with the fight against terrorist financing? Well, first, the
bank needs to know who its customers are if it is to be able to respond to requests
from law-enforcement or intelligence authorities concerning accounts in the names
of known terrorists or terrorist organizations. By definition, however, terrorists may
be reluctant (and that reluctance is likely to be greater in the future) to open an
account under their true names. They will thus try to hide behind anonymous
accounts or ‘fronts’ making use of trusts, charities, nominees, corporate vehicles,
profession intermediaries, and so on. The CDD paper gives clear guidance to banks
on how to prevent such fronts from being used by criminals, including of course
terrorists. This is a complex area in practice, but the principle itself is clear: the bank
must make every effort to establish the beneficial owner(s) of all accounts and
persons who conduct regular business with it.
2
Customer Due Diligence for Banks, January 2001. Although the document was targeted at
banks, it expresses the view that similar guidance needs to be developed for all non-bank
financial institutions.
44 Charles Freeland
The key to preventing terrorists from using banks has to be in the initial customer
identification process. Once an account is open, it will rarely be feasible for a bank to
identify unusual account activity by a terrorist. The patterns of account activity by
the Al-Qaeda perpetrators of the 11 September tragedy are by no means abnormal
for a person with an irregular source of income such as a consultant, or a student
with occasional parental support. Account profiling is therefore unlikely to identify a
terrorist customer. What would of course help would be a tip-off from another
source, maybe an intelligence source, or the observation by an alert staff member
that the customer's behaviour is suspicious. Another pointer could be that the origin
or destination of funds is a terrorist organization. However, one cannot expect banks
to monitor every transaction of what would likely be classified as a low-risk
customer. What one can do, and what the BCBS’s CDD paper does, is to insist that
banks maintain account and transaction records for at least five years so that the
audit trail can be followed and the origins or source of funds followed if required.
The BCBS paper lays down clear guidelines for customer acceptance and
customer identification procedures to be followed by banks in the opening of new
customer accounts. It advises individual supervisors to establish strict standards for
the documentation that should be required – and prohibits the use of anonymous
accounts. It does not specifically list the categories of documents that banks should
demand to see. There was an annex attached to the January consultative paper that
gave examples of the types of documentation that could be admitted. However, the
working group excluded this from the final October version because it felt that more
attention was needed to the issue. It is now planning to provide more detailed
guidance on customer identification procedures in due course, and to use that
opportunity to update the October paper with any further guidance on CDD that
has emerged from consultations in other bodies. To take one example, the FATF
and the Wolfsberg Group have made certain proposals for the completion of the
field for the originator‘s name in the transmission of wire transfers. The BCBS will
probably want to establish a best practice guideline for that issue in due course.
Nobody should be under any illusions that conducting customer due diligence is a
simple task – it is one that is full of contradictions. The culture of banking is
engrained in the desire to attract customers and profit from providing banking
services. As with retailers selling products that are not suitable for all, there needs to
be a highly-developed social conscience to prevent banking services falling into the
wrong hands. Ex post, it can be relatively easy to judge that a customer should not
have been accepted – ex ante, with the pressure on to welcome and even reward new
customers, the task is more challenging. There are behavioural differences to respect,
for example, in relation to well-heeled customers from other countries. The
compliance officer or risk manager in charge of customer due diligence will be in
constant conflict with the incentives provided to customer service units dedicated to
personal, private or offshore banking. There may also be conflicts of culture with
regard to what may or may not be regarded as acceptable behaviour by foreign
customers. This may go way beyond the bank – for example the UK is currently
grappling with the diplomatic ramifications of the freezing of an account linked to a
Qatari Minister who received ‘facilitation payments’ for a UK defence deal. The
UK’s Treasury and Home Offices are apparently in favour of the freeze, while the
Defence and Foreign Ministers oppose it. One can only sympathize with a bank that
gets involved in such a tug of war.
Fortunately, conflicts of this kind are not likely to arise with regard to terrorist
financing. However, there are other aspects that complicate the issue for the financial
sector. One of the difficulties in providing guidance to banks in the fight against
terrorism is to define what is a terrorist or a terrorist organization. There is often a
thin line between terrorists and freedom fighters and a good number of current and
recent Heads of State were once regarded as terrorists. The EU definition is more
subtle ‘persons who finance, plan, facilitate or commit terrorist acts’, and it goes on
to define a terrorist act. Nonetheless, it is a difficult issue on which the private sector
needs guidance from the authorities, and it is not guidance that the supervisors can
easily provide. Rather, the financial sector needs to receive information from police
and intelligence as to the terrorists and terrorist organizations on the ‘black list’. This
is even more true in the case of charities and foundations. Many innocent-sounding
organizations that may raise money from legitimate sympathizers who believe they
are contributing to a humanitarian cause have, in the past, been channelling at least
a portion of the funds they have raised to terrorist uses.
Much has been made by the media and by professional writers of the fact that
terrorism is different from money-laundering because it is the use of the funds that is
criminal not their source. However, it may be wrong to place too much emphasis on
this factor to explain why banks are unable to identify customers engaged in
terrorism. There has not, to the author’s knowledge, been a significant terrorist
organization to date that has funded itself wholly from legitimate means. Al-Qaeda
has been heavily involved in the marketing of drugs as well as other lesser crimes
such as credit card fraud. Terrorist organizations are certainly not beyond robberies,
kidnapping, extortion, and so on as a means of financing their illegal activities.
Building and maintaining an effective terrorist organization costs a great deal of
money – in the case of Al-Qaeda hundreds of millions. Hence, successfully denying
all criminals access to the financial system will hit the terrorists too. What may be
more challenging will be the identification of charities and other fund-raising
organizations that support terrorism. Many of the contributors to what are usually
set up with innocent sounding titles may not be aware that their money is being
channelled into a terrorist organization.
One concern that arises in the present hunt for Al-Qaeda money is that the terrorists
will turn increasingly to parallel underground banking systems. Attention has been
focused on the Hawala system – but it is by no means the only one for money
transmission. Western Union type transfer systems, travellers cheques, even credit cards
can be an effective means of financing individual terrorists if not whole terrorist cells.
Much has also been made of the need to crack down on correspondent banking
relations. Effectively, a respondent bank is relying on its correspondent to have
conducted due diligence of each of its customers, because there is no way the
respondent bank can monitor the probity of all transactions originating from sources
46 Charles Freeland
that it does not know. The principles enacted in the USA PATRIOT Act prohibiting a
bank from maintaining a correspondent relationship with a bank located in a ‘non-
cooperative’ jurisdiction appears to be a sound – if not necessarily watertight –
precaution. But there is a risk that countries without developed banking systems, whose
banks need their correspondent relationships to link with the principal world markets
or whose (innocent) citizens are active users of Hawala to transmit funds abroad, may
be harshly penalized through no fault of their own. Indeed, there are countries, such as
Somalia, that have no banking infrastructure and whose banking system is based
entirely on Hawala-type relationships. The BCBS paper does not go so far as to ban
correspondent banking relationships (except with so-called ‘shell banks’). But it says
that banks must decide whether they can rely on a correspondent to conduct adequate
due diligence of its customers in the same manner as an introducer3 – and hence it must
apply the criteria that are laid down for eligible introducers in determining whether to
enter into or to sustain a correspondent relationship.
It is a legitimate question to ask what the BCBS itself has been doing since 11
September to support the anti-terrorism efforts of the US government and others.
First, it accelerated the issue of its CDD paper and, in doing so, took pains to ensure
that it represents a response to the newly-identified threat (though, in truth, few
changes were made to the document). Second, the BCBS’s Secretariat has been
assisting the authorities in the transmission of the US ‘Control List’ of suspected
terrorists to banks in the major countries. It has not been creating the list directly,
but has acted as a conduit in taking the initial US list, adding additional names
identified by non-US authorities and circulating a consolidated list to the authorities
that make up its members. Those authorities have then passed on the list at their
discretion to the financial institutions within their jurisdictions. The lists were also
made available via the European Central Bank to countries in the European Union
that are not members of the Basel Committee. Not all supervisors have been
enthusiastic about this process – some have expressed doubt about the accuracy and
comprehensiveness of the list, and have voiced fears that circulating lists will create
complacency among banks about customers that do not appear on the list.
An important issue in this context and one that is of considerable interest to the
working group on cross-border banking is the extent to which the monitoring of
customer due diligence needs to be applied on a global basis. The four risks identified
in the CDD paper apply to a bank wherever it is operating – certainly to its overseas
branches and very probably to subsidiaries under its effective control. There is a
section in the paper that addresses the need for banks to be able to implement the
CDD standards imposed by their home-country regulator on a global basis, and for
home-country supervisors to be able to ensure that the standards are being adequately
applied through on-site examination on equivalent verification procedures.
3
An introducer is an entity that channels suitable customers to a bank. In some countries,
this is a regular and frequent source of new customers. The BCBS paper sets out strict
criteria for the acceptability of introducers.
Since the Control Lists began to circulate, this debate has become more pertinent
because it has raised questions about a bank’s ability to respond on behalf not only
of its head office and domestic banking network, but also of its offices abroad. Some
banks seek to ensure that they maintain a centralized customer database – if only to
save on IT costs – and hence are in a position to ‘search’ for identified customer
names across their global customer base. Some do not make that attempt – and, even
if they do, there will be individual units which for various reasons may not wish their
own customer base to be accessible from the head office. Others may use a numbered
account system to disguise the names of, say, their private banking clients in offshore
centres or their high net-worth clients in a private banking centre such as
Switzerland. It is clear, however, if a CDD principle is to be effective, that a bank
should be in a position to respond to an official request as to whether it has the
account of a named customer in any of the locations in which it operates. This means
that its offices abroad must be capable of responding to enquiries from head office
about named account holders. In the specific case of the Control List, many banks
have circulated the List to their offices abroad and asked for notification of any
matches. This means that the Lists have reached some outlying countries whose
supervisors/central banks have not received them.
Another issue relates to the ‘search’ capability. One of the lessons learnt since the
Control Lists have been circulating is that, while all banks would normally have their
account-holders in an electronically searchable form, relatively few banks have the
beneficial owners so recorded. It seems that many banks have the supporting
documentation to identify the recorded beneficial owner separately from their
principal customer base. Hence a search of the Control List can be extremely time-
consuming if banks are to search, as they should do, the beneficial owners of
accounts that they hold.
There is also a question about the means by which banks should react with respect
to matches with the Control Lists. This involves the legal area, because in most cases
some form of confidentiality legislation will apply and any exchange of information
will be subject to treaties or Memoranda of Understanding (MOUs). Where there
are suspicious transaction reporting rules and Financial Intelligence Units (FIUs) to
which suspicions can be reported, the gateway would seem to be clear-cut. However,
some FIUs may not have the powers to communicate directly with FIUs in other
countries, such as FINCEN in the United States. It may, in such cases, be more
efficient if the banks respond to their own supervisor, who can communicate
suspicions to the Federal Reserve Bank of New York. This channel may also be
required in the case of countries which have not yet established FIUs (though these
are becoming fewer). However, as a general rule, the supervisory information
channel is not well suited to suspicious transaction reporting, since it is designed for
the communication of problems concerning the bank’s own activities and is often
subject to a series of criteria designed to protect the confidentiality of any
information transmitted concerning individual customers and accounts. As often in
the case of information-sharing, the most sensitive issue, as mentioned earlier, is the
matter of tax confidentiality and the need to protect information about customer
48 Charles Freeland
accounts from being passed to home-country authorities. But that protection can, at
the same time, inhibit the bank supervisor from passing information to other official
bodies, such as the FIU.
The author’s view on the prospects for success in the fight against terrorist financing
is that co-operation is needed on an unprecedented scale, not only between the private
and public sectors, but within the public sector too. It is no secret that different official
entities within the United States had information which, if pooled, would have alerted
them to the 11 September terrorist attacks. Such information was not shared with
others who could have added to it, partly for reasons of professional jealousy between
the different agencies. Now, in the United States and elsewhere there is unprecedented
collaboration at the official level with at least two major US inter-agency task forces.
This effort is leading to intelligence successes, which have thankfully, at the time of
writing at least, contributed to the absence of further terrorist events, though there have
been some close calls. But, at the financial level, it seems that success has been more
limited. While some quite substantial sums have apparently been frozen, many of the
audit trails have petered out in impenetrable areas in the Middle East or in financial
centres, often at a high political level. It is not surprising that the financial trail is not a
simple one – Osama bin Laden reputedly went to Afghanistan originally to advise the
Taliban on the best means of marketing and laundering the proceeds of their opium
crops. He is known to operate a sophisticated financial machine and to have associates
well versed in underground banking methods.
In the future, it is going to be even more difficult to identify or to track the
financing of terrorism, for the perpetrators have now been warned. Only so much
can be done by the private sector – it needs to develop closer links with and receive
tip-offs from the public sector on an ongoing basis. It has been said that customer
privacy will not be the same again after 11 September, and this trend is being
reinforced by initiatives by the OECD and others to increase fiscal transparency and
force offshore financial centres to adopt stricter prudential and disclosure standards.
Banks must certainly remain alert to terrorism – just as they must remain alert to all
forms of criminal activity by their customers – but they can only supplement the
efforts being made by the intelligence and police authorities, and not substitute for
them. If there is to be real coordination, the public sector needs to share information
more readily with the private sector than it has traditionally been willing to so. It has
in the past been very much a one-way information flow and banks making
Suspicious Transaction Reports (STRs) to FIUs have often wondered whether they
have ever been investigated. The sharing of Control Lists with the financial
institutions is an encouraging sign that the public sector is willing to be more open,
and appreciates that it needs assistance from the banks and other financial
institutions if it is to defend properly its people against these terrible threats.
It is necessary, though, to close on a sombre note. Banks and bank supervisors
have rarely faced a responsibility as grave as they do now. Failing to conduct due
diligence in present circumstances could have deadly consequences, putting
thousands or conceivably hundreds of thousands of lives at risk. There is no place
to hide on this issue.
Financing of Terrorism –
A Predicate Offence to Money Laundering?
Armand Kersten
1. Introduction
On 30 October 2001, the Financial Action Task Force on Money Laundering

(FATF) agreed to a set of Special Recommendations on Terrorist Financing.1
Recommendation II provides:
‘Each country should criminalise the financing of terrorism, terrorist acts and
terrorist organisations. Countries should ensure that such offences are designated as
money laundering predicate offences.’ (emphasis added, AJK)
These Special Recommendations were agreed upon at a FATF ‘extraordinary
Plenary’, at which the FATF extended its mission beyond money laundering. 2
The 11 September 2001 attacks on America triggered drastic legislation aimed at
suppressing the financing of terrorism, 3 appearing to depart from the legal
apparatus, classically used in the fight against money laundering. For instance, the
significant part of the USA PATRIOT Act package is the International Money
Laundering Abatement and Anti-Terrorist Financing Act of 2001. In the Act, the
American Congress finds that money laundering permits transnational criminal
enterprises to conduct and expand their operations to the detriment and safety of
American citizens, and that money launderers subvert legitimate financial mechanisms
and banking relationships by using them as protective covering for the movement of
criminal proceeds and the financing of crime and terrorism.
By making a brief tour d’horizon of relevant source materials from international
(institutional) organizations, this paper shall address whether, from a methodolo-
1
FATF news release of 31 October 2001, FATF cracks down on Terrorist Financing
(available on the web at <http://wwwl.oecd.org/fatf/TerFinance_en.htm)>.
2
See the news release mentioned in ibid.
3
Two of the highest profile laws in this category being the Uniting and Strengthening
America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism
Act of 2001 (‘the USA PATRIOT ACT’) and the UK Anti-Terrorism, Crime and Security
Act 2001.

49
50 Armand Kersten
gical perspective, it makes sense to legislate to suppress financing of terrorism on the

basis of analogies with money laundering.
2. Money laundering
Whilst the United Nations Convention against illicit traffic in narcotic drugs and
psychotropic substances of 19 December 1988 (‘the Vienna Convention’) created
momentum for the attention to money laundering as a global phenomenon,4 it only
required the prohibition of the ‘laundering’ of drug proceeds.5 Note that the FATF,
in its initial 40 Recommendations of 19906 took the‘definition’ of money laundering
from the Vienna Convention.
The Council of Europe7 Convention on Laundering, Search, Seizure and
Confiscation of the Proceeds from Crime of 8 November 1990 (the Strasbourg
Convention), takes this a step further, by giving its Article 6 the title: ‘Laundering
offences’. Whilst repeating constituent elements already contained in the Vienna
Convention, it widens the circle of ‘predicate offences’ beyond drug trafficking. In so
far as is relevant for the purposes of this article, it provides that the parties must
establish as offences under their domestic laws:
a. the conversion or transfer of property, knowing that such property is
proceeds, for the purpose of concealing or disguising the illicit origin of the
property or of assisting any person who is involved in the commission of the
predicate offence to evade the legal consequences of his actions;
b. the concealment or disguise of the true nature, source, location, disposition,
movement, rights with respect to or ownership of property, knowing that
such property is proceeds and subject to its constitutional principles and the
basic concepts of its legal system;
c. the acquisition, possession or use of property, knowing, at the time of receipt,
that such property was proceeds. (emphasis added)
4
The term ‘money laundering’ as such seems to have been introduced in the US Money
Laundering Control Act of 1986.
5
It is noted that the Vienna Convention does not explicitly refer to (the term) money
laundering.
6
Later in this article, it will be seen that the 1996 revision aimed at widening the scope.
7
The Council of Europe should not be mistaken with the European Council. The Council of
Europe is an international institutional organization, whereas the European Council is an
organ of the European Union.
8
Available on the web at <http://conventions.coe.int/treaty/en/Treaties/Html/141.htm> .
Financing of Terrorism – A Predicate Offence to Money Laundering? 51
The Strasbourg Convention defines ‘proceeds’ as: any economic advantage from
criminal offences.9 It goes on to define ‘predicate offence’ as: any criminal offence
as a result of which proceeds were generated that may become the subject of an
offence as defined in the ‘laundering article’.10 This yields an entirely open-ended
range of predicate offences, hinging on the definition of ‘proceeds’ as any
economic advantage from criminal offences. Perhaps the only limitation is hidden in
the fact that it is left to the Member States to incorporate the convention’s
requirements in their domestic criminal laws, which leaves them discretion to draw
the circle themselves.
The Commission of the European Communities labelled the methodology of the
Strasbourg Convention: ‘an approach to combating the laundering of the proceeds of a
wider range of criminal offences than required by the Vienna Convention’ (emphasis
added).11
I now turn to the European Union (and the European Communities) itself. The
Council of the European Communities Directive of 10 June 1991 on prevention of
the financial system for the purpose of money laundering 12 provides:
‘Whereas for the purposes of this Directive the definition of money laundering is
taken from that adopted in the Vienna Convention; whereas, however, since
money laundering occurs not only in relation to the proceeds of drug-related
offences but also in relation to the proceeds of other criminal activities (such as
organized crime and terrorism), the Member States should, within the meaning of
their legislation, extend the effects of the Directive to include the proceeds of such
activities, to the extent that they are likely to result in laundering operations
justifying sanctions on that basis.’ (emphasis added)
The 1991 Convention thus envisages and recognizes that terrorism is a criminal
activity potentially resulting in proceeds in relation to which money laundering may
occur. From a logical perspective, however, it seems that this approach presumes the
criminal activity preceding the laundering of the proceeds.
In 1996, the FATF strengthened its 4th Recommendation to state that ‘each
country should extend the offence of drug money laundering to one based on serious
offences’, done so as to extend the ambit of the predicate offences beyond that of the
Vienna Convention.
9
Article 1, sub a.
10
Article 1, sub e.
11
Commission of the European Communities, Proposal for a European Parliament and
Council Directive, amending Council Directive 91/308/EEC of 10 June 1991 on prevention
of the use of the financial system for the purpose of money laundering, Brussels, 14 July
1999, COM (1999) 352 final, explanatory memorandum.
12
OJ 1991 L 166, p 77 et seq.
52 Armand Kersten
In 1998, under the auspices of the UN Office for Drug Control and Crime
Prevention,13 the report Financial Havens, Banking Secrecy and Money Laundering 14
was published. Under the header ‘issues for consideration’, this report addresses
‘predicate offences’15:
‘The time may have come to end the artificial division of criminal money into
categories depending on the nature of the crime. . . . One possible approach would
be to have member countries agree that any funds that are derived through
criminal activity are funds that can give rise to a charge of money-laundering.’
From the context of the report, it can be inferred that the term ‘artificial division’ is
used to point to distinctions sometimes made between criminal tax offences and tax
offences classified otherwise.
On 9 December 1999 the General Assembly of the UN adopted the International
Convention for the Suppression of the Financing of Terrorism. 16 Article 2 provides,
in so far as is relevant here:
‘1 Any person commits an offence within the meaning of this Convention if that
person by any means, directly or indirectly, unlawfully and wilfully, provides
or collects funds with the intention that they should be used or in the
knowledge that they are to be used, in full or in part, in order to carry out:
[...]
(b) Any other act [subparagraph (a) refers to acts constituting offences
under a list of treaties] intended to cause death or serious bodily injury
to a civilian, or to any other person not taking an active part in the
hostilities in a situation of armed conflict, when the purpose of such act,
by its nature or context, is to intimidate a population, or to compel a
government or an international organization to do so or to abstain from
doing any act.
[...]
3. For an act to constitute an offence set forth in paragraph 1, it shall not be
necessary that the funds were actually used to carry out an offence referred to
in paragraph 1, subparagraphs (a) or (b).
4. Any person also commits an offence if that person attempts to commit an
offence as set forth in paragraph 1 of this article.’ (parentheses added)
Article 1 paragraph 3 defines ‘proceeds’ as: any funds derived from or obtained,
directly or indirectly, through the commission of an offence set forth in Article 2.
13
Based in Vienna, this office created the UN Global Programme against Money Laundering
(GPML) and the GPML Forum. See the website mentioned in footnote 14.
14
Available on the web at <http://odccp.org/publications.html> .
15
At pages 73 and 74
16
Available on the web at <http://untreaty.un.org/English/Terrorism/Conv12pdf> – entry
into force was 10 April 2002.
In its Article 8, the Convention refers to ‘proceeds’ by providing, in so far as is

relevant here:
‘1. Each State Party shall take appropriate measures, in accordance with its
domestic legal principles, for the identification, detection and freezing or
seizure of any funds used or allocated for the purpose of committing the
offences set forth in article 2 as well as the proceeds derived from such offences,
for purposes of possible forfeiture.
2. Each State Party shall take appropriate measures, in accordance with its
domestic legal principles, for the forfeiture of funds used or allocated for the
purpose of committing the offences set forth in article 2 and the proceeds
derived from such offences.’ (emphasis added).
The Convention does not make any explicit reference to money laundering. The
closest it comes to an analogy (if it is one) is in Article 18, which provides:
‘1. States parties shall co-operate by adapting their domestic legislation, including:
[...]
(b) Measures requiring financial institutions and other professions involved
in financial transactions to utilize the most efficient measures available
for the identification of their usual or occasional customers in whose
interest accounts are opened, and to pay special attention to unusual or
suspicious transactions and report transactions suspected of stemming
from a criminal activity. For this purpose, States Parties shall consider:
[...]
iii) Adopting regulations imposing on financial institutions the obligation
to report promptly to the competent authorities all complex, unusual
large transactions and unusual patterns of transactions, which have no
apparent economic or obviously lawful purpose, without fear of
assuming criminal or civil liability for breach of any restriction on
disclosure of information if they report their suspicions in good faith.’
Thus, for instance, proceeds arising, by whatever means, directly or indirectly,
unlawfully and wilfully, from collecting funds with the intention that they should be
used or in the knowledge that they will be used, in full or in part, to carry out a
terrorist act are within the scope of the convention. It is not clear how the required
element of ‘unlawfulness’ must be related to the collection of funds. It is clearly
possible that the method used for collecting funds is not unlawful as such.
On 15 November 2000, the UN General Assembly adopted the United Nations
Convention against Transnational Organized Crime.17 This Convention is intended
to close the major loopholes blocking international efforts to crack down on those
engaging in illegal activities ranging from money laundering to trafficking in human
beings.
17
Available on the web at <http://www.odccp.org/palermo/convmain >.
54 Armand Kersten
The Convention contains definitions of a wide range of terms. Thus, for instance,
it defines ‘serious crime’ as: ‘conduct constituting an offence punishable by a
maximum deprivation of liberty of at least four years or a more serious penalty.’ 18
Article 6 of the new Convention addresses the ‘Criminalization of the laundering
of proceeds of crime’.19 The ‘definition’ of money laundering itself is extended quite a
bit further than that in the Vienna Convention of 1988. Notably, in this Article 6, the
new Convention provides:
‘Each State Party shall seek to apply its definition of money laundering to the
widest range of predicate offences;
Each State Party shall include as predicate offences all serious crime as defined in
article 2 of this Convention . . . ’ (parentheses and emphasis added).
It should be added that the new Convention explicitly provides for a so-called dual
criminality test.20
Hence, the UN seeks to use and define ‘serious crime’, as well as ‘organized
crime’. We are approaching the point of an ‘all crimes’ ambit of predicate offences.
This brings one back to the EU.
On 4 December 2001, the European Parliament and the Council of the European
Union adopted the second money laundering prevention directive. 21
Both the EU Council of Ministers and the European Parliament had called for
additional measures to enhance the 1991 EU anti-money laundering Directive. 22 On
14 July 1999, the EU Commission presented its proposal23 (the Proposal). The main
changes to the 1991 Directive are a widening of the prohibition of money laundering
to embrace not only drugs trafficking but also all organized crime, and an extension
of the obligations of the Directive to certain non-financial activities and professions.
It is this ‘widening’ of the prohibition of money laundering that shall now be the
focus of the rest of this paper. The explanatory memorandum expresses it thus:
18
Art. 2(b).
19
Thus, this Convention makes an explicit reference to the term ‘money laundering’; contrast
the absence of such reference in the Vienna Convention of 1988, as was noted supra.
20
Thus, offences committed outside the jurisdiction of a party constitute predicate offences
only when the relevant conduct is a criminal offence under the domestic law of the country
where it is committed and would be a criminal offence under the domestic law of the party
applying the Convention, had it been committed in that party’s jurisdiction, viz. Art.
6(2)(c).
21
Directive 2001/97/EC of the European Parliament and of the Council of 4 December 2001
amending Council Directive 91/308/EEC on prevention of the use of the financial system
for the purpose of money laundering, OJ 2001 L 344, p 76 et seq, available on the web at
<http://europa.eu.int/eur-lex/pri/en>.
22
See, supra, note 12
23
Commission of the European Communities, Proposal for a European Parliament and
Council Directive, amending Council Directive 91/308/EEC of 10 June 1991 on prevention
of the use of the financial system for the purpose of money laundering, Brussels, 14 July
1999, COM (1999) 352 final.
‘The 1991 Directive only requires the prohibition of the laundering of drugs
proceeds, as required by the Vienna Convention, but encourages Member States
to apply the approach of the Strasbourg Convention,24 namely of combating the
laundering of the proceeds of a wider range of criminal offences (often referred to
as ‘predicate offences’).
The FATF strengthened its relevant recommendation in 1996 to state that ‘each
country should extend the offence of drug money laundering to one based on
serious offences’. This corresponds to a growing trend based on the dramatic
increase in non-drugs based organised crime and on the realisation that having a
wide range of predicate offences should improve suspicious transaction reporting
and above all facilitate international co-operation between judicial and police
authorities in different countries.’ [parentheses and emphasis added]
As to the concrete question whether it would also be appropriate to base the
prohibition of money laundering contained in the (updated) Directive on the same
concept of ‘serious offences’ as in the Strasbourg Convention, 25 the Commission
interestingly distinguishes between, on the one hand, the criminal law treatment of
money laundering (i.e., the definition of the crime of money laundering) and, on the
other hand, the specific obligation to report suspicions of money laundering as
imposed upon the financial sector. It stresses that the Directive addresses the
obligations of reporting.
The Commission then writes:
‘The anti-money laundering defences thus depend to a large extent on the
goodwill and efforts of, in particular, the financial sector. The financial sector has
expressed considerable reticence concerning any reporting requirement that would
extend to an excessively wide range of offences, even including relatively minor
ones.’
Which leads the Commission to conclude:
‘The Commission has concluded that for the purposes of the Directive, and its
extension to certain non-financial activities, a reporting obligation based on
serious offences might be too broad. The Commission is therefore proposing that
the reporting obligation under the Directive should be based on activities linked
to organised crime or damaging the European Communities financial interests.’
(emphasis added)
Concretely then, the Proposal now defines ‘criminal activity’ as encompassing
‘participation in activities linked to organised crime’, and ‘fraud, corruption or any
other illegal activity damaging or likely to damage the European Communities’
financial interests’.26
24
See, supra, note 8.
25
See, supra, note 8.
26
Proposal, Article 1(E).
56 Armand Kersten
For the Directive, the Commission has knowingly thrown out ‘serious offences’,
and opted instead for: ‘organised crime’. In the Proposal, ‘organised crime’ means
exactly what it says: ‘involvement of an organised crime group’.27 This clear choice
was made in the face of the noticeable ‘trend’ among the EU Member States to
extend their domestic legislation to outlaw the laundering of the proceeds from a
wide range of ‘serious crime’.28
Conclusion
Where does all this lead? One thing is clear: Money laundering and financing of
terrorism are two completely different concepts. As is implied by the term
‘laundering’, its intent and purpose are to have moneys, derived from crime, assume
an apparent legal role in the financial system without this being known to the bona
fide participants in the financial system. Logically, this presumes the criminal offence
preceding the laundering. Ultimately, if the laundering succeeds, it is instrumental in
having those taking an interest in the crime enjoy its financial benefits.
Money launderers will seek to hide the funds and their origin from detection.
Surely, those contemplating to finance terrorism will strive to hide the funds and
their origin devoted to their cause from detection, too. This may well mean that they
resort to similar techniques to those used by money launderers. It is precisely here
that the strongest analogy between the two phenomena can be seen.
Where financing of terrorism is concerned, possibly no criminal offence preceded
the introduction of the funds in the financial system. Of course, there will be criminal
intent, but it makes no sense to construe the funds used to promote the cause as the
‘proceeds’ of that criminal intent.
Arguably, money laundering, to some extent, engenders the predicate offences.
Clearly, few would commit predicate offences if they did not perceive an opportunity
to ultimately derive the monetary benefit therefrom. Money laundering, however,
does not occur so as to bring about, or facilitate the criminal offence itself (although,
of course, some proceeds may be used to finance criminal operations).
It is suggested that it makes no sense to designate the financing of terrorism as a
money laundering predicate offence. Rather, it should be recognized and
distinguished as a separate category. This is not to say that, in legislating for the
consequences of cases involving the financing of terrorism, one should not draw
upon inferences taken and developed from the classical money laundering apparatus.
27
Proposal, explanatory memorandum, p. 7.
28
See European Commission, Second Commission Report to the European Parliament and the
Council on the implementation of the Money Laundering Directive, XV/1116/97-rev.2 – En,
III, 2
Obstacles in Company Law to Anti-Money
Laundering International Co-Operation in
European Union Member States
Ernesto U. Savona
1. Introduction
The misuse of corporate vehicles or entities or structures for money laundering

purposes has come to the attention of international organizations and the general
public together with the issue of offshore countries. In 2000, Transcrime’s Euroshore
report pointed out the ‘domino effect’ of company law on other laws and regulations
such as criminal, administrative and banking. 1 Depending on the type of regulation,
company law makes a financial system more transparent (or more opaque), thereby
influencing other sectors of regulation and the effectiveness of police and judicial co-
operation. If company law seeks to maximize anonymity in financial transactions by
facilitating the creation of shell or shelf companies whose owners remain largely
unknown (because other companies own them), such anonymity could be transferred
to other sectors of the law (criminal, banking, tax). Therefore, the names of the real
beneficial owners or beneficiaries of financial transactions remain obscured,
thwarting criminal investigation and prosecution. This conclusion has produced
two consequences. The first is the need for a better understanding of the role played
by legal and non-legal structures in facilitating crimes. Furthermore, given that the
conclusions of the Euroshore report are addressed to European Union Member
States, the second need is to better understand which regulation and/or insufficient/
absent implementation of regulation, where it exists, obstruct anti-money laundering
international co-operation.2
1
‘Euroshore – Protecting the EU Financial System from the exploitation of Financial
Centres and Off-shore facilities by Organised Crime’ (Trento Transcrime-University of
Trento 2000) at p. 16 (Final Report prepared for the European Commission, Falcone
Programme 1998).
2
The first case is dealt with in the ‘OECD Report on the Misuse of Corporate Vehicles for
Illicit Purposes, which covers offshore and onshore jurisdictions’ 9 May 2001; the second
case dealt with in this Report initiated in 2001 (contract JHA b/2000/B2 of 25 January

57
58 Ernesto U. Savona
The Tampere European Council of October 1999, in agreement with the

conclusions of the Euroshore report, considered the role of corporate law to be
important and in Recommendation 58 it invited the European Commission ‘to draw
up a report identifying provisions in national banking, financial and corporate
legislation which obstruct international co-operation. The Council is invited to draw
necessary conclusions on the basis of this report’. As a consequence the European
Commission launched a tender (JHA B/2000/B2/01 of 20 July 2000) and in January
2001 Transcrime at the University of Trento was awarded the Study of the regulation
and its implementation, in EU Member States, that obstruct anti-money laundering
international co-operation (banking/financial and corporate/company regulative
fields). The Report ‘Transparency and Money Laundering’ is the result of this
study and was presented by the European Commission at the Jumbo Council of 16
October 2001, one month after the events of 11 September.3 The report does not
mention terrorism, but the financial investigations for tracing and stopping the
financing of terrorist groups have always come up against the wall of opacity erected
by the corporations that deal with the financial transactions of criminals. Terrorists
make use of the same instruments as other criminals for their laundering purposes.
The aim of this article is to contribute to the understanding of how corporate law
could affect the opacity/transparency of a financial system. It presents, in an
abridged version, the second part of the report which covers corporate/company4
regulation. In this field the report covers ‘legal and non-legal structures’ that are
susceptible to being used in EU Member States in money-laundering operations.
Before moving on to the analysis some definitions are necessary:
Legal and non-legal ‘structure’ is defined as an ‘organization with an economic
or patrimonial vocation’;5
‘Regulation’ is defined as ‘the whole group of those laws and provisions in the
corporate/company regulative fields relevant to anti-money laundering
international co-operation’. In fact, the existence of a legal provision could
increase, either directly or indirectly, the effectiveness of the performance of
law enforcement, judiciary and financial authorities in the investigation of
money-laundering cases. First, it may be carried out directly by encouraging
active collaboration in supplying information relevant to criminal investiga-
Cont
2001) the main aim of which is to highlight, in EU Member States, those regulations and or
implementations thereof that – in the banking/financial and corporate/company fields –
constitute obstacles to anti-money laundering co-operation.
3
The research carried for the production of the main report was directed by the author, co-
ordinated by Sabrina Adamoli with the co-operation of Andrea Di Nicola and Alessandro
Scartezzini, all researchers at Transcrime-University of Trento. Eddy Wymeersch professor
in Ghent (Belgium) acted as general consultant
4
The first part of the report refers to the banking/financial field. This part has been excluded
from this article.
5
The term ‘patrimonial’ is intended as meaning ‘relating to somebody’s estate’.
Obstacles in Company Law to Anti-Money Laundering 59
tions, and secondly, it may be carried out indirectly by increasing the

transparency of a financial system through mechanisms identifying the subjects
involved in their operations;
Two types of obstacles are identified:
‘Obstacles to regulation’ preventing international co-operation in anti-money
laundering activities are defined as ‘the lack of regulation’. They are explained
by the variable ‘existence of regulation’ (R), The answers follow two
modalities: yes or no.
‘Obstacles to the implementation of regulation’ inhibiting international co-
operation in enacting measures against money laundering are defined as ‘the
incomplete/absent implementation of regulation’. They are explained by the
variables: a) existence of structures which enable the implementation (I)
(modalities: fully implemented, partially implemented, not implemented); b)
existence of controls for the implementation (C) (modalities: yes/no); c)
existence of sanctions against non-compliance (S) (modalities: serious sanction,
lenient sanction, no sanction).
2. Main assumption
The main assumption is that the less regulation there is at a national level in the
corporate/company regulative field, and the lower the implementation of the
regulation under consideration, where it exists, the greater the obstacles to anti-
money laundering international co-operation. That means that in order to remove
these obstacles, countries should be called upon to change their regulation in the
field.
Following this assumption, this article intends to answer the following questions:
1. What regulation and/or implementation thereof, in the corporate/company
regulative field, create obstacles to international co-operation between EU
Member States to prevent money-laundering?
2. What is the dimension of the obstacles in these fields?
The following steps have been followed:
analysis of the regulation in order to identify which of the specified transparency
variables involved in international co-operation for the prevention of money
laundering are lacking;
analysis of the implementation of regulation in the corporate/company regulative
fields in order to identify which of the transparency variables involved in
international co-operation for the prevention of money laundering specified
in 1) are lacking;
evaluation of the results of the two analyses of 1) and 2) in order to identify,
quantify and cross-compare obstacles to international co-operation between

EU Member States for the prevention of money laundering.
3. Methodology and data collection procedures
In order to identify the transparency variables and obstacles involved in

international co-operation for the prevention of money laundering in regulation
and/or in its implementation, primary and secondary sources were used:6
the primary sources were:
the replies to a questionnaire designed to select the legal and non-legal
structures susceptible to being used in money-laundering operations. This
questionnaire was sent to experts in the financial police units and the
Financial Intelligence Units of the fifteen EU Member States;
the replies to a questionnaire designed to study the regulation and its
implementation in the corporate/company regulative field and sent to
company law experts (professors and auditors), and to members of the
IOSCO, in EU Member States.7
secondary sources consisted of a variety of both published and unpublished
documents.8 These sources were utilized for the selection of the transparency
variables subsequently used in the analysis.
6
Given the complexity of the identified transparency variables, and the necessity to gather
information regarding the implementation of regulation in EU Member States, in
collecting information, preference was given to the answers of the experts to the
questionnaires submitted to them. The criteria used for the choice in case of differing
answers by experts of the same country to the same question is explained on page 144 of the
methodological appendix to the report.
7
The list of experts contacted can be found in the acknowledgements at the beginning of the
main report. As the results are based on their answers to the submitted questionnaires,
some degree of error is due to the opinions expressed by the experts on single transparency
variables. The criteria used for the choice in case of differing answers by experts of the same
country to the same question is explained in the methodological appendix.
8
‘Report on the Misuse of Corporate Vehicles for Illicit Purposes’ (Paris OECD Steering
Group on Corporate Governance 2001); R. Thomas, Company Law in Europe (London
Butterworths 2001); Company Law in Europe: Recent Developments (mimeo) (Manchester
CLAB University of Manchester 1999); M.J. Oltmanns, European Company Structures
(London-The Hague-Boston Kluwer Law International 1998); ‘Prevention of Organised
Crime: The registration of legal persons and the international exchange of information’
final report (T.M.C. Asser Instituut 2000); Modern Company Law for a Competitive
Economy (mimeo) (London DTI London 1998); A.J. Oakley, The Modern Law of Trusts
(London Sweet and Maxwell 1998); A. Sydenham, Trusts (London Sweet and Maxwell
1997); M. Lupoi, Trusts (Milan Giuffrè Editore 1997); D.J. Hayton, Law Relating to Trusts
4. Analysis of the corporate/company regulative field
This section describes the model utilized to analyze data collected for the
corporate/company regulative field, and sets out the conclusions. The assumption
made here was that obstacles to international co-operation in response to money
laundering depend either on a lack of regulation in the regulative field considered,
or in the incomplete/absent implementation of the regulation where it exists. The
purpose of the model is to show where these obstacles are (in which EU Member
State, in which thematic area and at which level), to assess the dimensions of these
obstacles in order to cross-compare them at an EU level, and to propose remedies
that might remove them.
The following steps were taken in developing the model for identifying obstacles
to anti-money laundering international co-operation and assessing their dimen-
sions:
STEP 1: selection of the legal and non-legal structures susceptible to being
used in money laundering operations;
STEP 2: Identification of thematic areas and relative transparency variables;
STEP 3: Analysis of the regulation at the national level;
STEP 4: Analysis of the implementation of the regulation at the national
level;
STEP 5: Cross-comparative analysis of the results;
4.1 Selection of the legal and non-legal structures susceptible to being

used in money laundering operations
The first step of the Study was that of selecting the legal and non-legal structures
susceptible to being used in money laundering operations in EU Member States. A
questionnaire was drafted, starting with a list of legal and non-legal structures used
in an earlier study,9 and sent to a maximum of three experts from financial police
Cont.
and Trustees (London Butterworths 1995); F. Galgano, Diritto commerciale: le società
(Milano Zanichelli 1999/2000 ed.); The Opacity Index (Price Waterhouse-Coopers 2001)
available on the Internet at <http://www.opacityindex.com>, last visited on 1 June 2001.
9
‘Transparence des structures utilisées à des fins économiques et/ou patrimoniales:
Présentation succinte de la situation actuelle dans les Etats Membres, document de travail
des services de la Commission’ of 5 October 2000 EC DOC. 12088/00. The list was
comprised of the public limited company, the private limited company, the société de droit
civil and its equivalents in other EU Member States, the trust, the società fiduciaria, the
limited partnership on shares, the ordinary partnership, the limited partnership, the co-
operation, the association, the foundation, the association momentanée, the private limited
company with one shareholder, the unlimited company, the European Economic Interest
Grouping, the etablissement public, the association internationale, the groupement
complementaire d’entreprises, and the association en participation.
units and Financial Intelligence Units in the fifteen EU Member States. With the co-
operation of Europol, the experts were chosen from units which specifically deal with
economic crimes on the basis of their experience and knowledge of money laundering
investigations. The experts acted as a virtual panel to whom responsibility was given
for the selection of the structures susceptible to being used in money laundering
operations. 10
According to the results of this survey, the structures selected for further analysis
were divided into three groups.
Three structures were selected as most susceptible to being used in money
laundering operations by at least 30 per cent of the EU Member States. The
regulation and its implementation in relation to these structures were, therefore,
analyzed in all the EU Member States where they exist. They are:
the public limited company (reported as susceptible to being used in money
laundering operations in 40 per cent of EU Member States and existing in all
of them);
the private limited company (reported as susceptible to being used in money
laundering operations in 67 per cent of EU Member States and existing in all
of them);
the société de droit civil and its equivalent in other Member States (reported
as susceptible to being used in money laundering operations in 37.5 per cent
of the EU Member States where it exists).11
This article covers only the first two company structures, leaving the third to the
main report. Furthermore, the analysis covers the regulation of trusts, selected as
susceptible to being used in money-laundering operations by Ireland, and also
analyzed in the United Kingdom.
10
On the basis of their experience and knowledge of money laundering, experts were asked to
select which legal and non-legal structures are susceptible to being used in money-
laundering operations in their countries and to weigh up their involvement in such activities
using a scale. The structure was selected according to the evaluation of this panel.
11
For the remaining structures in the list, the regulation and its implementation were only
analyzed in the single countries where they were reported as susceptible to being used in
money-laundering operations. The following structures are not part of this article but are
analyzed in the main report:
trusts in Ireland and United Kingdom;
the società fiduciaria was analyzed in Italy, the only country where it exists;
the limited partnership on shares was analyzed in Belgium and Italy;
the ordinary partnership was analyzed in Ireland, the Netherlands and Sweden;
the limited partnership was analyzed in Sweden;
the co-operative was analyzed in Belgium;
the association was analyzed in Ireland and Sweden;
the foundation was analyzed in Austria and the Netherlands;
the association momentanée (unión temporal de empresas) was analyzed in Spain;
the single member private limited company was analyzed in the Netherlands, Spain and
United Kingdom.
4.2 Identification of thematic areas and transparency variables in

regulation and in its implementation
The second step of the Study was to identify thematic areas and related transparency
variables involved in the regulation and its implementation. The following thematic
areas 12 were selected because of their relevance to international co-operation for the
prevention of money laundering:
Incorporation;
Company activity;
Identification of the real beneficial owner.
For each thematic area a set of constitutive elements (called ‘transparency variables’),
involved in the regulation and in its implementation was identified. The existence of
each of these variables ensures greater transparency of the corporate/company
regulative field. The idea behind this choice is that, in order to prevent and to combat
money laundering both nationally and internationally, it is essential to guarantee the
transparency of the financial and corporate systems of the EU Member States. The
less transparent the national financial and corporate systems are, the less effective and
efficient international anti-money laundering regimes become. This is one of the
conclusions reached by the Euroshore Report,13 which states that corporate/company
law conditions the level of a financial system’s transparency/opacity. Depending on
the type of regulation, it generates greater/lower transparency of a financial system,
thereby influencing the other sectors of regulation and conditioning the effectiveness
of international police and judicial co-operation.
Three thematic areas and the relative transparency variables were identified in
discussions with company law experts, who advised and co-operated throughout the
development of this Study, supplemented by the existing literature on this topic and
by the content of the existing European Union instruments. 14
12
Their relevance for anti-money laundering international co-operation is explained in
sections from 4.2.1 to 4.2.3 of the main report.
13
Transcrime – University of Trento, in co-operation with CERTI – Bocconi University
(Milan, Italy) and Erasmus University of Rotterdam (The Netherlands), Euroshore;
‘Protecting the EU Financial System from the Exploitation of Financial Centres and Off-
Shore Facilities by Organised Crime, Final Report Prepared for the European
Commission’ (Trento Falcone Programme 1998, January 2000) at pp. 75–77.
14
The most relevant in this context are: First Council Directive 68/151/EEC of 9 March 1968
on co-ordination of safeguards which, for the protection of the interests of members and
others, are required by Member States of companies within the meaning of the second
paragraph of Article 58 of the Treaty, with a view to making such safeguards equivalent
throughout the Community, OJ 1968 L 65/8; Second Council Directive 77/91/EEC of 13
December 1976 on co-ordination of safeguards which, for the protection of the interests of
members and others, are required by Member States of companies within the meaning of
the second paragraph of Article 58 of the Treaty, in respect of the formation of public
limited liability companies and the maintenance and alteration of their capital, with a view
to making such safeguards equivalent, OJ 1977 L 26/1; Fourth Council Directive
In each of the three identified thematic areas, the above-mentioned

transparency variables were turned into a number of questions, in order to verify
the existence of regulation in the area and to evaluate the level of its
implementation in the area. The questions were collected in a questionnaire,
which was sent to company law experts (professors and auditors) and to members
of the IOSCO in all EU Member States.15
4.2.1 The thematic area ‘Incorporation’

Incorporation is the initial phase of the ‘life’ of legal and non-legal structures, in
which the structure itself is established through a series of acts aimed at making it
operational. The relevance of this thematic area for international co-operation for
the prevention of money laundering lies in the fact that a lack of scrutiny during the
incorporation phase results in greater opacity in company law, which might obstruct
the acquisition of information regarding the physical persons participating in its
establishment. The less opaque (or the more transparent) the process of
incorporation is, the more available the information concerning the incorporation
of the structures will be. This facilitates the investigation of their activities and of the
persons controlling them at both national and international levels.
In 2000 the FATF stressed the importance of this area for international co-
operation for the prevention of money laundering. The existence of ‘inadequate
commercial law requirements for registration of businesses and legal entities’ is one of
the twenty-five criteria used to identify detrimental rules, which impede international
co-operation for the prevention of money laundering in non-cooperative countries or
territories.16 Criterion 12 relates to the existence of ‘inadequate means for identifying,
recording and making available relevant information related to legal and business
entities (name, legal form, address, identity of directors, provisions regulating the
power to bind the entity)’.
According to the FATF Report on Money Laundering Typologies, 1999–2000,
‘varying company formation procedures, along with a lack of transparency for the
process in some jurisdictions, are factors of which the money launderer may take
advantage through the company formation agent. The solutions to these problems
then, according to the FATF experts, fall into two major areas: increasing
cont.
78/660/EEC of 25 July 1978 based on Article 54 (3) (g) of the Treaty on the annual
accounts of certain types of companies, OJ 1978 L 222/11; Eighth Council Directive 84/
253/EEC of 10 April 1984 based on Article 54 (3) (g) of the Treaty on the approval of
persons responsible for carrying out the statutory audits of accounting documents, OJ 1984
L 126/20.
15
The researchers drafted the variables, subsequently turned into questions and sent in the
questionnaire, keeping in mind the features of legal structures. The same variables, for
analogy, were extended to non-legal structures.
16
FATF, ‘Report on Non-cooperative Countries and Territories’ (Paris FATF 2000) at p. 4.
oversight of company formation agents and insisting on minimum standards for

company registry and administration, as well as transparency for the process’.17
The FATF also underlines the role played by company formation agents,18 who
are the experts or agencies offering consultancy services in the incorporation of
legal entities. These experts can advise their clients on the choice of jurisdiction or
jurisdictions in which incorporating a legal entity is the cheapest and has the least
legal requisites. The FATF in fact states: ‘Structures created by company formation
agents to facilitate legitimate business activities might also be attractive as a cover for
money laundering’. Consequently ‘without the ability to determine the true owner of
these companies, government authorities investigating a particular money laundering
scheme will be unable to establish the necessary links from the funds to the
criminal’.19
The Financial Stability Forum, convened in April 1999 to promote international
financial stability through information exchange and international co-operation in
financial supervision and surveillance, has also highlighted the importance of
scrutiny in the incorporation phase of a legal entity.20
Another problem, mentioned by the OECD in its ‘Report on the misuse of corporate
vehicles for illicit purposes’,21 is related to the creation of ‘shelf companies’.22
Therefore a policy aimed at reducing opacity in this area should include a series
of elements which, in this study, are identified as transparency variables in
regulation.
Transparency variable 1 (existence of legal provisions requiring a statutory
authorization to incorporate a company) makes it more difficult to use a structure for
17
FATF, ‘Report on Money Laundering Typologies 1999–2000’ (Paris FATF 2000) at p. 10
(available on the Internet at <http://www.oecd.org/fatf/pdf/NCCT_en.pdf>).
18
Ibid, at p. 8.
19
Ibid, at p. 9.
20
Specifically, the ‘Report of the Working Group on Offshore Centres’ highlighted how the
integrity of financial systems is hampered by the presence, in offshore financial centres, of
opaque regulation concerning the incorporation and activity of legal entities and of
insufficient control of them. A ‘light and flexible incorporation and licensing regime’
resulting in ‘inadequate due diligence in incorporation and licensing of new financial
institutions and shell companies’ creates the risk that legal entities are incorporated with
illicit proceeds and are subsequently used in money laundering operations. See ‘Report of
the Working Group on Offshore Centres’ (Financial Stability Forum 5 April 2000) p. 12,
available on the Internet at <http://www.fsforum.org/Reports/RepOFC.pdf>.
21
‘Report on the misuse of corporate vehicles for illicit purposes’ (Paris OECD Steering group
on Corporate Governance 2001) at p. 13, available online at <http://www.oecd.org> .
22
According to the International Narcotics Control Strategy Report 1999, a shelf company is
‘a company that has already been incorporated with a standard memorandum and articles of
association and has inactive shareholders, directors, and secretary. When a shelf company is
subsequently purchased, the inactive shareholders transfer their shares to the purchaser and
the directors and secretary submit their resignations. Typically, the authorities need not be
notified when a shelf company is sold’. The end result is that there are companies whose real
beneficial owners and directors are unknown and not checked on by the authorities.
illicit purposes, as it makes it mandatory to supply information to a controlling

authority, which supervises the process of incorporation.
Transparency variable 2 (existence of legal provisions requiring background
investigations into the founders of a company) has the aim of requiring checks on all
the persons who intend to set up a structure in order to prevent it from being used as
a shield for criminal activities.
Transparency variable 3 (existence of legal provisions setting a minimum company
incorporation capital) increases the costs incurred by criminals when misusing
structures for illicit purposes.
Transparency variable 4 (existence of legal provisions requiring verification of the
legal origin of the incorporation capital) requires verification of the legal origin of the
capital invested in the structure in order to avoid illicit proceeds from being
introduced into the financial system.
Transparency variable 5 (existence of legal provisions requiring that the
incorporation capital is deposited at a credit institution) aims to make the control
and verification of the origin of the capital easier by making the use of an
intermediary obligatory.
Transparency variable 6 (existence of legal provisions requiring a minimum
incorporation period, in order to verify the information regarding the founders)
makes it possible to accurately investigate the persons incorporating a structure and
the documentation involved, in order to detect any anomalies and avoid the
structures being misused.
Transparency variable 7 (existence of legal provisions prohibiting the incorporation
of ‘shelf companies’) is aimed at prohibiting the use of structures, which have already
been incorporated with a standard memorandum and articles of association and
inactive shareholders, directors and secretary. Authorities need not be informed
when such structures are sold and their shareholders, directors and secretary are
replaced. This makes it more difficult to thoroughly verify the true beneficial owners
due to their very flexible incorporation procedures.
Transparency variable 8 (existence of legal provisions requiring that a registered
office/agent is domiciled in the country of incorporation) has the aim of linking a
structure to a physical location, because this makes eventual criminal investigation
of its activities more effective and facilitates the acquisition of information.
Transparency variable 9 (existence of legal provisions requiring that the company
be registered in a public register) makes information concerning the incorporation of
structures readily available to third parties and law enforcement agencies by
requiring that they are made public.
Transparency variable 10 (existence of legal provisions requiring that a central
controlling authority collects, maintains and verifies the information required for
registration), is necessary in order to centralize data, quicken access, and verify the
accuracy of the documentation presented, thus making it more difficult to misuse
structures.
4.2.2 The thematic area ‘Company activity’

The ‘Company activity’ area refers to the activities of an operational legal and non-
legal structure aimed at achieving its economic or patrimonial goal.
This area is relevant for international co-operation for the prevention of money
laundering because a lack of controls on the activities of the company increases the
opacity in company law and makes it difficult to monitor its behaviour and exchange
this information with other foreign authorities. The greater the possibility of gaining
information about the management and the activities of a structure, the more the
names of shareholders are accessible to other parties.
The more closely accounts are audited, and the greater the obligation to disclose
relevant information, the more information concerning the activities of structures is
available to law enforcement, judiciary and financial authorities and can be exchanged,
when necessary, with their counterparts for anti-money laundering purposes.
The International Organization of Securities Commissions (IOSCO)23 has
underlined how harmonized regulation of the operations of legal entities in the
securities market is necessary to guarantee the integrity of financial markets, stating
that ‘accounting principles and auditing standards are necessary safeguards of the
reliability of financial information’.24
The importance of scrutiny of company activity has also been emphasized by the
OECD in the discussions regarding the creation of a set of corporate governance
standards and guidelines. A set of non-binding principles, developed in 1999, covers
five areas, one of which is disclosure and transparency, directed at ensuring ‘ [ . . . ] that
timely and accurate disclosure is made on all material matters regarding the corporation,
including the financial situation, performance, ownership, and governance of the
company. [...] Information should be prepared, audited, and disclosed in accordance
with high quality standards of accounting, financial and non-financial disclosure, and
audit. An annual audit should he conducted by an independent auditor in order to provide
an external and objective assurance on the way in which financial statements have been
prepared and presented. Channels for disseminating information should provide for fair,
timely and cost-efficient access to relevant information by users’.25
A policy aimed at reducing opacity in this area, therefore, includes a set of
elements, identified as transparency variables of regulation in this study:
Transparency variable 11 (existence of legal provisions requiring the regular
updating of data in the company register) makes it compulsory to communicate all
changes in the structure. This makes it possible to improve knowledge of the
structure and more difficult to use it for criminal purposes.
23
Available online at <http://www.iosco.org/iosco.html> .
24
IOSCO, Objectives and principles of securities regulation, p. 4.
25
‘OECD Principles of Corporate Governance’ (OECD Ad Hoc Task Force on Corporate
Governance 1999) at pp. 19–22, available online at <http://www.oecd.org/daf/govern-
ance/principles.pdf>, visited on 25 July 2001.
Transparency variable 12 (existence of legal provisions requiring systematic

examination of the data held in the company register in order to detect inconsistent
or missing data) requires that the accuracy of the data is checked and possible
inaccuracies, anomalies or lack of information identified; this should indicate misuse
of the structure.
Transparency variable 13 (existence of legal provisions requiring the maintenance of
a shareholder register) is a means of making the names of the shareholders public. It
includes the names of the shareholders in alphabetical order and information on the
shares held. This makes it possible to acquire information on the persons in control
of the structure for law enforcement agency investigation.
updating of information in the shareholders register) requires that information
regarding shareholders is regularly updated in order to detect anomalies and to
connect the structure to the physical persons in control.
Transparency variable 15 (existence of legal provisions requiring the maintenance of
a share register) is aimed at making it compulsory to collect and keep up to date
information on share ownership. This makes the activity of the structure more
transparent and information readily available to third parties.
updating of information in the share register) requires that information concerning
shares is updated in order to detect anomalies and to make it possible to connect the
structure to the physical persons controlling it.
Transparency variable 17 (existence of legal provisions requiring the filing of the
minutes of the annual meeting) requires the filing of a formal document summarizing
the main decisions taken during the meeting regarding the activities of the structure.
This requirement is aimed at facilitating the scrutiny of the activities of a structure, in
order to ensure that they are not fictitious and to make its use for illicit purposes
more difficult.
Transparency variable 18 (existence of legal provisions requiring the filing of
accounts) requires further verification as to whether a structure carries out a real
economic activity and is not used only for documentary purposes.
Transparency variable 19 (existence of legal provisions requiring the keeping of
accounting records for at least five years) makes it possible to keep records of the
economic activities conducted in order to be able to examine the accounts at a later
date.
Transparency variable 20 (existence of legal provisions requiring an external
auditor) reduces the risk of fraud and other illicit activities involving the falsification
of documents and increases the transparency of corporate/company law by requiring
an independent examination of the activities of a structure.
Transparency variable 21 (existence of legal provisions requiring the depositing of
company documents with a competent authority) makes these documents readily
available for investigation of the structure and increases the transparency of the
information concerning its activities by making it more difficult to falsify company
documents.
Transparency variable 22 (existence of legal provisions requiring the keeping of tax

records) reduces the risk of fraud and other illicit activities making it possible to
exercise checks on the economic activity of the structure.
4.2.3 The thematic area ‘Identification of the real beneficial owner’

The area ‘Identification of the real beneficial owner’ refers to rules aimed at
identifying the person or persons who are actually in control of a structure and its
activities. In this thematic area, the opacity created by the impossibility of
ascertaining the identity of the shareholders and establishing a connection between
a structure and the physical person or persons running it obstructs effective
investigation at national and transnational levels.
The importance of the introduction of controls in order to ascertain the identity of
the real beneficial owner of a structure has recently been emphasized by the OECD
in its ‘Report on the misuse of corporate vehicles for illicit purposes’. The OECD
states that ‘any jurisdiction that provides mechanisms enabling individuals to
successfully hide their identity behind a corporate vehicle while excessively constraining
the capacity of authorities to obtain and share information on beneficial ownership and
control for regulatory/supervisory and law enforcement purposes is increasing the
vulnerability of its corporate vehicles to misuse’.26 However, ‘certain jurisdictions [...]
allow corporate vehicles incorporated or established in their jurisdictions to employ
instruments that can be used to obscure beneficial ownership and control, such as bearer
shares, nominee shareholders, and nominee directors, without devising effective
mechanisms that would enable the authorities to identify the true owners and
controllers when illicit activity is suspected or to fulfil their regulatory/supervisory
responsibilities. Some of these jurisdictions further protect anonymity by enacting strict
secrecy laws that prohibit company registrars, financial institutions, lawyers,
accountants, and others, under the threat of civil and criminal sanctions, from
disclosing any information regarding beneficial ownership and control to regulatory/
supervisory and law enforcement authorities’.27
Furthermore, the G–7 in July 2000 stressed that ‘corporations are sometimes
established simply in order to gain access to the financial system. If there is obscurity
about their ownership, banks and other financial institutions may not be able to
discover the identity of the beneficiary of the account and will be unable to meet their
“know your customer”obligation. The combination of market access and obscurity
of ownership can facilitate money laundering and market abuse’.28 Scrutiny during
the incorporation phase, therefore, can make it easier to ascertain the identity of the
founders and the aims that the structure intends to achieve, thus facilitating
international co-operation.
26
OECD Steering Group on Corporate Governance, op. cit., p. 2.
27
OECD Steering Group on Corporate Governance, op. cit., p. 7.
28
‘Actions against abuse of the global financial system’ (Okinawa G-7 Financial Ministers 21
July 2000) available online at <http://www.g7–2001.org/en/okinawaabuse.htm>.
A policy aimed at reducing opacity in this area should, therefore, include a set of
elements which in this study are identified as the transparency variables of
regulation:
Transparency variable 23 (existence of legal provisions prohibiting the issuance of
bearer shares) is aimed at making it possible to identify the physical persons who
hold shares in the structure itself and possibly in control of it, thus preventing
criminals from controlling structures without disclosing their identities.
Transparency variable 24 (existence of legal provisions requiring that participa-
tion in a company is communicated if a certain (share) threshold is exceeded) is
aimed at making it possible to identify the physical persons with significant
shareholdings in a structure and at increasing the transparency of its ownership.
Transparency variable 25 (existence of legal provisions prohibiting nominee
shareholders) is aimed at preventing a physical person from controlling a structure
by means of nominees (e.g. stockbrokers) who appear in the shareholder register but
make it difficult to establish the identity of the real beneficial owner of the shares.
Transparency variable 26 (existence of legal provisions prohibiting nominee
directors) is aimed at making it possible to establish a connection between a
structure and the physical person running it by avoiding that the real beneficial
owner uses a director for its formal management.
Transparency variable 27 (in case a legal entity is a shareholder, existence of legal
provisions requiring that complete information is supplied, so as to identify the real
beneficial owner) is aimed at making the ownership of a structure more transparent.
When a legal entity holds shares in another legal entity, the chain of corporations
thus generated makes it difficult to ascertain the identity of the real beneficial owner.
Transparency variable 28 (existence of legal provisions prohibiting legal entities
from acting as directors) is aimed at making it easier to understand who holds control
of a legal structure. When a legal structure is a director of another legal structure, the
chain of corporations thus generated makes it difficult to ascertain the identity of the
real and final power-holder.
Transparency variable 29 (existence of legal provisions requiring the disclosure of
the identity of the real beneficial owner of a structure to the authorities) is aimed at
obtaining the identity of the real beneficial owner of a structure on request, by the
public authorities. This makes the ownership of a structure more transparent and
harder to hide behind a corporate shield.
4.2.4 The transparency variables involved in the regulation of trusts

In its latest annual report,29 FATF highlighted how ‘trusts, along with various forms
of corporate entities, are increasingly perceived as an important element of large-scale
or complex money laundering schemes, despite their legitimate use and long tradition
in many jurisdictions. [. . .] the concern for anti-money laundering authorities is the
29
‘Annual Report 2000–2001’ (Paris 2001) at p. 16.
seemingly impenetrable anonymity which a trust may provide to the true owner or
beneficiary. This anonymity is enhanced by the fact that documentation of trusts is not
public information. [. . .]possible solutions range from establishing a strict regulatory
regime for trust formation agents (i.e., subject them to licensing, customer
identification, record keeping and reporting requirements) to imposing some sort of
public or semi-public registration requirement on trust creation’.
The reasons why trusts could be used in the money laundering process was
highlighted in the typologies report of February 2001.30
In Ireland and the United Kingdom, where trusts exist,31 the more trust law is
transparent, the more it is possible to establish the identity of the parties of the trust
and to scrutinize the activity of the trustees. Law enforcement authorities can avert
the use of trusts as shields for illegal transactions and exchange significant
information at a transnational level.
Given the diversity between trusts and other legal and non-legal structures,
appropriate indicators of transparency were selected for the analysis of the
regulation of trusts. They were identified by studying the available literature on
their regulation.32 A policy aimed at reducing opacity in the regulation of trusts
should contain a set of elements which, in this Study, are identified as indicators of
transparency in regulation:
Existence of legal provisions requiring written constitution of the trust. This
indicator of transparency has the aim of ensuring the existence of written
30
‘It should be pointed out that a trust is not the same as a company or other form of corporate
entity. When a company is established, it has its own “legal personality” that is separate and
distinct from the natural persons that serve as directors or shareholders. Property held by a
company is owned by the company as a legal person and not individually by the company
directors or shareholders. Property held in trust, on the other hand, is legally owned by the
trustee and no longer by the settlor nor by the beneficiary. Therefore, when dealing with
certain trusts, the work of an investigator may be further complicated by the fact that the
trustee may be a legal person (a trust company for example), and the beneficiary or
beneficiaries may also be trusts (or corporate entities). Establishing whether there are real
persons behind the legal arrangement and that the trust is a sham is a difficult if not impossible
task. Furthermore, trusts differ from corporate entities in that they generally have no
registration requirement or central registry, and there is usually no authority responsible for
oversight of such legal arrangements’. ‘Report on Money Laundering Typologies 2000–
2001’ (Paris FATF 2001) at p. 10.
31
As already mentioned, in the other EU Member States, trusts are not recognized as a
separate legal form, but are recognized if incorporated in accordance with the law of the
‘home’ country, such as Ireland or the United Kingdom.
32
A.J. Oakley: The Modern Law of Trusts, (London Sweet and Maxwell 1998); A. Sydenham,
Trusts (London Sweet and Maxwell 1997); M. Lupoi, Trusts, (Milan Giuffrè Editore 1997);
D.J. Hayton, Law Relating to Trusts and Trustees, (London Butterworths 1995); M.R.
Sancilio, ‘La disciplina del trust’, in Ricerca sul riciclaggio nel contesto dei rapporti tra
economia criminale edeconomia legale. Rapporto sull’attivita’ di ricerca 1 June 1998–31 May
1999 (Rome Ufficio Italiano dei Cambi 2000); S. Gardner, An Introduction to The Law of
Trusts Oxford Clarendon Law Series Clarendon Press 1990).
evidence that a trust has been set up, granting law enforcement authorities
the possibility to obtain information on trusts and their specific features.
Existence of legal provisions requiring registration of the trust deed in a public
register. This indicator of transparency requires that data regarding the main
features of a trust be centrally registered and publicly accessible. This would
make information about the trust easier to access by the general public and
law enforcement, judiciary and financial authorities, and easier to exchange
at a transnational level.
Existence of legal provisions requiring that the personal particulars of the
settler be included in a public document. This indicator of transparency is
aimed at avoiding the possibility that the settler remains anonymous, by
supplying the general public and law enforcement, judiciary and financial
authorities with information regarding the identity of the original owner of
the capital held in trust. Consequently, this diminishes the anonymity
surrounding the trust.
Existence of legal provisions requiring that the personal particulars of the
beneficiary be included in a public document. This indicator of transparency is
aimed at avoiding the possibility that the beneficiary remains anonymous by
supplying the general public and law enforcement agencies with information
regarding the identity of the person entitled to the benefits derived from the
investments of the trust fund. Consequently, this diminishes the anonymity
surrounding the trust.
Existence of legal provisions prohibiting the settler from also being the
beneficiary of the same trust. This indicator of transparency is aimed at
preventing criminals from exploiting the possibility of formally separating
themselves from the ownership of the proceeds of crime by conferring the
goods to a trust, and receiving the profits thereof by nominating themselves
as the beneficiaries of the same trust.
Existence of legal provisions prohibiting the beneficiary of a trust from being
another trust. This indicator of transparency is aimed at prohibiting the
beneficiary of a trust from being another trust, thus preventing a
supplementary layer of secrecy from being added to the trust and enhancing
the possibility of detecting the identity of the beneficiary.
Existence of legal provisions requiring a public register of trustees. This
indicator of transparency requires that data regarding the identity of trustees
be registered and publicly accessible, thereby making trustee information
available to both the general public and law enforcement agencies.
Existence of legal provisions requiring an authority to supervise the activity of
trustees. This indicator of transparency grants the possibility of scrutinizing
the activities of the persons and companies managing the trust fund and so
making it easier to detect any criminal misuse.
5. Analysis of the regulation and its implementation in the

corporate/company regulative field
The aim of the data analysis is to understand what are the obstacles to international
co-operation for the prevention of money laundering, where these obstacles are to be
found and at what level (regulation and/or implementation), and what are their
dimensions.
Separate analysis was carried out for each of the structures in EU Member States
identified as being susceptible to use as money laundering operations.
The analyzed regulation and its implementation are summarized in a series of
synoptic tables available in annex B of this report. The tables outline the obstacles to
international co-operation for the prevention of money laundering present in each
EU Member State.33
For each of the structures selected for further analysis and for each variable of
transparency, an index of obstacles to regulation and the implementation of
regulation was calculated, with a view to understanding in which thematic area
obstacles to international co-operation on anti-money-laundering activity are to be
found.34 These indexes represent, on a scale from 0 to 100, the dimensions of the
obstacles created by the absence of regulation and by their incomplete or absent
implementation where the regulation under consideration exists. The higher this
index, the higher the obstacles to international co-operation for the prevention of money
laundering. For each thematic area, these indexes have been subsequently aggregated
in a ‘General index of Obstacles to Regulation’ (GOR index) and in a ‘General index of
Obstacles to the Implementation of Regulation’ (GOI index). They are a quantitative
expression of the obstacles created, in each thematic area and in each EU Member
State, by the absence of regulation and the incomplete or absent implementation of
the regulation under consideration, where it exists.
5.1 Results of the analysis: the regulation and its implementation for the
legal and non-legal structures analyzed in all countries where they
exist
5.1.1. Public limited company

The above-mentioned Indexes, related to the obstacles to regulation and to its
implementation, are summarized in the following table (Table 1).
33
The answers given by the experts used for the analysis have not been systematically
crosschecked.
34
For an explanation of the process of calculating these indexes, see section B of the
methodological appendix (step 6).
The EU average Indexes of Obstacles to regulation and to its implementation set out
in Table 1 are graphically represented in Figure 1.
As can be seen from this figure, the greatest obstacles to international co-
operation for the prevention of money laundering seem to be found in the lack of
regulation in the three identified thematic areas rather than in its implementation.
Where regulation exists, it seems to show a high implementation level. The thematic
area ‘Identification of the true beneficial owner’ is where obstacles to regulation are
the most significant (GOR 62.2). The second area where obstacles to regulation are
to be found is ‘Incorporation’ (GOR 43.8). The analysis conducted by applying the
model shows which of the single transparency variables, in each thematic area, are
the most problematic in terms of obstacles to international co-operation for the
prevention of money laundering.
1. OBSTACLES IN THE THEMATIC AREA ‘INCORPORATION’

Main obstacles in the thematic area ‘Incorporation’

Transparency variable 6 (Existence of legal provisions requiring a minimum
period for incorporation, in order to scrutinize the information regarding the
founders) - index of obstacles to regulation 100.0;
Transparency variable 7 (Existence of legal provisions prohibiting the
incorporation of ‘shelf’ companies) - index of obstacles to regulation 85.7;
Transparency variable 4 (Existence of legal provisions requiring verification
of the legal origin of the incorporation capital) – index of obstacles to
regulation 78.6;
Transparency variable 2 (Existence of legal provisions requiring background
investigations on the founders of a company) – index of obstacles to
regulation 73.3;
Transparency variable 1 (Existence of legal provisions requiring statutory
authorization to incorporate a company) – index of obstacles to regulation
46.7.
2. OBSTACLES IN THE THEMATIC AREA ‘COMPANY ACTIVITY’
Main obstacles in the thematic area ‘Company activity’

Transparency variable 12 (Existence of legal provisions requiring systematic
examination of the data held in the company register in order to detect

inconsistent or missing data) – index of obstacles to regulation 46.7;
Transparency variable 15 (Existence of legal provisions requiring the
maintenance of a share register) – index of obstacles to the implementation
of regulation 26.7;
Transparency variable 17 (Existence of legal provisions requiring the filing of
the minutes of the annual meeting) – index of obstacles to the implementation
of regulation 26.7.
3. OBSTACLES IN THE THEMATIC AREA ‘IDENTIFICATION OF THE REAL

BENEFICIAL OWNER’
Main obstacles in the thematic area ‘Identification of the real beneficial owner’
issuance of bearer shares) – index of obstacles to regulation 80.0;
Transparency variable 27 (In case a legal entity is a shareholder, existence of
legal provisions requiring that complete information is supplied in order to
identify the true beneficial owner) – index of obstacles to regulation 78.6;
Transparency variable 25 (Existence of legal provisions prohibiting nominee
shareholders) – index of obstacles to regulation 71.4;

directors) - index of obstacles to regulation 71.4;
disclosure of the identity of the true beneficial owner of a company to the
authorities) – index of obstacles to regulation 64.3;
Transparency variable 28 (Existence of legal provisions prohibiting legal
entities from acting as directors) – index of obstacles to regulation 46.7.
5.1.2 Private limited company

The indexes, relative to the obstacles to regulation and its implementation, are
summarized in the following table (Table 2).
The EU average indexes of obstacles to regulation and its implementation set out in
Table 15 are graphically represented in Figure 5.
As in the case of the public limited company, the greatest obstacles to international
co-operation for the prevention of money laundering seem to be found in the lack of
regulation in the three identified thematic areas rather than in its implementation.
Where the regulation exists, it seems to show a high implementation level. The
thematic area ‘Identification of the real beneficial owner’ is where obstacles to
regulation are the most significant (GOR 56.5), while the second area where
obstacles to regulation are to be found is ‘Incorporation’ (GOR 44.4).
The analysis conducted applying the model shows which of the single
transparency variables in each thematic area are the most problematic in terms of
obstacles to international co-operation for the prevention of money laundering.
1. OBSTACLES IN THE THEMATIC AREA ‘INCORPORATION’
Main obstacles in the thematic area ‘Incorporation’

Transparency variable 6 (Existence of legal provisions requiring a minimum
incorporation period) – index of obstacles to regulation 100.0;
incorporation of ‘shelf companies’) – index of obstacles to regulation 85.7;
Transparency variable 2 (Existence of legal provisions requiring background
investigations into the founders of a company) – index of obstacles to

regulation 73.3;
Transparency variable 4 (Existence of legal provisions requiring verification
of the legal origin of the incorporation capital) – index of obstacles to
regulation 71.4;
Transparency variable 1 (Existence of legal provisions requiring statutory
authorization to incorporate a company) – index of obstacles to regulation
46.7.
2. OBSTACLES IN THE THEMATIC AREA ‘COMPANY ACTIVITY’
Main obstacles in the thematic area ‘Company activity’

Transparency variable 12 (Existence of legal provisions requiring systematic
examination of the data held in the company register in order to detect
inconsistent or missing data) – index of obstacles to regulation 60.0;
Transparency variable 17 (Existence of legal provisions requiring the filing of
minutes of the annual meeting) – index of obstacles to regulation 40.0;
maintenance of a share register) – index of obstacles to regulation 26.7.
3. OBSTACLES IN THE THEMATIC AREA ‘IDENTIFICATION OF THE REAL

BENEFICIAL OWNER’
Main obstacles in the thematic area ‘Identification of the real beneficial owner’
Transparency variable 27 (In case a legal entity is a shareholder, existence of
legal provisions requiring that complete information is supplied, so as to
identify the real beneficial owner) – index of obstacles to regulation 85.7;
Transparency variable 24 (Existence of legal provisions requiring that
participation in a company is communicated, if a certain (share) threshold is
exceeded) – index of obstacles to regulation 76.9;
disclosure of the identity of the real beneficial owner of a company to the
authorities) – index of obstacles to regulation 64.3;
directors) – index of obstacles to regulation 61.5;
shareholders) – index of obstacles to regulation 57.1.
5.1.3 Trust
The regulation of trusts was analyzed in Ireland (which mentioned them as
susceptible to being used in money laundering operations) and the United Kingdom.
In order to analyze the regulation of trusts, which differ from all the forms studied in
this report, appropriate indicators of transparency were selected. Their relevance for
international co-operation for the prevention of money laundering is explained in
section 8.2.4.
The following table highlights the results of the analysis in relation to the
existence of legal provisions, which should ensure transparency of trusts.
As can be seen in this table, the regulation of trusts allows for a high level of opacity.
The basic rule is that no formalities are required, and so a trust can be constituted
orally. The decision depends on the importance that the parties attribute to having
written evidence of the transaction, and what is entailed. Even though the possibility
of constituting trusts orally attributes flexibility to the instrument (allowing the
creation of a trust whenever two subjects – the settlor and the trustee – voluntarily
agree to create one), this might obstruct investigations into money laundering by the
authorities. Official trust registers for registering trust deeds do not exist, even where
trusts are incorporated in writing and the identities of the parties, therefore, remain
unclear. Furthermore, there are no restrictions on who can be a trustee nor is there a
register of the details of the identity of the trustees, and this makes tracing them very
difficult. The same obstacles to identification appear to apply to the settlor, whose
identity does not need to appear on any document. The beneficiary of a trust may be
a company or another trust, not only a physical person or several persons. In the
former case, there is an additional layer of confidentiality regarding the beneficiary.
There is some opacity in the management of the trust as well. There is no
authority that supervises the activity of trustees. The latter only have general
limitations as regards the administration of the trust fund, but there is no actual
examination of single investments by any person or authority.
This difficulty in detecting the existence of a trust and the identity of its parties,
together with the absence of supervision of the trustees and the possibility that the
settlor or another trust might be the beneficiary, can be misused by criminals. In fact,
money launderers can invest the proceeds from crime in a trust thereby formally
separating themselves from the ownership of the money and assets, and exploit the
confidentiality surrounding the trust to reduce the risk of being identified. Where a
criminal is both the settlor and the beneficiary, he will formally separate himself
from the ownership of the dirty proceeds by attributing them to a trustee, but
actually obtain the benefits from the investment himself.
6. Conclusions
The results illustrate that, as far as the public and private limited companies are
concerned, the greatest obstacles to international co-operation for the prevention of
money laundering are to be found in the thematic area ‘Identification of the real
beneficial owner’.35 The main obstacle is a lack of regulation requiring full
information regarding the real beneficial owner of a public or private limited
company, especially when a legal entity is a shareholder or director, or the issuance
35
The relevance of this area for anti-money laundering international co-operation is outlined
at section 9.2.3 of the report.
of bearer shares is permitted. Furthermore, some problems seem to arise from the
fact that, in some EU countries, the regulation allows for nominee shareholders and
directors.
The thematic area ‘Incorporation’ also presents obstacles to international co-
operation for the prevention of money laundering, even though to a lesser degree
than the former. Lack of regulation in this area makes it more difficult to acquire
information about the physical persons party to the creation of legal structures and
increases the possibility that these might be used for criminal purposes. Scrutiny in
this area would raise the costs incurred by criminals when using legal structures for
money laundering and increase the amount of information available to law
enforcement, judicial and financial authorities, thereby facilitating national and
international investigation of the operations of those companies. Some EU Member
States permit shelf companies, that is, previously incorporated companies with a
standard memorandum and articles of association with inactive shareholders,
directors and secretary. Often, authorities do not need to be informed when such
companies are sold and their secretary, directors or shareholders are replaced. This
makes it more difficult to thoroughly investigate the real beneficial owner, given that
shelf companies are incorporated with a very flexible procedure. Furthermore, many
EU Member States do not investigate the founders of a company or ascertain the
legal origin of the incorporation capital.
The European Commission might, therefore, consider taking action to define
more specific and stringent guidelines for EU Member States in the thematic areas
mentioned above, relevant to anti-money laundering international co-operation.
This would increase transparency of the whole corporate/company regulative field
and make information available to law enforcement, judiciary and financial
authorities dealing with national money laundering cases, thus facilitating
international co-operation for the prevention of money laundering.
The analysis of regulation covering trusts has shown it as being characterized by
great opacity and absence of all those provisions relevant for international co-
operation for the prevention of money laundering. Their regulation and the
confidentiality of their constitution hinder the gathering of information about the
people setting them up and their management structure. This opacity creates
obstacles to international co-operation for the prevention of money laundering
because of the lengthy process in getting information.
Corporate and/or company regulation, which today is undergoing extensive
reforms in the area of corporate governance in the EU Member States, should pay
more attention to the benefits that transparency would bring to international co-
operation for the prevention of money laundering. The Euroshore report highlighted
the strategic importance of this area for international co-operation for the
prevention of money laundering and this article illustrates the associated obstacles
and their dimensions. Until now, questions relating to corporate governance have
mainly been restricted to the national level. It appears however that the European
Commission launched a study in December 2000 on codes of corporate governance
in the EU. A final report is expected by the end of 2001. In addition, the Commission
has announced the setting up of a high level group of experts in corporate law who
will produce a report by June 2002. There may be scope within these initiatives to
tackle the issue of transparency as defined in the main report and in this article.
Having a European Directive on banking and financial regulation, without a set of
European standards on key issues in corporate governance, makes the whole anti-
money laundering regime unbalanced and weak.
Terrorist Finance, Money Laundering and the
Rise and Rise of Mutual Evaluation:
A New Paradigm for Crime Control?
Michael Levi* and William Gilmore**
Introduction
The discourse of risk and globalization has become a very popular one, both among
social analysts and within the business and intelligence ‘communities’. Implicit and/
or explicit risk judgments have long been central to the financial world and its
policing: the key question is which risks are being considered and whether we have
the knowledge and operational models to incorporate them. Bankers, lawyers and
law enforcement personnel are forced by pressure of circumstances to live so much in
the present that it is difficult to see how far we have travelled in the era beginning
approximately in the mid–1980s since money laundering first became a term with
which bankers and lawyers were expected to be acquainted. The authors crave the
readers’ indulgence therefore for some historical development of the paradigm of
banking and law enforcement to set alongside the other contributions to this volume.
In making such a contribution, the authors want to clarify how far the risk paradigm
has entered the general world of ‘law and order’, at least in the UK. 1
The allocation of scarce policing and surveillance (including private sector)
resources inevitably entails the conscious or taken-for-granted allocation of
priorities. Goal displacement is commonplace, as interest groups seek (consciously
or not) to further their own objectives at the expense of the proclaimed objective.
Nevertheless, resource allocators have to decide which are the most serious – in
* Professor of Criminology, Cardiff University, Wales. Address for correspondence:

Professor Michael Levi, Glamorgan Building, King Edward VII Avenue, Cardiff CF10
3WT, UK, Levi@Cardiff.ac.uk. The research on which this article is based was funded by
the UK Economic & Social Research Council’s Future Governance Research Initiative.
** Professor of International Criminal Law, University of Edinburgh
1
It is easy to overestimate the extent to which policing paradigms travel at the same speed in
the same direction. Those enforcement worlds in which transnational mutual assistance is
commonplace may harmonize more quickly – though there are substantial variations even
within the EU – but this may not touch significantly the general styles of policing.

87
88 Michael Levi and William Gilmore
terms of both ‘objective’ harm 2 and media-constructed harm that turn into political
and organizational priorities – current and future events with which they wish to deal
in relation to the resources that they have available. This relationship is a naturally
dynamic one, in the sense that left to themselves, organizations tend to focus on the
short-term politically (with small or large ‘p’) pressed priorities and to neglect the
longer term structural issues: in this human process, stated goals are often eroded
except when organizations insist on the pursuit of their operational plans. The latter
style is often condemned by pragmatists as ‘inflexible’ (and is one of the features of
totalitarian centrally planned economies), despite the consistency that such
adherence to policy brings compared with the legal dictum of ‘taking each case on
its merits’, which latter can amount to little more than a justification for
unselfconsciously erratic policy-making. In contemporary policing, for example, in
making decisions about how much surveillance particular released sex offenders
‘need’, explicit risk assessments are made, though there may not be the resources to
accommodate all those who need high supervision and therefore actual time devoted
to each high-risk person may be scaled down.3 Public order policing similarly is risk-
based, though not normally on the basis of clinical judgments about the risks from
individual people.
By contrast with modern banking, 4 the discourses of international bodies such as
the Financial Action Task Force are primarily oriented not so much towards risk-
management as towards national and institutional obligations to reduce crime
facilitation. In this sense, though intended to be applied within the context of
globalization, they sit securely within the absolutist ‘law and order’ control mode
rather than with some other risk optimization mode. Despite the rhetoric of
‘financial crime risk management’, this is based on modest scientific foundations in
many areas: despite typologies exercises, there is insufficient hard, systematically
collected evidence of the extent and forms of fraud and, especially, of money
laundering5 to enable sensible universally agreed judgments to be made. One should
have sympathy for the inherent difficulty about the publication of advice on modi
operandi of terrorism finance and on the laundering of other forms of crime, since the
availability of information of this kind to financial institutions around the globe
2
Some readers may not believe in the concept of objective harm but, by analogy with Bishop
Berkeley’s refutation of the solipsistic fallacy, there are self-evident effects of terrorist
attacks that are physically objective. This is so even though some might not define
martyrdom as a ‘harm’ and the slaughter of enemies as not harming the innocent or even
(as in genocide) not harming persons of the same human status as the perpetrators.
3
M. Maguire, ‘Policing by risks and targets: Some dimensions and implications of
intelligence-led crime control’ in (2000) 9 Policing and Society 1
4
See Charles Freeland, ‘How Can Sound Customer Due Diligence Rules Help Prevent the
Misuse of Financial Institutions in the Financing of Terrorism’ in (2002) 4 European
Journal of Law Reform 2, and the standard setting of most bank regulators
5
See, for example, the current advice given to financial institutions by FATF on profiles of
terrorism for anti-laundering detection purposes.
A New Paradigm for Crime Control 89
inevitably gives rise to leakage to some offenders and thus serves as counter-
intelligence.6 Conversely, regulators and policing agencies should understand that if
they cannot specify and/or are unwilling to specify the plausible forms of laundering
– often on the expressed grounds that they do not want to constrain the
identification and reporting behaviour of regulated persons – it may be unfair to
expect financial institutions to do so. As money-laundering legislation shifts from
criminal penalties for ‘failing’ to report crimes one did actually suspect to those for
‘failing’ to report crimes one ‘objectively’(?) ought to have suspected,7 this tension
about reasonable expectations will become progressively greater.
But these are not the only difficulties. For example, there are resource constraints
that arise in relation to the ‘War on Terrorism’. Governments for whom terrorism
risks against domestic targets are modest may be reluctant to divert resources away
from local crime concerns (or non-policing needs such as health and education) to
help to reduce terrorism risks in other countries; while Western countries such as the
UK (since ‘the Troubles’ in Northern Ireland in the late 1960s) and, more recently,
the US, more willingly divert resources from domestic crime issues which do concern
the public8 to dealing with terrorist threats. A key motivator for this transnational
transformation of defences against terrorism is the global reach of threats not just to
embassies and other governance institutions overseas but also to corporate interests
worldwide. Again, there is nothing new about this risk from globalization to the
national economic interests of superpowers: as their role in defending the British
East India Company and West Indian plantations illustrates, 18th and 19th century
policing in colonies was usually directed towards the preservation of overseas assets,
and such threats often contained a cultural or ideological component as well as any
desire to take property for resale and economic gain.9
6
This is so a fortiori if the information is placed on websites. The UK National Criminal
Intelligence Service and some other European FIUs such as the Netherlands are developing
limited access extranets, but counter-intelligence risks still remain.
7
For such shifts towards ‘objective’ obligations, see the Second Directive on Money
Laundering agreed by the EC and the European Parliament at the end of 2001, and the
Proceeds of Crime Act 2002 in the UK.
8
Rates of street and household crime have been falling since 1998 to the time of writing, but
fear of those crimes has not been falling. Whether Enron employees and ex-employees in
Texas (as opposed to New York and Washington) would be (now and in the past, with the
benefit of hindsight) rational to fear terrorism more than to fear the collapse of their own
pension funds and employment is a more complex issue that lies outside the scope of this
article.
9
Indeed, the tradition of the police serving (and/or being perceived as serving) the interests
of the state rather than those of the local population and crime victims is one of the more
unfortunate legacies of colonialism that community policing strategies have had great
difficulty in overcoming. The fact that no-one then called these ‘anti-globalization’
protests (for the term had not been invented) does not make that any less accurate as an
ascription.
The regulation of economic élite and piratical behaviour trans-nationally involves

‘persuading’ formally independent nation states to adopt similar measures even
though there sometimes may be no obvious benefit to them in so doing. To some
extent, this constellation of self-interest is altered by terrorism in the abstract.
However, those groups or networks threatening the US and other Western powers
may be quite different from those threatening some Third World governments, while
many small island economies may be affected by terrorism only indirectly via ‘trickle
down’ from damage to global business levels. Furthermore, the behavioural
boundaries of such global regulation are somewhat vague, given the flexible
definitions both of terrorism and transnational organized crime.
There is an inherent tension between, on the one hand, governmental and
prosecutorial threats to the private sector for not succeeding in detecting or reporting
possible money laundering10 and, on the other, the fact that the support of corporate
actors is needed for ‘government at a distance’ to succeed: the state or rather, in the
case of trans-national crime control, the total set of states11 cannot hope to monitor
and control financial transfers directly. This monitoring must be ‘entrusted’ (under
threat of penal and/or administrative sanctions) to the financial services firms and
professionals in the front line of the ‘war on terrorism’ (and ‘war on organized
crime’). Even if we knew how many jurisdictions were currently facilitating the
movements of terrorist funds (which potentially is all jurisdictions involved in
financial services business), the enforcement task would not be restricted to those,
since the use of particular offshore finance centres is based upon a dynamic view of
the costs and benefits of particular jurisdictions at any given moment.12
It is difficult, even with hindsight, to work out when and how the view developed
that attacking the money trail was a key element in the fight against organized crime.
Wechsler places it in the mid–1980s13 – which would be around the period that the
FBI and other law enforcement agencies started to use the Racketeer Influenced
Corrupt Organizations (RICO) legislation passed in 1970 – but at least outside the
US, the investigative resources devoted to financial policing have never reflected the
rhetorical and political attention it has received. Even before the frantic and all-
consuming financial search for terrorist funds in the wake of the air strikes against
10
It is not suggested that this is simple game theory. Through ideological hegemony, the
marshalling of political support and party and/or personal financing, corporate actors can
wield enormous influence.
11
The authors have avoided the tempting term ‘collectivity’ because it can be argued that this
implies harmonious purposes among states: the extent to which the collaboration of all
states is required differs by type of crime: fewer states need to co-operate to deal with
maritime piracy than with money laundering or intellectual property violations, since
technology makes the latter sites very portable with low capital costs.
12
The authors are not positing an optimal or ‘rational’ model here. Every launderer has his or
her own information set and contacts, and in an imperfect market of knowledge
asymmetries, there is no one model that fits all.
13
W. Wechsler, ‘Follow the Money’ in (July/August 2001) 80(4) Foreign Affairs 40.
New York and Washington in September 2001 (and, for that matter, before the
collapse of Enron in December 2001), there was widespread official fear of ‘the dark
side of globalization’. The latter brings together a variety of themes and a variety of
political positions from financial regulators concerned about unmonitored ‘off-the-
books’ (though often legal) transactions conducted by vast commodity hedging
funds held in offshore finance centres; through law enforcement agencies bothered
about ‘the’ Mafia and international terrorist networks; to aid agencies troubled by
the ‘export’ (that is, theft) of funds by Third World potentates into covert individual
and corporate accounts held in offshore finance centres. Terrorist finance generates a
threat to the security of international capital and the lives of financial services
employees as well; so (to a greater extent than with drug trafficking or tax evasion,
for example) self-interest may reasonably temper profit maximization if institutions
believe that the identification of terrorist finance can protect them or activities in
which they have a stake.14
The ideological and value threat of terrorism thus constitutes a distinction from
organized crime and other ‘threats to society’. One of the special features of terrorist
fund laundering is that it explicitly aims to examine the proceeds of legitimate-source
activity actually used or intended to be used for (rather than deriving from) a
criminal purpose; in that sense, its closest analogues are (1) the corporate and
political ‘slush funds’ used for transnational corruption and political finance, and (2)
tax evasion on non-criminal activities. This broad approach is crucial if anything
approximating a plausible effort is to be made in restricting terrorists’ access to
funds; though on a harm reduction model, it may make some sense to restrict flows
to particular terrorist groups from particular sources without necessarily having a
major impact on the totality of terrorist finance.15
This article shall review how the international ‘community’ strives to counter the
anomic, crime-facilitative effects of globalization by rowing against the tide of
economic liberalization in the name of global crime control and financial stability. 16
Thus, there is a sometimes faltering attempt to create a new world anti-crime order
(of which measures against terrorism are a part) as a component of, or supplement
to, the New World Economic Order. There will be a review of the growth of ‘soft
law’ instruments and cascading peer group pressures and their gradual transforma-
14
This stake might include businesses or governments to which they have loaned money,
whose security as well as whose business plans may be disrupted both by actual and fear of
terrorism. Contrariwise, the reporting of suspected terrorist finance also can bring physical
risks to staff should they be identified – directly or by logical deduction – as the source of
the information.
15
To avoid accusations of naivety, it is necessary to recognize that terrorist funding can come
from the West as well as from the ‘rogue states’ defined by the US.
16
A cynic might suggest that these controls are taken in the interests of Western capitalist
security, but given the number of Third World countries devastated by the looting of both
overseas aid and domestic assets by their corrupt potentates, the authors regard this as a
very partial analysis.
tion into a mix of raising consciousness of mutual interdependence with economic

and political sanctions to act against transnational corruption and transnational
laundering facilities.
Money-laundering and anti-crime strategies
The regulation of the money trail relates to any crimes that require and/or generate
significant crime proceeds requiring more than short-term storage. Drug trafficking
was the precursor for international policing expansion by US agencies such as the
DEA17 and by the military and intelligence agencies in the post-Communist era, but
though proactive ‘special investigative methods’ have expanded everywhere, none of
them can plausibly prevent all drugs, people, or contraband smuggling. Therefore
the attempt to monitor financial transactions and confiscate crime proceeds beyond
the borders of individual governments was the obvious next key strategy in the
transnational ‘organized crime’ containment programme.18 Though it was never
clear whether such monitoring and confiscation constituted a sufficient as well as
necessary condition for success (nor how it would be identified if and when ‘success’
had been attained), success was believed to require a major global infrastructure of
compatible legislation and mutual legal assistance both for financial investigation
and for proceeds of crime restraint and confiscation. The US, supported from the
start by Australia, France and the UK, was the principal enthusiast for anti-
laundering measures to attack kingpins of the drugs trade but, as Gilmore has
observed,19 the extraordinary rapidity (less than two years) with which the 1988 UN
Vienna Convention came into force is testimony to the power of drug issues in the
political culture of nations around the world. Despite such political consensus,
however, the G–7 took an early decision in 1989 to create a new (temporary) body,
the Financial Action Task Force, rather than leaving it to the UN to serve as the
efficient instrument of these anti-laundering measures. Since that date, measures to
control the money trail have proceeded along two axes:
1. The increased drawing of financial institutions into playing public functions,
via the imposition of requirements (a) to report suspicions and – just as
17
E. Nadelmann Cops Across Borders (University Park Pennsylvania State University Press
1993).
18
See for recent developed notions of this, e.g., Office of National Drug Control, National
Drug Control Strategy (Washington DC Office of national Drug Control Policy 2002);
State, Money-Laundering and Financial Crimes (Washington DC US State Department
2001); Treasury, The 2001 Money Laundering Strategy (Washington DC US Treasury
Department in consultation with the US Justice Department).
19
W. Gilmore, Dirty Money: The Evolution of Money Laundering Counter-Measures
(Strasbourg Council of Europe Publishing 1999, 2nd ed.).
significantly – to develop the capacity to form suspicions (via know-your-

customer and other rules) on pain of imprisonment and corporate penalties,
and (b) to report and not to deal financially with persons who appear on lists
of ‘banned persons’, of which the most notable source is the US Office of
Foreign Assets Control (OFAC);20 and
2. The increased development of international norms for money laundering
control at the level of the nation state via FATF and its regional
complementary bodies in Asia-Pacific, the Caribbean, Europe and, most
recently, Africa and South America, as well as via financial regulators.
There has been a shift from the initial exclusively drug focus in anti-laundering
policy towards a focus on all-crime (though currently excluding tax crime) and
transnational organized crime,21 to which terrorism has been added explicitly in the
aftermath of 11 September 2001.22 As Levi23 and Gold and Levi24 observed in their
20
Of the many other lists, perhaps the most significant are those issued under the authority of
the UN Security Council requiring the immediate (and indefinite) freezing of the assets of
stipulated natural and legal persons. See in particular the ‘Taliban’ lists made under the
authority of Resolution 1267 of 15 October 1999 and the ‘Al-Qaeda’ list mandated by
Resolution 1333 of 19 December 2000. As explained elsewhere in this article, these lists are
legally binding on all member States because they are measures taken under Chapter VII of
the UN Charter.
21
Prior to 11 September 2001, the money-laundering nexus had only intermittently sought to
bridge crimes for economic gain with terrorism. The UK Prevention of Terrorism
(Temporary Provisions) Act 1989 included several measures intended to clamp down on
terrorist finance (and Northern Ireland legislation gave greater powers in the province), but
the most explicit link came in June 1995 when President Clinton wrapped up terrorist
threats with international organized crime when he told the UN that ‘the threat to our
security is not in an enemy silo, but in the briefcase or the car bomb of a terrorist. Our
enemies are also international criminals and drug traffickers who threaten the stability of
new democracies and the future of our children’. (President Clinton, Address at the United
Nations Fiftieth Anniversary Charter Ceremony, San Francisco, 26 June 1995. Text
available at <www.defenselink.mil/1995/s19950626-clinton.html>)
In Presidential Decision Directive [PDD] 42, dated 21 October 1995, President Clinton
asserted that ‘ international organised criminal enterprises [. . .] are not only a law
enforcement problem, they are a threat to national security’. In Executive Order 12,978 [21
October 1995, 1995 USCCAN B106], effective the same day and never rescinded, he
declared a ‘national emergency to deal with that threat’. Federal agencies were directed to
take ‘all appropriate actions within their authority to carry out this order’. The primary
and over-riding common purpose of the Directive and the Executive Order was ‘to protect
the welfare, safety and security of the United States and its citizens’, though there was some
recognition of obligations to others.
22
Prior to the 11 September terrorist attacks in the United States, the issue of terrorist
financing had not assumed a position of prominence in the activities of the FATF, though
it had in some individual jurisdictions such as Northern Ireland (see Levi and Osofsky,
1995). On 24 September the Ecofin Ministers of the 15 EU members called for the mandate
of the FATF to be broadened so as to cover the terrorist issue. On 6 October 2001, G-7
finance ministers called upon the FATF to include specific treatment of terrorist funds in
studies of how suspicious financial transaction reports come to be constructed and

followed through, few bankers know what types of crime – if any – their customers
may be engaged in: with the exception of some ideologically or culturally
sympathetic bankers and non-bank financial services such as money transmitters,
this would apply a fortiori to terrorist finance. If clients fool bankers or lawyers into
believing that at most, the funds constitute ‘merely’ tax ‘dodging’, then it is plausible
that no suspicious transaction report will be made.25 Therefore, it is only if all crimes
are included within the obligation to report suspicions that the layer of
rationalizations falls away (save, perhaps, for labelling the behaviour tax avoidance).
Conversely, representatives from some offshore finance centres have expressed the
view (in discussions with the principal author) that it is only if the drugs issue is split
off from tax evasion (and, especially, from OECD measures against ‘harmful tax
avoidance’) that effective financial services co-operation with anti-drug law
enforcement will take place. At the time of writing, in the summer of 2002, FATF
Member States are far from agreement over whether countries should be compelled
explicitly to include tax offences as a predicate for money laundering.
One of the prime instruments of the New World Economic Order is the radical
concept of mutual evaluation, which involves peer evaluation of both the enactment
and implementation of legislation and other policy instruments. This represents a
major departure from the traditional view that implementation of treaties and
conventions was a purely domestic matter. Even though methodological coherence
cont.
the current revision of the 40 Recommendations; to issue special guidance on the subject to
financial institutions; and to develop a process to identify countries that facilitate terrorist
financing and to propose a course of action to achieve co-operation from such
jurisdictions. An emergency plenary meeting of the FATF was held in Washington DC
on 29–30 October 2001. It agreed on eight special recommendations on terrorist financing
and a plan of action ‘to secure the swift and effective implementation of these new
standards’. A declaration by the EU heads of state and the commission of 19 October 2001
called for ‘effective measures to combat the funding of terrorism by formal adoption of the
Directive on money laundering and the speedy ratification by all Member States of the
United Nations Convention for the Suppression of the Financing of Terrorism. Moreover,
the commitments made in the FATF, the mandate of which must be broadened, must be
turned into legislative instruments by the end of the year’, i.e., 2002.
23
M. Levi, ‘Pecunia non olet: cleansing the money launderers from the Temple’, in (1991) 16
Crime, Law, and Social Change 217.
24
M. Gold and M. Levi, Money-Laundering in the UK: an Appraisal of Suspicion-Based
Reporting (London Police Foundation 1994).
25
The 1999 FATF interpretative note tries to find an intermediate position and to get
financial and other regulated bodies to report suspicions even when a ‘tax’ explanation is
given, at least where it is not obvious that tax evasion actually is involved. This stales:
‘In implementing Recommendation 15, suspicious transactions should be reported by
financial institutions regardless of whether they are also thought to involve lax matters.
Countries should take into account that, in order to deter financial institutions from
reporting a suspicious transaction, money launderers may seek to state inter alia that
their transactions relate to tax matters.’
and standardization remain underdeveloped, mutual evaluation has gained

increasing popularity as a method; it holds out the promise of greater legitimation
and ‘buy in’ potential than measures that are simply imposed, and thus it is not
surprising that (with variations) such a process is built into all late modern regimes
for dealing with corruption (Council of Europe ‘GRECO’ and OECD) as well as
money laundering and proceeds of crime confiscation (Council of Europe, EU,
FATF and the IMF).
Mutual evaluation and the Financial Action Task Force

(1) The Context
The increasing popularity of mutual evaluation processes at the international level
owes much to the demonstration effect of the work of the Financial Action Task
Force on Money Laundering (FATF). Since this body was created by the 1989 Paris
Summit Meeting of the G–7, its membership has expanded to include 29 jurisdictions
representing OECD countries, financial centre jurisdictions and (more recently)
selected strategically important states drawn from previously underrepresented
regions such as South America. It meets in plenary session several times each year,
including one meeting held in the country of the presidency (which rotates on an
annual basis). Though located physically within the OECD (and being a significant
component of its website), the FATF is not formally part of that or any other
international institution, nor is it a creature of treaty. Rather it is the steering body
of an ad hoc grouping of governments and others with a single issue agenda – money-
laundering controls – which can contain great complexity given the range of
activities with which that agenda intertwines. Regulated laundering potentially
includes the proceeds of all crimes for gain and even, in the case of terrorism and
some cyber crimes, of the proceeds of both criminal and non-criminal activities
committed for ideological rather than material gain. FATF attendees consist mainly
of financial regulators and law enforcement representatives, alongside senior civil
servants normally drawn from Treasury and Justice Departments.
The FATF aims to give effect to three central objectives:
a) the strengthening of the criminal law and securing other improvements in
national legal systems;
b) the strengthening of international co-operation; and
c) the enhancement of the role of the private sector in efforts to prevent and
detect money laundering. It has done so primarily by making and reviewing
(in 1995–6 and again 2001–2) its 40 recommendations or action steps which
were first elaborated in its 1990 Report.26
26
See Gilmore supra note 19, and M. Pieth, Die Bekämpfung der Geldwäscherei – Modellfall
Schweiz?, (Basel and Frankfurt am Main 1992).
i) Monitoring implementation by FA TF members

In the conclusion to the 1990 report it was recognized that ‘a regular assessment of
progress realised in enforcing money laundering measures would stimulate countries
to give to these issues a high priority...’.27 Two principal procedures have since been
developed to this end:28
1. a process of annual self assessment, originally based on two detailed
questionnaires circulated to each member country or territory and then
analyzed for compliance with the 40 Recommendations. The self-assessment
system has been refined on several occasions, adding to the number of more
objective items and then, after the general revisions of 1996, extending
questions on the laundering of non-drug crime proceeds. ‘Enhanced self-
assessment’ procedures were agreed to at the September 1999 FATF plenary,
and two alterations are particularly significant, namely the removal from the
self-assessment process of non-mandatory or vague recommendations and a
more focused review on areas of partial or non-compliance. FATF also tried
to simplify and streamline the process, shortening and combining the
previous questionnaires. 29 The self-assessment procedure continues to
contain divergent interpretations of some recommendations, but FATF
members themselves consider there to have been a significant improvement;30
2. Unprecedented in international practice in the criminal law sphere at the
time, FATF II decided to supplement self assessment with a system of mutual
evaluation, examined by selected other members of the FATF, according to
an agreed protocol for examination and agreed selection criteria. The initial
round of mutual evaluation, the major purpose of which was to assess the
degree of formal compliance with the recommendations, was completed in
1995. A second round, with a focus on the effectiveness in practice of the
measures taken by members, was initiated in the following year and was
completed in mid–1999. The remit here also included an assessment of ‘any
follow-up action taken in response to the suggestions for improvement made
in the first round’,31 The third round will focus ‘exclusively on compliance
27
W. Gilmore (ed.) International Efforts to Combat Money Laudering, (Cambridge Grotius
1992) at p. 24.
28
A third but little used device is known as a cross-country review. This is intended to provide
an analysis of the implementation of specific recommendations by the membership as a
whole.
29
‘FATF Annual Report 1999–2000’ (Paris FATF 2000) at p. 20.
30
See, e.g., ‘FATF Annual Report 2000–2001’ (Paris FATF 2001) at pp. 13–14. The FATF
has decided to complete an early self-assessment exercise to ascertain the degree of
compliance by its members with the new recommendations on the financing of terrorist
activities.
31
See ‘FATF Annual Report: 1996–1997’ (Paris FATF1997) at p. 10. Although there were
only 26 members in the relevant period, a total of 28 evaluations were undertaken; this
with the revised parts of the recommendations, the areas of significant

deficiencies identified in the second round and generally the effectiveness of
the counter-measures’32 but because of the phasing of the evaluation cycle in
relation to the revisions, evaluation criteria are always the product of the
previous set of recommendations rather than the most recent agreed
improvements.
Mutual evaluation is, in essence, an international system of periodic peer review
under which each member is subject to a form of on-site examination. 33 As Patrick
Moulette, the current FATF executive secretary, has pointed out: ‘Each evaluation
team usually comprises three examiners (four for the larger countries) of different
nationalities whose expertise must cover all aspects of the fight against money
laundering. Each team therefore comprises a legal expert (a judge or justice ministry
representative), a financial expert (from a finance ministry, central bank or
regulatory authority for the financial sector), and an operational services (law
enforcement) expert (from the police, the customs or an agency receiving and
analysing suspicious transaction reports, such as FINCEN in the United States).’34
Formally, the team of examiners is selected by the FATF president (in reality, by the
secretariat), and thereafter, the country to be examined is advised as to both the
composition of the team and the dates of the on-site visit. 35 While it is ‘an underlying
principle of the mutual evaluation process[. . .]that all members should participate in
the process’, this goal was not fully satisfied in the first round. In the second, all
members provided at least one evaluator although efforts to secure a better balance
in terms of overall involvement were not completely realized.36
The examination team visits the country in question, normally for three days,
cont.
included assessments of Aruba and the Netherlands Antilles, which are separate
constituent parts of the Netherlands which is a member of the FATF.
32
‘FATF Annual Report: 1997–1998 (Paris FATF 1998) at p. 8
33
For this reason (among others), the Multilateral Evaluation Mechanism (MEM) being
operated by the Inter-American Drug Abuse Control Commission of the OAS to monitor
compliance with the anti-drug strategy of the hemisphere cannot be regarded as a system of
mutual evaluation as that term is used in this paper. In the CICAD process, each evaluated
country provides data in response to a standard questionnaire as well as a paper on its drug
problem on the basis of which a governmental expert’s group, representing all 34 Member
States, drafts jurisdiction specific reports including recommendations for improvement.
There is no on-site visit element to the process (which also excludes sanctions of any kind).
However, the process does include detailed coverage of the issue of money laundering and
extends to the monitoring of the implementation of country specific recommendations.
34
P. Moulette, ‘The Mutual Evaluation Process of the Financial Action Task Force on
Money Laundering’ (PC-R-EV(98)1, 29 January 98) (Strasbourg Council of Europe 1998)
at p. 25.
35
‘Review of FATF Anti-Money Laundering Systems and Mutual Evaluation Procedures
1992–1999’ (Paris FATF 2001) at p. 37.
36
Ibid. at pp. 37–38.
during which time it meets those ministries and institutions (public and private) with
a mandate or substantial practical involvement in the anti-money laundering sphere.
The team then prepares a detailed report, including the identification of deficiencies
and suggestions for improvement, which is discussed in and adopted by a plenary
meeting of the Task Force. Although each such report is and remains confidential,
agreement was reached to make executive summaries public. These are contained in
the annual reports of the work of the FATF, which can now be accessed by the
general public on the Internet.
Detailed procedures, rules and expectations have been developed to govern all of
the stages of this innovative and intrusive process,37 the comprehensive exposition of
which lies beyond the scope of this article. However, while the system has evolved
over time, a significant effort has been made from the outset to ensure equality and
consistency of treatment of evaluated jurisdictions and a recent internal review has
concluded that, by and large, these goals have been met.38
Although the self assessment and mutual evaluation procedures were developed
with existing Member States and territories in mind, they have been used in two
situations which were not fully envisaged at the outset; in relation to institutional
members and in the context of the recent limited programme of geographic
expansion of membership. The European Commission and the GCC are full
participants within the FATF, but – perhaps significantly for anti-terrorism
purposes – while all fifteen European Union States are members, none of the six
members of the GCC (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United
Arab Emirates) are Task Force participants in their own right.
Over time the absence of regular monitoring procedures for these countries
emerged as a source of concern, connected at least in part to terrorism and the fear
thereof. In May 1997 agreement was reached on how to carry out an evaluation of
the measures taken by them. The first step was to distribute self-assessment
questionnaires. Unfortunately the partial and incomplete nature of the subsequent
returns made it impossible to form a view as to the state of compliance.
Consequently, it was agreed that a high level FATF mission would be despatched
to the Council Secretariat to seek further information and ‘to discuss how to
improve the implementation of effective anti-money laundering systems in the Gulf
region’.39 This mission eventually took place in January 1999 and resulted in a
commitment to provide all outstanding information required for the self-
assessment exercise. In addition, the discussions set in train a process which was
to result in all GCC members save Saudi Arabia agreeing to undergo mutual
evaluation.40 However, ‘given the unique position of the GCC[. . .]it was decided
37
Ibid, at 35–42; R. Sansonetti, The Mutual Evaluation Process: A Methodology of
Increasing Importance at International Level’ in (2000) 7(3) Journal of Financial Crime 218
at 219–220.
38
See FATF supra note at p. 13.
39
40
‘FATF Annual Report: 1998–1999’ (Paris FATF 1999) at p. 30.
that mutual evaluations of its member States should be a joint FATF/GCC

process’.41 The series of on-site visits commenced in June 2000 and all five had
taken place prior to June 2001. Similarly, the same five states have completed the
self-assessment exercise and responsibility for future such surveys has been
assumed by the GCC Secretariat.42
The second innovative context in which the process of mutual evaluation has been
employed is in the vetting of new applicants for membership. In June 1998, the
FATF decided to permit the first limited expansion of its membership since the early
1990s. Here the focus was to be on broadening the geographic base to include
‘strategically important countries which already have certain key anti-money
laundering measures in place (criminalization of money laundering; mandatory
customer identification and suspicious transactions reporting by financial institu-
tions), and which are politically determined to make a full commitment towards the
implementation of the forty recommendations, and which could play a major role in
their regions in the process of combating money laundering’.43 The subsequently
elaborated criteria for admission included a political commitment ‘to undergo
annual self-assessment exercises and two rounds of mutual evaluations’.44
Pursuant to this policy of strategic influence, Argentina, Brazil and Mexico, which
had been admitted to observer status in September 1999, had their anti-money
laundering systems positively evaluated (on the limited range of ‘fundamental’
principles) the following year and were admitted to full membership in June.45
Surprising those sceptics who regard mutual evaluation as a ‘stroking’ cartel, the
prospect of a mutual evaluation visit frequently acts as a catalyst for governmental
action. As Dilwyn Griffiths, the then FATF executive secretary, noted in his address
to the 1993 Oxford Conference on International and White Collar Crime: ‘I do not
think that progress in implementing the recommendations would have been as swift
and substantial without it. Countries are concerned to have a good story to tell
examiners and there is thus an impetus to get things done which would otherwise be
lacking’.46 The detailed reports indicate often quite extensive areas in which
improvements in laws, regulations and practices could and should be made. One of
the functions of the second round (which will also be a feature of the third) is to
41
42
See FATF supra note at pp. 14–15; Saudi Arabia has since submitted a self-assessment to
the Secretariat of the GCC.
43
44
45
Potential new members include Russia, India, China and South Africa. A curious feature of
this list is that Russia, as will be seen below, is presently on the FATF blacklist of NCCTs.
46
D. Griffiths, ‘International Efforts to Combat Money Laundering: Developments and
Prospects’, in Action Against Transnational Criminality: Papers from the 1993 Oxford
Conference on International and White Collar Crime (London Commonwealth Secretariat
1994) p. 11 at p. 13.
check on the measures adopted in response to the deficiencies identified in the earlier
report.47
While these periodic reviews have been sufficient to secure substantial
improvements in many FATF members, compliance with the forty recommenda-
tions is incomplete. For this reason, the Task Force has formulated a policy
(unchanged since 1994) which reflects a graduated approach. At its most basic and
frequently invoked level, this takes the form of a requirement for the country
concerned to make periodic reports. As one insider has noted: ‘when a country fails
to comply with a large number of FATF recommendations, we initiate a follow-up
procedure, a major feature of which is the obligation to submit regular progress
reports on the implementation of the recommendations. There would be no point in
completing an evaluation and then ignoring the result.’ 48
When this tactic for increasing peer pressure fails, additional steps may be taken,
as happened with Turkey in 1995—96. Its failure, inter alia, even to enact basic anti-
money laundering legislation had placed it in a position of serious non-compliance
with the recommendations. Accordingly, the FATF president first wrote to relevant
ministers in that member country expressing concern. Subsequently, a high level
mission was sent to Ankara to encourage the government to take urgent action or
face the possibility of having more serious steps taken against it. Finally, on 19
September 1996, the FATF issued a public statement in which it invoked its so-called
Recommendation 21 procedure against a member for the first time.49
This prospect of financial near-paralysis seems to have had the effect of
stimulating the attention of policy makers and others in Ankara, and in November
1996 Turkey enacted and brought into force the Law on the Prevention of Money
Laundering. The Recommendation 21 measures were then lifted.
Concerns over partial non-compliance by other FATF members have been
frequently expressed. Of these, the most serious to date related to Austria, which had
declined to abolish anonymous passbooks for Austrian residents in spite of the fact
that this was regarded as a clear breach of the requirements of Recommendation 10.
As a result, the FATF policy was triggered. The president first wrote to the Austrian
Government about this matter, but when this did not lead to change, a high level
47
A recent FATF internal review reveals significant differences in the level of positive
responses to such recommendations from the first round: ‘When averaged out across all the
members[...], approximately the same number of suggestions were implemented as those
that were not’ (see FATF supra note at p. 34).
48
See Moulette supra note at p. 27)
49
Recommendation 21 of the FATF states: ‘Financial institutions should give special
attention to business relations and transactions with persons, including companies and
financial institutions, from countries which do not or insufficiently apply these
Recommendations. Whenever these transactions have no apparent economic or visible
lawful purpose, their background and purpose should, as far as possible, be examined, the
findings established in writing, and be available to help supervisors, auditors and law
enforcement agencies.’
mission was dispatched to Vienna without success. The Task Force invoked
Recommendation 21 and called on financial institutions to give special attention ‘to
transactions with bank cheques issued by Austrian banks and denominated in
Austrian schillings, as these funds might be the result of the closing of anonymous
passbook savings accounts’. In the news release of 11 February 1999 which announced
this measure, the FATF indicated that it would continue to monitor the situation.
When even this robust (in international relations terms) stance failed to bring
about the desired change in policy the Task Force, at its February 2000 meeting,
took the unprecedented step of agreeing – and agreeing publicly – to suspend Austria
from membership unless, by 20 May:
‘1. The Austrian government issues a clear political statement that it will take
all necessary steps to eliminate the system of anonymous passbooks in
accordance with the 40 FATF Recommendations by the end of June 2002.
2. The Austrian government introduces and supports a Bill into Parliament
to prohibit the opening of new anonymous passbooks and to eliminate
existing anonymous passbooks in accordance with the above paragraph.’50
Whether to mitigate public shaming or from fear of economic consequences, the
Austrian government soon took the required steps, leading to the lifting of the threat
of suspension.51
However, questions have been raised about the willingness of FATF to apply
consistent principles to more powerful nations than Turkey or Austria: the prime
candidate here is the US, whose 1997 and subsequent evaluations might appear to
merit more severe treatment than it has received.52 The operation of the non-
compliance policy ‘relies on a combination of the compliance findings under mutual
evaluation reports and the self-assessment exercise’,53 though both the non-
compliance strategy and mutual evaluation have had the original 1990 recommenda-
tions as the frame of reference whilst self assessment relates to the recommendations
as amended in 1996. These should however be brought into alignment in the course
of the third round (although as noted earlier, the next round will also be out of ‘sync’
with the new recommendations).54
ii) FATF-style regional bodies

In governmental circles in the major economies, the FATF experience with mutual
evaluation has been widely perceived as a success. A recent internal review concluded
50
OECD News Release, Paris, 3 February 2000.
51
See FATF supra note at pp. 20–22; K. Alexander, ‘The International Anti-Money
Laundering Regime: The Role of the financial Action Task force’ in (2000) 1(1) Financial
Crime Review 9 at 19.
52
The Economist, 23 June 2001, at p. 801.
53
54
See FATF supra note at pp. 17–18
that the process had ‘proven to be, by and large, an effective and efficient one, which
utilises relatively few resources to obtain significant results’.55 A broadly similar view
has been taken in the literature. 56 Sansonetti noted that the process ‘is one of the
cornerstones of the FATF and has proven to be the most successful element of its
activities’.57 The Task Force has created an ever-growing number of regional anti-
money laundering bodies, most recently in Africa and South America. These
regional structures differ in practice, procedure and emphasis in response to regional
needs, practical local realities and political sensitivities. Similarly, the nature and
intensity of the relationship with the FATF itself differs from case to case, but there
is always some involvement with the FATF secretariat, and such bodies as the
Offshore Group of Banking Supervisors conduct joint OGBS/FATF evaluations.
The rather awkwardly entitled Select Committee of Experts on the Evaluation of
Anti-Money Laundering Measures (PC-R-EV) is supported by the Secretariat of the
Council of Europe in Strasbourg, and its processes of self assessment and mutual
evaluation are undertaken against a more extensive set of anti-laundering standards
than those applied to FATF members. Thus, in addition to the Forty
Recommendations, participating countries are assessed in relation to their
compliance with the 1988 UN and 1990 Council of Europe conventions, and the
1991 EC Directive.58 All members report back to a plenary meeting one year after
being subject to mutual evaluation on their own progress made towards
implementation of the recommendations contained therein.59 Members cannot be
suspended, though the Recommendation 21 procedure for ‘special attention to
transactions’ may be applied.60 At its January 2001 plenary, it was agreed that in
principle the second round of evaluations, which has now commenced, should
include at least one FATF evaluator in each team.61 Clearly, the political principle is
to get Member States to ‘buy in’ to the legitimacy of the process and to the outcomes
generated by that process under the watchful eye of FATF.
The June 1996 annual report noted that ‘where a non-member has successfully
gone through a mutual evaluation by an international organisation, using a
methodology in line with FATF standards, and is in compliance with the FATF
forty recommendations according to this evaluation, that non-member should not
fall under the policy outlined in Recommendation 21’.62 Conversely, a mutual
55
56
S. Morris, ‘Mutual Evaluation: An Approach to Achieving Fairness and Progress in
Implementing International Agreements’ in (1999) 15(7) International Enforcement
Reporter 285; S. Morris, ‘Mutual Evaluation Systems’ in (2000) 15(4) American University
International Law Review 792.
57
See R. Sansonetti (2000) at p. 218.
58
‘PC-R-EV: Annual Report 2000’ (Strasbourg Council of Europe 2000) at p. 41.
59
Ibid, at pp. 5, 8.
60
‘PC-R-EV: Examiners Guide’ (Strasbourg Council of Europe 2000) at pp. 12–13.
61
See Council of Europe supra note at p. 6.
62
‘FATF Annual Report: 1995–1996’, (Paris FATF 1996) at p. 17.
evaluation by such a body which revealed substantial non-compliance could be

expected to make the imposition of this measure by the FATF even more likely.
However, the Non-Cooperative Countries or Territories (NCCT) initiative has called
this into question. The Task Force established a working group which afforded
priority to the elaboration of criteria to be utilized in defining non-cooperation and
in establishing the process through which to identify specific jurisdictions considered
to meet the criteria in practice. Central to it are some 25 criteria – a distillation from
and adaptation to the 40 Recommendations – which define non-cooperation for
these purposes. 63 It also established a review process which was intended to result in
the production of a ‘black list’ of NCCTs. Finally, for present purposes, it identified
a number of steps – including the imposition of sanctions – to encourage progress
from those so listed.
The Task Force undertook country specific reviews (which differed substantially
from the mutual evaluation process in both nature and scope) over the following
months the outcome of which was contained in its report of 22 June 2000.64 This
created, inter alia, a ‘black list’ of 15 jurisdictions. While the majority were ‘offshore’
centres in the Caribbean and the Pacific, it also embraced states as diverse as Israel
and Russia. Those listed were strongly urged to address identified deficiencies in
their systems. As an initial encouragement to do so, the Task Force (unexpectedly)
invoked its Recommendation 21 procedure for all on the list. It also warned that if
they failed to respond in a positive manner, consideration would be given to the
adoption of counter-measures. In July these developments were warmly welcomed
by the G–7. Heads of State and Government reiterated their willingness to act
together, in appropriate cases, to impose such measures ‘including the possibility to
condition or restrict financial transactions with those jurisdictions and to condition
or restrict support from IFIs to them’.65
In the course of the following year, the FATF articulated its policy on the removal
of jurisdictions which make sufficient progress from the list, reviewed (and listed)
additional non-member states and territories, and paved the way for the imposition
of co-ordinated measures against certain delinquents,66 a step finally taken for the
first time in early December 2001, but restricted to the Pacific Island micro-State of
Nauru. 67
63
See FATF supra note at pp. 18–19.
64
‘Review to Identify Non-Cooperative Countries or Territories: Increasing the Worldwide
Effectiveness of Anti-Money Laundering Measures’ (Paris FATF 2000).
65
Statement of the G-7.
66
See FATF supra note 35; and FATF, ‘Review to Identify Non-Cooperative Countries or
Territories: Increasing the Worldwide Effectiveness of Anti-Money Laundering Measures’
(Paris FATF 2001).
67
At the joint Ecofin and Justice and Home Affairs (JHA) Council held in Luxembourg on
16 October 2001, all EU members agreed to apply countermeasures ‘in concert and
concomitantly’. All undertook to ensure that they had the necessary legal powers in place
by 1 January 2002.
This plainly represented a cultural shift, in trying to achieve results from

multilateral efforts without first or afterwards requiring global consensus. Needless
to say, virtually every aspect of this initiative has been the subject of criticism and it
has proved to be extremely controversial within the FATF-style regional groups.68
Expressions of significant discontent in this and other similar contexts have been
acknowledged by the Task Force. In the words of the June 2001 annual report:69
[…] the FATF recognises that this effort has[…]had the unintentional effect of
straining the relationship between the FATF and the FATF-style regional
bodies. The FATF has therefore discussed possible solutions to improve its
relationships with the FATF-style regional bodies in the NCCT area.
Possibilities include giving greater weight to the mutual evaluations conducted
by FATF-style regional bodies when assessing potential NCCTs, provided the
regional body takes into account the 25 NCCT criteria as part of its mutual
evaluation process.70
Both the PC-R-EV and the FATF have agreed to do this: notwithstanding the fact
that there is no doubt that certain of those criteria, while consistent with the 40
Recommendations, go beyond those standards as currently drafted and therefore
impose higher standards than those applied to ‘full’ FATF members.71
iii) The influence of the FATF model beyond money laundering

Given the fact that all fifteen Member States of the EU are FATF participants, it is
not surprising that the positive experience of the mutual evaluation of anti-money
laundering measures should have resulted in discussions of how it could and should
be used in the work of the union in other justice and home affairs spheres. In the
mid–1990s, the increased focus on the threat posed by organized crime provided that
opportunity.
The high level group set up in 1998 recognized that, while formal participation in
such treaty regimes was a necessary condition for the provision of specific forms of
international co-operation, it was not, in itself, sufficient to ensure effective and co-
ordinated action. For this reason, Political Guideline 3 requested the Council to
establish a mechanism, based on the experience with the model developed in the
FATF, for mutually evaluating the manner in which instruments concerning
international co-operation in criminal matters are applied and implemented in each
of the Member States. Elsewhere the principles on which this peer evaluation process
were to be based were set out in summary form. It was recommended that mutual
68
Cf. Council of Europe supra note 58 at pp. 5–7.
69
The FATF decided in September 2001 to conduct a self-assessment exercise to gauge the
extent to which its own membership complies with the NCCT criteria. No decision has yet
been taken to integrate this equivalence into the next round of mutual evaluations.
70
See FATF XII supra note at p. 11.
71
See Council of Europe supra note 58 at pp. 6–7; see FATF supra note at p. 5.
evaluation ‘should as a priority be carried out in respect of judicial co-operation and

could, if the experience proves positive, be extended to other areas of implementa-
tion’.72
While the FATF precedent was clearly influential in the formulation of the text
of the Action Plan (and is specifically invoked in the preamble), only two (Ireland
and the Netherlands) FATF reports have been made public by those countries,73
whereas every member of the EU has elected to permit publication in full of the
country reports produced during the first round. In this respect, there is a parallel
with Council of Europe GRECO teams74 discussed below. Within the OECD
corruption context, unlike FATF, the full reports are required to be made publicly
available.
At a more substantive level, the follow-up and compliance procedures of the
FATF are more extensive and firmly established than those of the EU. This is partly
explained by the fact that, while it has a single-issue agenda, the Joint Action is
intended to deal in sequence with diverse criminal justice issues. Nevertheless,
proposals have recently been made by the presidency that a reporting system be
established through which each jurisdiction would describe, in writing, ‘either the
action taken since the evaluation to remedy the problems pinpointed by the experts,
or the reasons for their inaction’.75 The presidency suggested that, subject to cost,
consideration be given to extending such evaluations to the candidate countries for
admission to the EU.76
The strategy for the prevention and control of organized crime for the beginning
of the new millennium published in the Official Journal in May 2000 calls for highest
possible priority to be given to the strengthening of the mutual evaluation process
and its utilization for the most important issues concerned with the prevention and
control of organized crime. Here a balance should be sought between relevant law
enforcement, judicial and prosecutorial concerns. Furthermore the Council was
urged to consider the possibility of supplementing it ‘with a simplified and expedited
mechanism, to be applied to the implementation by Member States of specific
undertakings. This simplified and expedited mechanism could be used for the
evaluation of specific areas of implementation or for questions which necessitate
rapid evaluation’. 77 However, without overstating and idealizing the ‘one culture’
72
Council action plan to combat organized crime of 15 August 1997, OJ 1997 C251/1 at p. 11.
73
74
Technically, a country can object to having its report published but to date (Spring 2002)
this has not happened, as a culture has developed of making them open.
75
‘Note from the Presidency: Final report on the first mutual evaluation exercise – mutual
legal assistance in criminal matters’ (CRIMORG 12/EJN5) (Brussels Council of the
European Union 2001) at p. 30.
76
Ibid.
77
The Prevention and Control of Organised Crime: A European Union Strategy for the
Beginning of the New Millennium, of 3 May 2000, OJ 2000 C 124/1 at pp. 12–13.
view of Europe, these measures arise within the context of fairly equal countries:
post-enlargement, far greater heterogeneity of culture, income and state capacity will
exist.
Mutual Evaluation and the OECD’s instruments against

transnational corruption
The Context
The procedures of mutual evaluation have been further developed in an area closely
related to money laundering and containing some overlaps with it: the harmoniza-
tion of international standards against corruption, promoted primarily by the
OECD78 and the Council of Europe. 79 One component of this is the application of
money laundering legislation as a lever for freezing and repatriating embezzled and
defrauded public funds as well as bribe payments to senior public officials in the
victim countries, especially in the South and the East.
Again, the technologies applied to make international instruments work are
closely related to the context of the initiative. In the case of the OECD’s anti-bribery
initiative, the US has initially been the driving force, even if for reasons that differ
from those that drive its interests in combating money laundering. The Foreign
Corrupt Practices Act (FCPA), enacted under the Carter administration as part of
the post-Watergate clean-up,80 left US-business at a competitive trade disadvantage
since their major competitors in Europe and Asia were not ready to follow suit in the
1970s.81 However, towards the end of the 1980s the Republican administrations
under Reagan and Bush began to tone down the FCPA.82 In an effort to shift
responsibility for what seemed to be a departure from a moral approach to
international business, the first Bush administration sought a clear decision within
the OECD. However, quite unexpectedly, instead of refusing the US initiative, the
OECD Working Group on Bribery (WGB) decided to outlaw transnational
corruption. The example of the FATF greatly helped to develop a flexible soft-law
78
OECD: Revised Recommendation of the Council on Combating Bribery in International
Business Transactions, adopted on 23 May 1997, Convention on Combating Bribery of
Foreign Public Officials in International Business Transactions, adopted by the
Negotiating Conference on 21 November 1997, signed on 17 December 1997.
79
Council of Europe: Criminal Law Convention on Corruption, ETS No 173, 27 January
1999, Civil Law Convention on Corruption, ETS No 174, 4 November 1999.
80
ABA (ed.), The Foreign Corrupt Practices Act: How to Comply Under the New Amendments
and the OECD Convention, (California 19 February 1999).
81
An early attempt of the UN to co-ordinate the efforts of the Convention was abandoned in
1979 after there was a failure to agree.
82
Cf. the amendments to the FCPA of 1988.
approach in the years between 1989 and 1994, with the drafting of an openly worded
recommendation. The process of toughening up the language in the years up to 1997
demonstrates the ambiguous nature of such collegial participant groups: the
intergovernmental process leaves national governments totally outside until they are
suddenly confronted with a fairly concrete text and asked to take legal action. The
text is only politically, not legally, binding, but its implementation will be forced
along by a very strong lobby of peers. In May 1997, some European countries
(especially France and Germany) sought to slow down or derail the initiative by
substituting for the collegial ‘soft law’ procedures the more formal negotiated rules
required for a legally binding convention. The OECD, an institution hitherto
unaccustomed to drafting conventions let alone criminal law treaties, countered by
rewriting part of the recommendation into a binding text and negotiated the final
treaty in a matter of six months. Whereas, as was noted above, the FATF integrated
its members’ standards into regional and national texts to be applied both inside and
outside the organization, the OECD’s peer group amalgamated soft law and
convention texts and appended an evaluation process to enforce the implementation
of this mix, but only on its members.83 Shortly afterwards, the Council of Europe
followed suit by pursuing an equally mixed agenda of guiding principles and criminal
and civil law conventions among its GRECO members.84
Different from the FATF and also from most international organizations dealing
with corruption, the OECD is totally focused on a very specific goal: to create a level
playing field for exporters and investors worldwide85 by collectively-unilaterally86
banning the bribery of foreign public officials and related accounting offences as well
as money laundering by natural and corporate persons domiciled in industrialized
states. Caught in a kind of ‘prisoner’s dilemma’, states had to choose whether to go
ahead and expose industries domiciled in their territories to the risk of severe
criminal or administrative action, or to risk public stigma and marginalization as
states tolerant of corruption. Such pressure has taken on formidable forms and – to a
greater extent than the FATF NCCT initiative, for example – has been directed
towards changing the legislation and behaviour of the core members of the Club.
83
Article 12 of the bribery convention specifically provides for monitoring and follow-up to
be undertaken in the framework of the OECD Working Group on Bribery (WGB). The
terms of reference of the WGB in turn make provision for systems of both self- and mutual
evaluation.
84
The 1998 agreement establishing GRECO contains detailed provisions on the mutual
evaluation procedures that were to be utilized, so these are less flexible than the OECD
arrangements.
85
The OECD Member States represent 70 per cent of world exports and 90 per cent of
foreign direct investment. The US trade representative estimated the value of the OECD
convention to the US at 30 billion USD per annum in potential trade gained from the
prevention of transnational bribery by its competitors.
86
Cf. for this approach M. Pieth, ‘The Harmonization of Law against Economic Crime’ in
(1998/99) European Journal of Law Reform 527 at 535 et seq.
Targets for such high-visibility pressure have included France, Germany, Japan and
the UK.87
Under this high-profile media and political reputational spotlight, it is not
surprising that the OECD convention was implemented even more quickly than the
UN drugs convention: it entered into force barely a year after its signature and two
years later, all signatories have ratified, and thirty out of thirty-five members have
implemented the standard in national law. This rapid development may suggest a
sense of the pressure applied amongst Member States, a pressure intensified after the
key G–7 countries had decided to change their own legislation.
The international significance of the FATF precedent
The significance of the rise and rise of mutual evaluation processes of the FATF type
at the international level should not be underestimated. The notion that, to join a
quasi-club within the international community and to be considered acceptable to
responsible international society, one had to submit to periodic on-site inspection by
one’s peers, constituted a radical departure from the orthodoxy of international
affairs, where considerations of autonomy and sensitivities about territorial
sovereignty have traditionally dominated governmental thinking. Intrusive verifica-
tion procedures are, of course, not unknown. Of these, perhaps the most
comprehensive are to be found in the sphere of arms control and disarmament;
the ultimate form of which to date was provided for in the text of the 1993 UN
Convention on the Prohibition of the Development, Production, Stockpiling and use
of Chemical Weapons and on their Destruction.
However, even in the sphere of the monitoring of the implementation of legal
obligations enshrined in international treaties, on-site procedures are very much the
exceptions which prove the rule. More commonly, multilateral treaties will contain
either no or relatively formal monitoring procedures allied with weak dispute
settlement procedures: an approach well illustrated by the 1988 UN drug trafficking
convention.88 In the case of the FATF’s efforts to monitor compliance and
87
The then German minister of economy was exposed in the international media as
condoning international corruption for delaying the agreement to the new text. The UK
has been officially and publicly criticized for its unwillingness to legislate in time and
representatives have gone as far as to discuss economic sanctions against British
companies. Japan has been asked to redraft its new law due to serious ‘misunderstandings’,
and in late 2001, the diet was in the process of adopting new additional legislation to
complement the first version of three years ago. In the case of France, the WGB intervened
during the primary legislative process itself and asked for changes to be made between the
first and second reading. After some serious political haggling, essential changes were
made.
88
W. Gilmore (1993) at pp. 38–41.
implementation of its 40 Recommendations, they take the form of ‘soft law’ and are
not formally binding as a matter of international law. As noted earlier, its package of
counter measures is not contained in a treaty text to which its members have
subscribed (though some of the required or suggested measures are embodied, at
least in part, in other treaty texts). While some recommendations may have
crystallized into rules of customary international law, many must continue to be
regarded as lacking any obligatory legal effect, whatever may be the political and
economic effects of non-compliance.
The importance of the international precedent set by the FATF (and, at least on
paper, by certain of the regional anti-money laundering groupings) is further
underlined by the fact that the membership agreed to a practical graduated
procedure (of which the imposition of Recommendation 21 measures89 and the
threat of expulsion are particularly noteworthy) through which their own
compliance with the agreed strategy can be encouraged if not enforced. It is rare
for countries to accept the concept of the imposition of quasi-sanctions for failure to
implement non-legally binding standards, and this indicates the power of ‘soft law’
when combined with heavyweight political push.
The Security Council has the power to impose sanctions under Chapter VII of the
UN charter in order to maintain or restore international peace and security. In the
aftermath of the terrorist attacks on the US on 11 September 2001, such powers were
used to prevent and suppress the financing of terrorist acts and to require the
freezing, without delay, of terrorist funds (Security Council Resolution 1373 (2001)).
Notwithstanding the view of the Council that there is a close connection between
international terrorism and, inter alia, drugs, money laundering and organized
crime,90 the opportunity to utilize its powers against other criminal suspects in the
absence of such a demonstrable terrorism nexus is severely restricted by both
technical legal and political considerations.
In large measure because of the positive demonstration effect of the FATF
precedent, the making of provision for mutual evaluation of the implementation of
international commitments in the area of financial crime has become commonplace.
Indeed, in certain institutional contexts it has become the new orthodoxy. This is, in
turn, well illustrated in the practice of the Council of Europe, where the firm
expectation has emerged that international legal instruments adopted in pursuance
of its programme against corruption will make specific provision for the monitoring
of implementation through GRECO.91
Though some few communist ideological insurgents remain (e.g. FARC in
Colombia) and the G–7 may reasonably fear Islamic anti-capitalist as well as anti-
globalization campaigners, anti-communism may no longer be as necessary because
89
See supra note 13.
90
This is too large an issue to be dealt with here, but some groups fund terrorist activities
from crime, while others may do so wholly or partially from legitimate business activities.
91
See, e.g., Article 24 of the Council of Europe Criminal Law Convention on Corruption.
there are no plausible alternatives to capitalism, at least in non-theocratic States.

Bodies such as FATF where voting powers are widely distributed cannot be a simple
mechanism for the pursuit of US-only, UK-only or France-only ‘threat reduction’.
An authentic reason to take action outside the borders of the state is provided by the
(correct) analytic construction that the continuing existence of places to hide and
cleanse money is a prerequisite for a continuing transnational crime enterprise trade.
Putting pressure on all governments to comply has both symbolic as well as direct
instrumental purposes. The term ‘mutual evaluation’ will survive because it serves
the purpose of making international relations look voluntary; the extent to which
this is and will be seen as being mystificatory, and by whom, depends both on how
the major G–7 countries behave (in whatever international body they are operating)
and on how legitimate both the acts and the process are seen by those who are
members of regional/international bodies and those who are not.
At least three aspects of the expansion of globalized modes of regulation
(including mutual evaluation) may give cause for concern. First, such expansion may
erode or side-step some essential principles of the rule of law, not because it is
involuntary but because it shows a lack of interest in classical principles of criminal
law. Secondly, it is not clear what, if any, limits there are to this pragmatic
expansionism (and the implementation ‘assistance’ that often accompanies it). And
thirdly, the soft focus of mutual evaluation may conceal a tougher underbelly of
hegemony and lack of democratic control.92 It is difficult to see what sort of
democratic argument would support the right of Third World élites to receive bribes
from the West against the economic interests of their nations. However, if the
economic activities of independent states are defined as illegitimate facilitators of
‘the enemy’93 that ‘require’ disablement in the ‘Wars’ on organised crime and
terrorism, this poses obvious dangers for the traditional rights of minority nations
who are cajoled or threatened into submission.94 A sense of grievance is especially
likely when FATF member countries are not sanctioned for the same practices that
would lead less powerful nations to be blacklisted. This may be politically tempting
but it looks like the sort of (often unconscious) preference for symbolic victories over
real impact that has bedevilled the ‘War on Drugs’ since its inception; if the UK, US
or other powers are allowed not to identify beneficial owners, but the OGBS and
smaller economies are required to identify them on pain of economic sanctions, how
can the claim to effectiveness – whether as a motivation or as an effect – be justified?
A similar situation arises with requirements on European but not American
92
See Pieth supra note at pp. 540–5.
93
J. Blum et al., Financial Havens, Banking Secrecy and Money-Laundering (New York
United Nations 1998); M. Levi and M. Maguire, ‘The Identification, Development and
Exchange of Good Practice for Reducing Organised Crime’ (Report for Falcone
Programme, European Commission, 2001 unpublished).
94
It can become a slippery slope on which any obstructions to smooth co-operation are
deemed to justify intervention and sanctions.
accountants and lawyers to report suspected transactions. The imposition of

reporting obligations on lawyers flows from the new directive and (at least until the
revision of the 40 Recommendations) does not form a part of the FATF package.
Consequently, the sanctions against non compliance does not apply to this issue for
EU members at present. Thus, mutual evaluation is a very useful process to
international bodies who are concerned with effectiveness (or rather, efficiency and
coherence) of implementation, which also offers a political mode of integration well
beyond the mere passage of legislation; it does not by itself orient states in judging
the impact of regulation on the extent and organizational form of primary criminal
behaviour itself. Indeed, whereas there is a clear connectedness of anti-transnational
bribery policies to fairer trade and of some ‘good governance’ controls to better flows
of famine and (relative) poverty relief, the measurement of the relationship between
anti-laundering controls and actual outcomes, such as crime reduction, remains very
much in its infancy.
Although this paper has described the rise and rise of mutual evaluation and
stressed the significance of this, there must also be consideration of the limitations of
this exercise. Whether or not it is correct that a tighter focus on terrorist finance will
eliminate (or, more plausibly, reduce) terrorism, the measures demanded by the most
likely attack targets are unlikely to be achieved simply by mutual evaluation and
voluntary responses. There is too great a temptation to stigmatize ‘rogue states’ and
take financial action in the face of ‘clear and present danger’. There will also be
pressures to rationalize the world systems of evaluation to reduce the regulatory
burdens that inspections impose, though if and how this will be achieved politically
remains open to serious question. One should note here the FATF-inspired self-
assessment exercise of compliance by both member and non member States, with the
eight special recommendations on terrorism. In the latter context at least, by the
June 2002 plenary, the FATF put in place a process to identify non-cooperative
jurisdictions in this sphere and compel improvements, based on the responses to self
assessment questionnaires by members and non-members.95
Though it is doubtful that those areas in which mutual evaluation has been firmly
established will be reigned back, newer international conventions and other
instruments outside the EU and applicant countries’ framework may find it more
difficult to get countries to agree to be monitored. It remains to be seen, therefore,
whether mutual evaluation constitutes a false dawn of a new mode of regulation of
international criminal ‘law-in-action’, or merely an application to a relatively
restricted though important set of globalized commercial phenomena based on what
the unprepared political market would bear at a particular historical conjuncture.
95
See the FATF website, especially the press releases following the Washington DC meeting
October 2001, the Hong Kong meeting at the end of January 2002, and the Paris meeting
June 2002.
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Financing of Terrorism: Following the Money
Mark Pieth*
1. Introduction
Combating money laundering or, to borrow a phrase, ‘following the money’, has
developed into one of the most dynamic concepts in financial regulation and
criminal law over the past decade. The paradigm has turned out to be extremely
flexible; first applied in a limited field to describe the accumulation of capital
generated on illegal markets, it is now used as a catch-all phrase for the management
of ill-gotten gains from all possible sources. It is hardly surprising then that once the
first shock after the 11 September terrorist attacks had subsided, governments,1
financial institutions 2 and later also international organizations 3 started to develop
the concept of a coordinated fight against terrorism. In fact, one might ask why
existing policies had not been more rigorously implemented before that date. 4 As
early as 1980, the first document in Europe conceptualizing the term ‘money
laundering’5 did not focus on drug trafficking, rather it sought a means of tracking
the ill-gotten gains of hijacking and robbery by left-wing terrorists, especially in Italy
and Germany (‘Red Brigades’ and ‘Red Army Faction’). Furthermore, the UN had
already negotiated a series of instruments against terrorism 6 before 11 September,
some of which were only ratified by the majority of member states after the attacks
of last fall.
The question why the anti-money-laundering-concept was not applied more
rigorously to terrorist groups, such as the IRA, ETA and others, that have long been
in existence is certainly a valid one. The suspicion arises that political difficulties in
* Professor, Criminal Law at University of Basel.

1
For US: Cf. ‘USA Patriot Act’, H.R. 3162 < www.politechbot.com/docs/usa.act.fi-
nal.102401.html>.
2
Cf. ‘Wolfsberg Statement, the Suppression of the Financing of Terrorism’.
3
FATF, Special Recommendations on Terrorist Financing, 31 October 2001.
4
If they had been, why would many countries now be drafting more stringent legislation?
5
Council of Europe: R(80)10 of 27 June 1980.
6
GA Res. 49/60, 9 December 1994; GA Res. 51/210, 17 December 1996; GA Res. 52/164
and 165, 15 December 1997; GA Res. 53/108, 8 December 1998; GA Res. 54/109, 9
December 1999, launching the International Convention for the Suppression of the
Financing of Terrorism and the Security Council Res. 13/73.

115
116 Mark Pieth
drawing a clear line between ‘freedom fighters’ and ‘terrorists’ blocked the necessary
consensus. After 11 September, everything seems quite different: the UN, the
Financial Action Task Force (FATF) and others are now focusing their efforts on
controlling the ‘financing of terrorism’ and have immediately attempted to apply the
concept commonly used for the control of money laundering for this purpose.7
International agendas come about through pragmatic reactions to events. The
problem, however, demands a more fundamental discussion of the wider context of
the development of the paradigm. Going back in time to the mid 1980s, when ‘money
laundering’ became a household word throughout the world, the aim at that time
and subsequently focused mainly on impeding the financing and re-financing of
illicit drug-trafficking. Within the field of criminal law, international standards
promoted three major changes: the criminalization of the management of funds
derived from the drugs trade, forfeiture of ill-gotten gains, and reciprocal mutual
legal assistance.8
However, a closer look reveals that in the early discussions leading up to the Forty
Recommendations of the Financial Action Task Force on Money Laundering
(FATF),9 a second goal had already been defined, which aimed at a more rigorous
control of routine transactions. This was, of course, the primary concern of countries
with large drug-user markets. However, it was evident that the ambitions, especially
those of the US delegation to the FATF, went even further; beyond the registration
of cash transactions, the suggested measures were intended to reduce drastically the
use of cash globally in order to establish a paper trail wherever possible. It is in
keeping with the logic of this strategy that one of the major suggestions made by the
US delegation in the early days of the FATF was to maintain meaningful statistics
on aggregate financial flows in OECD countries.10 Clearly, the international minimal
standards developed concurrently on ‘customer-due-diligence’ (CDD) for banks,
especially the ‘KYC’-principle (know-your-customer), codified first in the Basel
Statement of Principles 11 and integrated into the common standards of the FATF
1990,12 indicate that the initiative against money laundering was from the outset
multi-focused. Beyond tracking criminals and their assets, broader risk management
strategies and international regulations for financial markets were anticipated. This
motivation comes out even more clearly in later initiatives, most notably the
Financial Stability Forum and its report in 2001 13 as well as the current work of the
7
Cf. note 3,‘… financing of terrorism, terrorist acts and terrorist organisations as predicate
offences to money laundering’!
8
Pieth, Tracking Down the Dirty Money, Financial Times, 25 October 2001, p. 23.
9
FATF, Forty Recommendations, report of 6 February 1990.
10
Cf. ibid, Documentation Legal and Regulatory Subgroups FATF I.
11
Basel Statement of Principles of 12 December 1988.
12
Cf. supra note 9, FATF Rec. 12–14.
13
Financial Stability Forum, International Standards and Codes to Strengthen Financial
Systems, April 2001.
Financing of Terrorism: Following the Money 117
IMF14 that addresses the problems associated with the destabilizing potential of
offshore financial centres and the services they offer.
2. The abolition and re-introduction of asset forfeiture
Returning to the primary goal – crime control – a rarely discussed development

needs to be analyzed. In the beginning, money laundering was not so much a concept
to criminalize the behaviour of individuals or legal persons but rather a means of
securing the forfeiture of ill-gotten gains. In fact the United Nations’ ‘Comprehensive
Multi-disciplinary Outline of Future Activities in Drug Abuse Control’15 of 1988, the
blueprint of the Vienna Convention Against Trafficking in Narcotic Drugs of 1988,16
did not mention criminalization as such, but concentrated exclusively on forfeiture.
Forfeiture of assets looks like an old concept and in fact has its roots in the
confiscation of the entire assets of a person convicted and executed for major crime
(‘laesio majestatis’, treason, witchcraft and similar offences) in ancient Rome, also
later on in the Middle Ages and especially during early industrialization in the period
of absolutist rule in Europe.
One thing these regimes had in common was that they used criminal law in a
purely utilitarian if not instrumental way, an approach best illustrated by
Macchiavelli’s views on government in ‘Il Principe’. The current discourse on
forfeiture of assets frequently overlooks the fact that the abolition of confiscation
was at least as crucial to the protagonists of early Human Rights declarations and
the drafters of the first constitutions in Europe and the Americas during the Age of
Enlightenment as the restriction of the death penalty. Absolutists in the 18th century
were often unable to raise sufficient funds to meet the costs of their overblown
schemes and their penchant for warfare without increasing reliance on loans from
the emerging moneyed industrialist class. Under these circumstances, it was
occasionally practical to dispossess those winners of the industrialization process,
especially as they increasingly demanded their share of political power to match their
economic significance. Asset forfeiture was used as an element in the process of
criminalization of political opponents. It is hardly then surprising that for those from
whom property was confiscated, forfeiture was regarded as an arbitrary tool wielded
14
Developing an IMF-ROSC-Module on money laundering, cf. Neue Zürcher Zeitung, 12
March 2002, p. 27.
15
Target 23, p. 63 f: ‘Forfeiture of the Instruments and Proceeds of Illegal Drug Trafficking’;
the issue of criminalizing money laundering, however, was introduced in Art. 3 of the 1988
Convention and the political declaration of the General Assembly in the GA Res. S-17/2 of
15 March 1990.
16
UN Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances
(‘Vienna Convention’) of 20 December 1988.
118 Mark Pieth
by a non-legitimate state with the aim of subjugating and dispossessing them in order
to enrich the ruler. Beccaria (Dei delitti e delle bene, 1766, XXV.), for instance, one of
the most articulate contemporary protagonists of criminal policy in the 18th century,
deplored the irrational aspects of confiscation, which included pushing the innocent
(i.e. family members of the dispossessed) into crime.
Confiscation viewed from this angle clearly posed a risk to investment and an
infringement on the inviolability of private property. It is no coincidence that some
modern constitutions, which are still extensively influenced by the bourgeois
revolutions of the late 18th and early 19th centuries and to be found in some Latin
American constitutions (see Mexico), squarely declare ‘confiscation’ as unconstitu-
tional. It is noteworthy that ‘confiscation’ remained a political ‘four-letter-word’ for
nearly two hundred years until it was reinvented in the 1970s. Certainly up until
then, the general confiscation of all assets of a convicted person was outlawed
because it was considered disproportionate and had far reaching effects on the family
of the dispossessed. However, many legal systems retained a certain power to forfeit,
although this was generally limited to dangerous objects (‘instrumenta sceleris’, such
as the instruments or weapons used to perpetrate a crime or the products of crime,
for instance pornographic paintings) in order to destroy them. Increasingly, it must
be added, an effect similar to that of confiscation was achieved by raising the level of
fines to siphon off ill-gotten gains. Even nowadays, some legal systems prefer
confiscatory fines to the actual confiscation of ill-gotten gains.17
Nevertheless, this historical development still does not explain how it was possible
to reintroduce confiscation towards the end of the 20th century, including some
broad, sweeping forms of forfeiture of all assets18 and even the occasional reversal of
the burden of proof of legal origin imposed on the owner. 19 Furthermore, there is the
need to clarify why this historical shift back to an old and discredited concept could
have been engineered without provoking major intellectual debate. A change of
conceptual terminology is discernible in the early 1970s, when it was increasingly
stated that it was inadequate to punish individuals, whilst at the same time allowing
them to enjoy the fruits of their illegal behaviour. The issue did not really develop,
however, as long as criminal law concentrated on crimes with clearly defined victims
who could be granted compensation out of the profits of crime. With the expansion
of victimless crimes or crimes against the public interest, especially the criminaliza-
tion of trafficking in narcotic substances, the issue became increasingly important.
Whereas in Europe in the 18th century during the age of absolutist regimes,
confiscation was used to dispossess well-to-do citizens who were claiming their share
in political power, the new concepts were far more easily legitimized, as they largely
17
So, for instance, the US FCPA does not contain special provisions for criminal forfeiture,
similar results could, however, be achieved either by civil forfeiture or a confiscatory fine.
18
Cf. the German ‘Vermögensstrafe’ and ‘Erweiterter Verfall’.
19
Cf. Rider, ‘The Crusade against Money Laundering – Time to Think!’ (1998) Vol. 1 Issue 4
European Journal of Law Reform at p. 518.
constituted a welcome addition to public income, by way of ‘taxing’ large-scale

illegal activities and organized criminals (‘The Mafia’, the ‘folk-devils’ of our time).
3. Contradictions in controlling drug money laundering
Forfeiting the gains derived from illegal drug trafficking and, at a later stage,
criminalizing those who helped obscure the origins of those gains, was introduced as
a narrowly focused tactical concept that pinpointed taking away the profits and
thereby reducing the attractiveness of becoming a trafficker. Already at that time, a
macroeconomic rationale was put forward in support of the new tactics. The
argument was advanced that siphoning off the illegal profits would lead to a rise in
the price of the illegal goods and consequently to a reduction in their demand.20 This
was rather short-sighted reasoning in an area where demand is bound to be highly
elastic due to the dependency of a large segment of drug-users who are prepared to
procure the necessary funds to finance their habit by all available means. In fact, the
effect of the strategy was that it most likely even made the problem all the more acute
by boosting the market volume. It raised the attraction of illegal activity since the
profits were bound to rise concurrently with the prices, probably even disproportio-
nately so.
The impact of anti-money laundering policies on the drug problem worldwide
thus remained very limited. Huge efforts, at immense expense in money and
personnel, in both the public and the private sectors were made, yet the number of
criminal cases brought 21 and the amount of profit forfeited 22 remained small in
relation to the estimated funds generated by illegal markets.23 The size of the drug
problem has, if at all, been affected to a much greater degree by alternative policies
than by the military/police approach. 24 Nevertheless, the production of laws and
regulations has not diminished and the regional reach of anti-money laundering
concepts has continued to expand.
The discourse shifted and increasingly all funds in the hands of organized crime
operators, (whether legally or illegally obtained25) were declared dangerous, just as
‘instrumenta sceleris’ had been earlier on, since they increased the ability of such
organizations to engage in illegal activities and to come into conflict with the
20
Meier/Dessecker/Smettan (eds.), Gewinnabschöpfung bei Betäubungmitteln (Wiesbaden
1989) at p. 539.
21
Kilchling (ed.), Die Praxis der Gewinnabschöpfung in Europa (Freiburg 2002) at p. 441.
22
Ibid., at p. 444.
23
Cf. the figures published by the UN and their critique in Pieth, Bekämpfung der
Geldwäscherei (Basel/Frankfurt 1992) at p. 12.
24
Cf. Pieth, ‘Gefährliche Strategiespiele’ in: Plädoyer (1992) at p. 38.
25
Cf. for the more recent of forfeiture of assets under the control of organized crime: UN
Model Legislation on Money Laundering 1995 (UNDP) or Art. 59 s. 3 Swiss Penal Code.
120 Mark Pieth
authorities (or, alternatively, bribe them for protection). In a relatively short period
of time the international organizations, pushed on by a small group of countries
(especially the US, France and the UK), managed to broaden the discussion on
money laundering from a limited effort to reduce drug-trafficking to a generalized
concept to tackle serious crime. The political mechanisms used for the expansion of
the paradigm can be illustrated by the image of concentric circles created by a stone
thrown into a pond. The core countries mentioned above convinced the G–7 States.
The G–7 States in turn created a specialized body to combat money laundering (the
FATF26) in 1989, which then included the wider framework of OECD countries (and
a few non-members), and ultimately formed regional satellites.27 The implementa-
tion of the strategy was promoted by soft law and peer pressure (monitoring28 ), it
was only at a later stage that some areas were integrated into binding international
law.29 Most recently, the UN went over the same terrain again with the largest
constituency.30
The fact that the effect of anti-money laundering policies probably amounts to
little more than a relatively low ‘tax’ on illegal trade has not impeded the continued
production of yet more rules. Instead the focus of the discourse shifted entirely.
4. The generalization of the concept of money laundering
With the extension of the scope of money-laundering-offences from drug-trafficking

to ‘all serious crime’, (which was accepted by the FATF in 1996 in the revised edition
of its Forty Recommendations)31 and its implementation at the national level around
the world, now ordinary crimes against property as well as corruption, illegal arms-
trading, gaming and trafficking in human beings, and so on, are considered
predicates.
If this is a perfectly logical step intellectually (why should fraud be less serious
than drug trafficking?), neither the authorities, nor the private sector, have fully
grasped the practical implications of this widening of the scope of anti-money
laundering. On the one hand the sheer volume of ‘dirty money’ has probably
26
Cf. supra note 9, revised Recommendation of 1996 N. 4.
27
As, for example, the Caribbean Financial Action Task Force, created with the Kingston
Declaration of 6 November 1992.
28
Gilmore, Dirty Money: The Evolution of Money Laundering Counter-Measures (Strasbourg
1999, 2nd ed.); for monitoring procedures in general: Pieth, ‘From Ideal to Reality: Making
the New Global Standards Stick’ in No Longer Business as Usual, Fighting Bribery and
Corruption (Paris OECD 2000).
29
Cf. the Council of Europe Convention of 8 November 1990 on Laundering, Search, Seizure
and Confiscation of the Proceeds from Crime, Strasbourg.
30
UN Convention against Transnational Organised Crime, cf. GA 55/383.
31
Cf. supra note 26.
doubled, or even tripled, as estimates of the funds generated by corruption (bribes

and the profits of bribery) alone are said to equal the profits of the illegal drugs
trade.32 These additions also extend awareness (red flag lists etc.) to new types of
legal risks, even if the actual methodology of laundering may not vary that much
according to the predicates. Financial institutions are now forced to extend their
vigilance to ‘slush funds’ held by their largest and best institutional clients (especially
multinational enterprises who might get involved in grand corruption). Although the
money held in these funds is not actually laundered, it may still be destined for
criminal purposes, and for financial institutions, the risk is not so much that of
becoming a launderer but of being held liable as an accomplice, if the purpose of a
transaction was foreseeable. The impact of the extension of predicates is
considerable. Apart from the traditional transaction-related red flag lists, additional
factors pertaining to the person (client as well as beneficial owner), his or her place of
origin and residence and so on, his or her economic background, the industry-sector
involved and so on will all have to be monitored and it would be best to develop a
weighted score-table for the new risks identified.
From a more general standpoint it may be said that money laundering is now
used as an icon for ‘financial crime’ as such. Financial crime has developed into a
common denominator of all kinds of macrocrime. Organized, corporate and also
state-criminals (as well as para-state criminals if one thinks of offences committed by
the members of militias) all need funding and most of them need to hide their
profits.33
Just as legal business entities have maximized the benefits of globalization so too
have criminal operators. They are linked up in international networks and can easily
transfer their centres of activity and, above all, make use of modern banking
technology to transfer their assets. They have proved to be highly proficient in
benefiting from regulatory arbitrage, similar to the way companies and individuals
optimize their tax situation. Having recruited the help of financial institutions across
the world, these operators have succeeded in building so-called structures
(combining the assistance of attorneys and other holders of professional privilege
with the use of bank accounts located in financial centres with strong bank secrecy
and little inclination for giving mutual legal assistance as well as deploying
International Business Companies).34
32
This figure has repeatedly been quoted by the media as a World Bank estimate. It has,
however, not been possible to track down the original source. Nevertheless, it can be
assumed that the dimensions of funds generated both by bribes and the profits of bribery
are huge.
33
Pieth, Working paper presented at the 10th UN Congress on the Prevention of Crime and
the Treatment of Offenders, Vienna, 10–17 April 2000, plenary meeting on international
co-operation in combating transnational crime: New challenges in the 21st century.
34
‘Paradis financier, secret bancaire et blanchissement d’argent’ United Nations, New York
1999.
122 Mark Pieth
Jonathan Winer has in this volume 35 pointed out that there is an inherent risk of
the banking community being used for these purposes and that part of the problem is
the organization of banking supervision at the national level when financial
institutions operate globally. This takes us back to the regulatory concepts that have
developed in parallel to criminal law over the last decade.
5. The slow development of ‘customer-due-diligence’ (CDD)
In 1988, when the Basel Committee on Banking Supervision (BCBS) wrote the Basel
Statement of Principles36 and introduced the concept of ‘KYC’ (know-your-
customer) as a fundamental principle in banking supervision, the aim was far
broader than ‘catching criminals’. The principle sought first to facilitate credible risk
management by financial institutions, and secondly to reduce the risks of
uncontrolled money flows worldwide. If this last point had not yet clearly emerged,
it certainly was part of the motivation for upgrading these principles in a
fundamentally new code, the BCBS’s new code of ‘Customer-Due-Diligence for
Banks’ of October 2001, discussed in greater detail by Charles Freeland in this
volume. 37 These efforts are closely linked to the work of the Financial Stability
Forum 38 and its successors in the IMF. 39 Beyond combating money laundering,
these obligations on customer acceptance and their continuous monitoring are part
of an attempt at harmonizing standards in banking supervision as a reaction to the
demise of national control by using elements of global governance for financial
centres. Of course, more detailed rules on CDD are only one aspect within a wider
framework, and the next steps due in this development are still quite undefined.
It is, however, significant that the FATF was not really in the position to give
more detailed guidance between 1990 and about 1999 on customer due diligence. All
the excitement about the Non Co-operative Countries and Territories process, the
blacklisting and partial de-listing of so-called ‘NCCTs’, has overshadowed the fact
that many FATF core-members were not ready to implement even basic customer
due diligence standards at the levels already defined in the 1990 recommendations. 40
35
See J. Winer, ‘Globalization, Terrorist Finance, and Global Conflict – Time for a White
List?’ in (2002) 4 European Journal of Law Reform (in this issue).
36
Cf. supra note 11.
37
C. Freeland, ‘How Can Sound Customer Due Diligence Rules Help Prevent the Misuse of
Financial Institutions in the Financing of Terrorism?’ in (2002) 4 European Journal of Law
Reform (in this issue).
38
Cf. supra note 13.
39
Cf. supra note 14.
40
Cf as an example: Financial Action Task Force on Money Laundering, Second Mutual
Evaluation Report on the United States, FATF VIII, 21 March 1997.
The lack of clear international guidance on identifying ‘beneficial owners’ is an

example of this period of stagnation.
New developments were set in motion by various international initiatives. In 1997
the OECD Working Group on Bribery wrote its Convention on Combating Bribery
in International Business Transactions.41 As part of the concluding act, the Council
of the OECD decided to go beyond this convention and discuss the abuse of
financial resorts (especially OFCs) for the purpose of facilitating bribery and bribe-
money laundering.42 Work on this topic very soon focused, at least in part, on
customer due diligence. Concurrently, and not unrelated to the process, 13 major
international banks and the NGO ‘Transparency International’ decided to develop a
private code of conduct, the ‘Wolfsberg Principles’.43 Probably their most significant
effect was to provoke regulators, who had already started work on new rules on
CDD within the BCBS, into adopting a more rigorous approach. As was to be
expected, the CDD paper of the BCBS would in turn influence the FATF
recommendations which have also been under revision since 2000 and are due to be
published in October 2002.
6. The impact of 11 September 2001
The foregoing is a description of the state of affairs prevailing when the events of 11
September occurred and completely changed perceptions of terrorism worldwide.
During the period immediately following the attacks, governments and international
organizations working on this subject grappled mainly with the differences between
money laundering and the financing of crime.44 It was maintained correctly that
much of the money used to finance terrorist operations could have legal sources, and
that therefore different concepts should be applied. The FATF tried to short-circuit
this by a daring, if intellectually untenable, assertion: by calling the financing of
terrorism ‘money laundering’, the tedious discussions and new concepts seemed to
become unnecessary. Armand Kersten rightly criticizes this approach in this
volume.45 Nevertheless, concepts need to be in place to criminalize the intentional
acceptance and the management of such funds which are to be subject to forfeiture
and must also be included in the anti-money laundering notification schemes.46 It
41
OECD: Convention on Combating Bribery of Foreign Public Officials in International
Business Transactions, 21 November 1997.
42
Cf. Pieth, ‘Korruptionsgeldwäsche’, in FS Niklaus Schmid (Zürich 2001) at p. 437.
43
Cf. < www.wolfsberg-principles.com > .
44
Cf. supra note 3, FATF Special Recommendations on Terrorist Financing.
45
A. Kersten, ‘Financing Terrorism – a Predicate Offence to Money Laundering?’ in (2002) 4
European Journal of Law Reform (in this issue).
46
Cf. supra note 8.
124 Mark Pieth
will almost certainly be more difficult for banks to identify such funds compared to
those of other high risk clients because the red flags pointing to the criminal origin
will have to be re-assigned. In this context, financial institutions are even more
dependant on official lists of names than they would be, for instance, in the case of
drug-traffickers. 47 One might therefore say that the awareness concepts used to
detect the monies of terrorists have far more in common with the formal approach
used in embargo cases than with the usual increase in diligence with respect to
unusual circumstances or critical client segments.
With the passage of time since the attacks, however, what emerges is that at a
technical level risk management in connection with the financing of terrorism is not
all that different from managing other, more traditional, risks. The principal lesson
we can draw from 11 September is that it would be a good idea to finally implement
the basic concepts against money laundering. The section of the US PATRIOT Act 48
referring to new rules for financial institutions to a large extent covers traditional
ground, and issues which could not be implemented previously on account of
political opposition under the former US administration49 have now passed into law.
7. Where are we going?
The events of 11 September have certainly shocked legislators into action. Some of
the laws against terrorism enacted quickly all over the world, have little more than
symbolic value, much of what has been addressed in the financial field was already in
the pipeline well before the attacks. Legislation on KYC that was formerly
considered impossible is suddenly acceptable.50 Furthermore, it is now possible to
speed up legislation and regulation in previously targeted areas like correspondent
banking.51 This could also be the moment to re-evaluate more thoroughly the
question which of the recommendations of the FATF remains too unspecific. To
some extent the Wolfsberg principles or, even more apposite in connection with this
issue, the BCBS’s CDD-Recommendations address the question of thorough
identification of ‘beneficial owners’, including beneficiaries of trusts and corporate
47
Cf. supra note 2.
48
Cf. supra note 1, US PATRIOT Act, Sec. 301 ss.
49
Cf. the difficulties of the previous administration in passing more stringent anti-money-
laundering rules under the Chairmanship of Senator Levin; the last minute agreement of
the New York Clearing House Association under the Chairmanship of Undersecretary
Eizenstat and the initial reluctance of the new administration (Spokesperson: Secretary of
the Treasury Paul Henry O’Neill) on introducing tougher anti-money-laundering
legislation.
50
Cf. supra notes 48 and 49.
51
Cf. already the New York Clearing House Association Guidelines and the Patriot Act.
vehicles, on the basis of ‘satisfactory evidence’.52 This direction is a welcome addition

to the up-to-now, rather superficial obligation of clients simply to name the
beneficiaries. The identification of beneficiaries is probably one of the key topics in
the current development of anti-money laundering systems. In parallel to the
blacklisting of ‘NCCTs’, it would be worthwhile to do a better job in the world of
regulated banking (roughly comprising the OECD Member States) to prevent the
uncontrolled influx of assets from under-regulated centres outside the area (the
‘cordon sanitaire’-model).
Up to now, the main focus of this text has been the technical development of
money laundering principles. It is time to place the discourse in a wider context. It
has already been stated that money laundering is increasingly turning into an ‘icon’
of financial crime in general and that it is closely linked to all forms of organizational
crime (including organized, state and corporate crime), be it Mafia-type activities on
illegal markets, the plundering of natural resources, environmental crime, corrup-
tion, terrorism or even genocide. Organizational crime is typically transnational and
usually maintains its activities over an extended period of time. In order to keep
going, it is dependant on a business-orientated, financial and administrative
management structure. Of all forms of organizational crime, terrorism is probably
one of the least cost intensive. Nevertheless, the use of financial institutions is crucial
to these types of crime.
Jonathan Winer in his paper rightly points out that ‘contrary to the position of
many banks and bankers, moving money from country to country, disguising its origins
and enabling its use for criminal purposes is not a morally neutral activity’. 53 Financial
institutions all over the world have been used to prolong and deepen the plight of the
victims of these practices, especially that of the population of developing countries in
the South. There have been countless financial scandals in connection with
potentates who have plundered their countries’ coffers, who have received exorbitant
bribes which will have to be repaid by the already impoverished citizens of their
states. Money laundering, however, is being conceptualized more and more as a
means of repatriating stolen goods. Conceptual terminology gives the fight against
money laundering a distinct emancipatory ring, thus creating strong ethical grounds
for pressurizing financial centres and institutions to follow strict customer due
diligence guidelines.
Whilst breaking the power of undemocratic leaders and their accomplices in the
financial world may help to quell the anger of dispossessed populations from which
terrorists are frequently recruited, an all-out war against the financing of terrorism
could backfire, even if it appears to be the logical consequence of what has been said
so far. If money laundering is increasingly used as an ‘empty concept’ that is
arbitrarily adapted, and possibly were to go as far as attempting to gain control over
52
Basel Committee on Banking Supervision, Customer Due Diligence for Banks, October
200l, § 32 ss. (p. 8).
53
Cf. supra, note 35 at p. xx.
126 Mark Pieth
money flows worldwide – as if this were even feasible – then the idea of using it to
track down any political opponent would make the concept at risk of being regarded
as an oppressive tool. It is unfortunate that there is almost no intellectual debate
currently as to what constitutes ‘terrorism’. This makes it even easier for politicians
to fill the gap – for example by the EU Council in its Common Positionf54 adopted at
the end of 2001. This document defines a ‘terrorist act’ in terms of the sort of crimes
one would expect, but then goes on to include intentional acts; ‘causing extensive
destruction to an information system, [or] a fixed platform located on the continental
shelf … resulting in major economic loss’. If terrorism is to encompass hackers and
organizations that protest in the North Sea then – to put it somewhat bluntly – the
efforts to fight money laundering become part of the problem as well. They are at
risk of being perceived as instruments of repression and terror and not only nurture
the anger of those who are already disaffected with society but also alienate the
average citizen as well. There is still time however, to re-define the goals of anti-
money laundering initiatives and give their instrumentation the necessary contours.
54
Council Common Position 2001/931/CFSP on the application of specific measures to
combat terrorism OJ 2001 L 344/93.#
Documentation
FATF Cracks Down on Terrorist Financing
At an extraordinary Plenary1 on the Financing of Terrorism held in Washington,

D.C. on 29 and 30 October 2001, the Financial Action Task Force (FATF) expanded
its mission beyond money laundering. It will now also focus its energy and expertise
on the worldwide effort to combat terrorist financing. ‘Today the FATF has issued
new international standards to combat terrorist financing, which we call on all
countries in the world to adopt and implement,’ and FATF President Clarie Lo.
‘Implementation of these Special Recommendations will deny terrorists and their
supporters access to the international financial system.’
During the extraordinary Plenary, the FATF agreed to a set of Special
Recommendations on Terrorist Financing2 which commit members to:
Take immediate steps to ratify and implement the relevant United Nations
instruments.
Criminalize the financing of terrorism, terrorist acts and terrorist organisations.
Freeze and confiscate terrorist assets.
Report suspicious transactions linked to terrorism.
Provide the widest possible range of assistance to other countries’ law
enforcement and regulatory authorities for terrorist financing investigations.
Impose anti-money laundering requirements on alternative remittance systems.
Strengthen customer identification measures in international and domestic wire
transfers.
Ensure that entities, in particular non-profit organisations, cannot be misused
to finance terrorism.
1
Attended by representatives of the 31 FATF members and 18 FATF-style regional bodies
and observer organizations. Regional bodies and observer organizations included the Asia/
Pacific Group on Money Laundering, the Caribbean Financial Action Task Force, the
Easterna dn Southern Africa Anti-Money Laundering Group, the Select Committee of
Experts on the Evaluation of Anti-Money Laundering Measures of the Council of Europe,
the Asian Development Bank, the Commonwealth Secretariat, the European Central Bank,
Europol, the Inter-American Development Bank, the International Monetrary Fund, the
International Organisation of Securities Commissions, Interpol, the Offshore Group of
Banking Supervisors, OAS/CICAD, the United Nations Office on Drug Control and
Crime Prevention, the World Bank, and the World Customs Organisation.
2
See the text of the Special Recommendations in Annex.

© 2002, Financial Action Task Force on Money Laundering. Printed in the Netherlands.
129
130 Documentation
In order to secure the swift and effective implementation of these new standards,
FATF agreed to the following comprehensive Plan of Action:
By 31 December 2001, self-assessment by all FATF members against the
Special Recommendations. This will include a commitment to come into
compliance with the Special Recommendations by June 2002 and action plans
addressing the implementation of Recommendations not already in place. All
countries around the world will be invited to participate on the same terms as
FATF members.
By February 2002, the development of additional guidance for financial
institutions on the techniques and mechanisms used in the financing of
terrorism.
In June 2002, the initiation of a process to identify jurisdictions that lack
appropriate measures to combat terrorist financing and discussion of next
steps. including the possibility of counter-measures, for jurisdictions that do
not counter terrorist financing.
Regular publication by its members of the amount of suspected terrorist assets
frozen, in accordance with the appropriate United Nations Security Council
Resolutions.
The provision by FATF members of technical assistance to non-members, as
necessary, to assist them in complying with the Special Recommendations.
In taking forward its Plan of Action against terrorist financing, the FATF will
intensify its co-operation with the FATF–style regional bodies and international
organizations and bodies such as the United Nations, the Egmont Group of
Financial Intelligence Units, the G-20, and International Financial Institutions, that
support and contribute to the international effort against money laundering and
terrorist financing.
FATF also agreed to take into account the Special Recommendations as it revises
the FATF 40 Recommendations on Money Laundering and to intensify its work
with respect to corporate vehicles, correspondent banking, identification of
beneficial owners of accounts, and regulation of non-bank financial institutions.
The FATF is an independent international body whose Secretariat is housed at
the OECD. The twenty-nine member countries and governments of the FATF are:
Argentina; Australia; Austria; Belgium; Brazil; Canada; Denmark; Finland; France;
Germany; Greece; Hong Kong; China; Iceland; Ireland; Italy; Japan; Luxembourg;
Mexico; the Kingdom of the Netherlands; New Zealand; Norway; Portugal;
Singapore; Spain; Sweden; Switzerland; Turkey; the United Kingdom; and the
United States. Two international organizations are also members of the FATF: the
European Commission and the Gulf Co-operation Council.
For further information, please contact Helen Fisher, OECD Media Relations
Division (Tel: 33 1 45 24 80 94 or helen.fisher@oecd.org) or the FATF Secretariat
(Tel: 33 1 45 24 79 45 or contact@fatf-gafi.org)
FATF Special Recommendations on
Terrorist Financing
Recognizing the vital importance of taking action to combat the financing of

terrorism, the FATF has agreed these Recommendations, which, when combined
with the FATF Forty Recommendations on money laundering, set out the basic
framework to detect, prevent and suppress the financing of terrorism and terrorist
acts. For further information on the Special Recommendations as related to the self-
assessment process, see the Guidance Notes.
A. Ratification and Implementation of UN Instruments
Each country should take immediate steps to ratify and to implement fully the 1999
United Nations International Convention for the Suppression of the Financing of
Terrorism. Countries should also immediately implement the United Nations
resolutions relating to the prevention and suppression of the financing of terrorist
acts, particularly United Nations Security Council Resolution 1373.
B. Criminalizing the Financing of Terrorism and

Associated Money Laundering
Each country should criminalize the financing of terrorism, terrorist acts and
terrorist organizations. Countries should ensure that such offences are designated as
money laundering predicate offences.

131
132 Documentation
C. Freezing and Confiscating Terrorist Assets
Each country should implement measures to freeze without delay funds or other
assets of terrorists, those who finance terrorism and terrorist organizations in
accordance with the United Nations resolutions relating to the prevention and
suppression of the financing of terrorist acts.
Each country should also adopt and implement measures, including legislative
ones, which would enable the competent authorities to seize and confiscate property
that is the proceeds of, or used in, or intended or allocated for use in, the financing of
terrorism, terrorist acts or terrorist organizations.
D. Reporting Suspicious Transactions Related to Terrorism
If financial institutions, or other businesses or entities subject to anti-money

laundering obligations, suspect or have reasonable grounds to suspect that funds are
linked or related to, or are to be used for terrorism, terrorist acts or by terrorist
organizations, they should be required to report promptly their suspicions to the
competent authorities.
E. International Co-operation
Each country should afford another country, on the basis of a treaty, arrangement or
other mechanism for mutual legal assistance or information exchange, the greatest
possible measure of assistance in connection with criminal, civil enforcement, and
administrative investigations, inquiries and proceedings relating to the financing of
terrorism, terrorist acts and terrorist organizations.
Countries should also take all possible measures to ensure that they do not
provide safe havens for individuals charged with the financing of terrorism, terrorist
acts or terrorist organizations, and should have procedures in place to extradite,
where possible, such individuals.
F. Alternative Remittance
Each country should take measures to ensure that persons or legal entities, including
agents, that provide a service for the transmission of money or value, including
transmission through an informal money or value transfer system or network,

should be licensed or registered and subject to all the FATF Recommendations that
apply to banks and non-bank financial institutions. Each country should ensure that
persons or legal entities that carry out this service illegally are subject to
administrative, civil or criminal sanctions.
G. Wire Transfers
Countries should take measures to require financial institutions, including money

remitters, to include accurate and meaningful originator information (name, address
and account number) on funds transfers and related messages that are sent, and the
information should remain with the transfer or related message through the payment
chain.
Countries should take measures to ensure that financial institutions, including
money remitters, conduct enhanced scrutiny of and monitor for suspicious activity
funds transfers which do not contain complete originator information (name,
address and account number).
H. Non-profit Organizations
Countries should review the adequacy of laws and regulations that relate to entities
that can be abused for the financing of terrorism. Non-profit organizations are
particularly vulnerable, and countries should ensure that they cannot be misused:
a. by terrorist organizations posing as legitimate entities;
b. to exploit legitimate entities as conduits for terrorist financing, including for
the purpose of escaping asset freezing measures; and
c. to conceal or obscure the clandestine diversion of funds intended for
legitimate purposes to terrorist organizations.
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Annex 1
(on the report of the Sixth Committee (A/54/615)) 54/109.
Convention for the Suppression of the Financing of Terrorism
The General Assembly,

Recalling all its relevant resolutions, including resolution 46/51 of 9 December 1991,
resolution 49/60 of 9 December 1994, by which it adopted the Declaration on Measures to
Eliminate International Terrorism, and resolutions 51/210 of 17 December 1996 and 53/108 of
8 December 1998,
Having considered the text of the draft international convention for the suppression of the
financing of terrorism prepared by the Ad Hoc Committee established by General Assembly
resolution 51/210 of 17 December 1996 and the Working Group of the Sixth Committee,*
1. Adopts the International Convention for the Suppression of the Financing of Terrorism
annexed to the present resolution, and requests the Secretary-General to open it for signature
at United Nations Headquarters in New York from 10 January 2000 to 31 December 2001;
2. Urges all States to sign and ratify, accept, approve or accede to the Convention.
76th plenary meeting
9 December 1999
Annex
International Convention for the Suppression of the Financing of Terrorism
Preamble
The States Parties to this Convention,
Bearing in mind the purposes and principles of the Charter of the United Nations concerning
the maintenance of international peace and security and the promotion of good-
neighbourliness and friendly relations and cooperation among States,
Deeply concerned about the worldwide escalation of acts of terrorism in all its forms and
manifestations,
Recalling the Declaration on the Occasion of the Fiftieth Anniversary of the United Nations,
contained in General Assembly resolution 50/6 of 24 October 1995,
Recalling also all the relevant General Assembly resolutions on the matter, including
resolution 49/60 of 9 December 1994 and the annex thereto on the Declaration on Measures to
Eliminate International Terrorism, in which the States Members of the United Nations
solemnly reaffirmed their unequivocal condemnation of all acts, methods and practices of
terrorism as criminal and unjustifiable, wherever and by whomever committed, including
those which jeopardize the friendly relations among States and peoples and threaten the
territorial integrity and security of States,
Noting that the Declaration on Measures to Eliminate International Terrorism also

encouraged States to review urgently the scope of the existing international legal provisions
on the prevention, repression and elimination of terrorism in all its forms and manifestations,
with the aim of ensuring that there is a comprehensive legal framework covering all aspects of
the matter,
Recalling paragraph 3 (f) of General Assembly resolution 51/210 of 17 December 1996, in
which the Assembly called upon all States to take steps to prevent and counteract, through
appropriate domestic measures, the financing of terrorists and terrorist organizations, whether
such financing is direct or indirect through organizations which also have or claim to have
charitable, social or cultural goals or which are also engaged in unlawful activities such as
illicit arms trafficking, drug dealing and racketeering, including the exploitation of persons for
purposes of funding terrorist activities, and in particular to consider, where appropriate,
adopting regulatory measures to prevent and counteract movements of funds suspected to be
intended for terrorist purposes without impeding in any way the freedom of legitimate capital
movements and to intensify the exchange of information concerning international movements
of such funds,
Recalling also General Assembly resolution 52/165 of 15 December 1997, in which the
Assembly called upon States to consider, in particular, the implementation of the measures set
out in paragraphs 3 (a) to (f) of its resolution 51/210,
Recalling further General Assembly resolution 53/108 of 8 December 1998, in which the
Assembly decided that the Ad Hoc Committee established by General Assembly resolution 51/
210 of 17 December 1996 should elaborate a draft international convention for the
suppression of terrorist financing to supplement related existing international instruments,
Considering that the financing of terrorism is a matter of grave concern to the international
community as a whole,
Noting that the number and seriousness of acts of international terrorism depend on the
financing that terrorists may obtain,
Noting also that existing multilateral legal instruments do not expressly address such financing,
Being convinced of the urgent need to enhance international cooperation among States in
devising and adopting effective measures for the prevention of the financing of terrorism, as
well as for its suppression through the prosecution and punishment of its perpetrators,
Have agreed as follows:
Article 1
For the purposes of this Convention:
1. ‘Funds’ means assets of every kind, whether tangible or intangible, movable or immovable,
however acquired, and legal documents or instruments in any form, including electronic or
digital, evidencing title to, or interest in, such assets, including, but not limited to, bank
credits, travellers cheques, bank cheques, money orders, shares, securities, bonds, drafts and
letters of credit.
2. ‘State or government facility’ means any permanent or temporary facility or conveyance
that is used or occupied by representatives of a State, members of Government, the legislature
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or the judiciary or by officials or employees of a State or any other public authority or entity
or by employees or officials of an intergovernmental organization in connection with their
official duties.
3. ‘Proceeds’ means any funds derived from or obtained, directly or indirectly, through the
commission of an offence set forth in article 2.
Article 2
1. Any person commits an offence within the meaning of this Convention if that person by any
means, directly or indirectly, unlawfully and wilfully, provides or collects funds with the
intention that they should be used or in the knowledge that they are to be used, in full or in
part, in order to carry out:
(a) An act which constitutes an offence within the scope of and as defined in one of the
treaties listed in the annex; or
(b) Any other act intended to cause death or serious bodily injury to a civilian, or to any other
person not taking an active part in the hostilities in a situation of armed conflict, when the
purpose of such act, by its nature or context, is to intimidate a population, or to compel a
Government or an international organization to do or to abstain from doing any act.
2.(a) On depositing its instrument of ratification, acceptance, approval or accession, a State
Party which is not a party to a treaty listed in the annex may declare that, in the
application of this Convention to the State Party, the treaty shall be deemed not to be
included in the annex referred to in paragraph 1, subparagraph (a). The declaration shall
cease to have effect as soon as the treaty enters into force for the State Party, which shall
notify the depositary of this fact;
(b) When a State Party ceases to be a party to a treaty listed in the annex, it may make a
declaration as provided for in this article, with respect to that treaty.
3. For an act to constitute an offence set forth in paragraph 1, it shall not be necessary that the
funds were actually used to carry out an offence referred to in paragraph 1, subparagraph (a)
or (b).
4. Any person also commits an offence if that person attempts to commit an offence as set
forth in paragraph 1 of this article.
5. Any person also commits an offence if that person:
(a) Participates as an accomplice in an offence as set forth in paragraph 1 or 4 of this article;
(b) Organizes or directs others to commit an offence as set forth in paragraph 1 or 4 of this
article;
(c) Contributes to the commission of one or more offences as set forth in paragraph 1 or 4 of
this article by a group of persons acting with a common purpose. Such contribution shall
be intentional and shall either:
(i) Be made with the aim of furthering the criminal activity or criminal purpose of the
group, where such activity or purpose involves the commission of an offence as set
forth in paragraph 1 of this article; or
(ii) Be made in the knowledge of the intention of the group to commit an offence as set
forth in paragraph 1 of this article.
Article 3
This Convention shall not apply where the offence is committed within a single State, the
alleged offender is a national of that State and is present in the territory of that State and no
other State has a basis under article 7, paragraph 1 or 2, to exercise jurisdiction, except that the
provisions of articles 12 to 18 shall, as appropriate, apply in those cases.
Article 4
Each State Party shall adopt such measures as may be necessary:
(a) To establish as criminal offences under its domestic law the offences as set forth in article 2;
(b) To make those offences punishable by appropriate penalties which take into account the
grave nature of the offences.
Article 5
1. Each State Party, in accordance with its domestic legal principles, shall take the necessary
measures to enable a legal entity located in its territory or organized under its laws to be held
liable when a person responsible for the management or control of that legal entity has, in that
capacity, committed an offence as set forth in article 2. Such liability may be criminal, civil or
administrative.
2. Such liability is incurred without prejudice to the criminal liability of individuals who have
committed the offences.
3. Each State Party shall ensure, in particular, that legal entities liable in accordance with
paragraph 1 above are subject to effective, proportionate and dissuasive criminal, civil or
administrative sanctions. Such sanctions may include monetary sanctions.
Article 6
Each State Party shall adopt such measures as may be necessary, including, where
appropriate, domestic legislation, to ensure that criminal acts within the scope of this
Convention are under no circumstances justifiable by considerations of a political,
philosophical, ideological, racial, ethnic, religious or other similar nature.
Article 7
1. Each State Party shall take such measures as may be necessary to establish its jurisdiction
over the offences set forth in article 2 when:
(a) The offence is committed in the territory of that State;
(b) The offence is committed on board a vessel flying the flag of that State or an aircraft
registered under the laws of that State at the time the offence is committed;
(c) The offence is committed by a national of that State.
2. A State Party may also establish its jurisdiction over any such offence when:
(a) The offence was directed towards or resulted in the carrying out of an offence referred to
in article 2, paragraph 1, subparagraph (a) or (b), in the territory of or against a national
of that State;
(b) The offence was directed towards or resulted in the carrying out of an offence referred to
in article 2, paragraph 1, subparagraph (a) or (b), against a State or government facility
of that State abroad, including diplomatic or consular premises of that State;
(c) The offence was directed towards or resulted in an offence referred to in article 2,
paragraph 1, subparagraph (a) or (b), committed in an attempt to compel that State to do
or abstain from doing any act;
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(d) The offence is committed by a stateless person who has his or her habitual residence in
the territory of that State;
(e) The offence is committed on board an aircraft which is operated by the Government of
that State.
3. Upon ratifying, accepting, approving or acceding to this Convention, each State Party shall
notify the Secretary-General of the United Nations of the jurisdiction it has established in
accordance with paragraph 2. Should any change take place, the State Party concerned shall
immediately notify the Secretary-General.
4. Each State Party shall likewise take such measures as may be necessary to establish its
jurisdiction over the offences set forth in article 2 in cases where the alleged offender is present
in its territory and it does not extradite that person to any of the States Parties that have
established their jurisdiction in accordance with paragraphs 1 or 2.
5. When more than one State Party claims jurisdiction over the offences set forth in article 2,
the relevant States Parties shall strive to coordinate their actions appropriately, in particular
concerning the conditions for prosecution and the modalities for mutual legal assistance.
6. Without prejudice to the norms of general international law, this Convention does not
exclude the exercise of any criminal jurisdiction established by a State Party in accordance
with its domestic law.
Article 8
1. Each State Party shall take appropriate measures, in accordance with its domestic legal
principles, for the identification, detection and freezing or seizure of any funds used or
allocated for the purpose of committing the offences set forth in article 2 as well as the
proceeds derived from such offences, for purposes of possible forfeiture.
2. Each State Party shall take appropriate measures, in accordance with its domestic legal
principles, for the forfeiture of funds used or allocated for the purpose of committing the
offences set forth in article 2 and the proceeds derived from such offences.
3. Each State Party concerned may give consideration to concluding agreements on the
sharing with other States Parties, on a regular or case-by-case basis, of the funds derived from
the forfeitures referred to in this article.
4. Each State Party shall consider establishing mechanisms whereby the funds derived from the
forfeitures referred to in this article are utilized to compensate the victims of offences referred
to in article 2, paragraph 1, subparagraph (a) or (b), or their families.
5. The provisions of this article shall be implemented without prejudice to the rights of third
parties acting in good faith.
Article 9
1. Upon receiving information that a person who has committed or who is alleged to have
committed an offence set forth in article 2 may be present in its territory, the State Party
concerned shall take such measures as may be necessary under its domestic law to investigate
the facts contained in the information.
2. Upon being satisfied that the circumstances so warrant, the State Party in whose territory the
offender or alleged offender is present shall take the appropriate measures under its domestic law
so as to ensure that person’s presence for the purpose of prosecution or extradition.
3. Any person regarding whom the measures referred to in paragraph 2 are being taken shall
be entitled:
(a) To communicate without delay with the nearest appropriate representative of the State of
which that person is a national or which is otherwise entitled to protect that person’s
rights or, if that person is a stateless person, the State in the territory of which that person
habitually resides;
(b) To be visited by a representative of that State;
(c) To be informed of that person’s rights under subparagraphs (a) and (b).
4. The rights referred to in paragraph 3 shall be exercised in conformity with the laws and
regulations of the State in the territory of which the offender or alleged offender is present,
subject to the provision that the said laws and regulations must enable full effect to be given to
the purposes for which the rights accorded under paragraph 3 are intended.
5. The provisions of paragraphs 3 and 4 shall be without prejudice to the right of any State
Party having a claim to jurisdiction in accordance with article 7, paragraph 1, subparagraph
(b), or paragraph 2, subparagraph (b), to invite the International Committee of the Red Cross
to communicate with and visit the alleged offender.
6. When a State Party, pursuant to the present article, has taken a person into custody, it shall
immediately notify, directly or through the Secretary-General of the United Nations, the
States Parties which have established jurisdiction in accordance with article 7, paragraph 1 or
2, and, if it considers it advisable, any other interested States Parties, of the fact that such
person is in custody and of the circumstances which warrant that person’s detention. The State
which makes the investigation contemplated in paragraph 1 shall promptly inform the said
States Parties of its findings and shall indicate whether it intends to exercise jurisdiction.
Article 10
1. The State Party in the territory of which the alleged offender is present shall, in cases to
which article 7 applies, if it does not extradite that person, be obliged, without exception
whatsoever and whether or not the offence was committed in its territory, to submit the case
without undue delay to its competent authorities for the purpose of prosecution, through
proceedings in accordance with the laws of that State. Those authorities shall take their
decision in the same manner as in the case of any other offence of a grave nature under the law
of that State.
2. Whenever a State Party is permitted under its domestic law to extradite or otherwise
surrender one of its nationals only upon the condition that the person will be returned to that
State to serve the sentence imposed as a result of the trial or proceeding for which the
extradition or surrender of the person was sought, and this State and the State seeking the
extradition of the person agree with this option and other terms they may deem appropriate,
such a conditional extradition or surrender shall be sufficient to discharge the obligation set
forth in paragraph 1.
Article 11
1. The offences set forth in article 2 shall be deemed to be included as extraditable offences in
any extradition treaty existing between any of the States Parties before the entry into force of
this Convention. States Parties undertake to include such offences as extraditable offences in
every extradition treaty to be subsequently concluded between them.
2. When a State Party which makes extradition conditional on the existence of a treaty receives
a request for extradition from another State Party with which it has no extradition treaty, the
requested State Party may, at its option, consider this Convention as a legal basis for
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extradition in respect of the offences set forth in article 2. Extradition shall be subject to the
other conditions provided by the law of the requested State.
3. States Parties which do not make extradition conditional on the existence of a treaty shall
recognize the offences set forth in article 2 as extraditable offences between themselves, subject
to the conditions provided by the law of the requested State.
4. If necessary, the offences set forth in article 2 shall be treated, for the purposes of extradition
between States Parties, as if they had been committed not only in the place in which they
occurred but also in the territory of the States that have established jurisdiction in accordance
with article 7, paragraphs 1 and 2.
5. The provisions of all extradition treaties and arrangements between States Parties with
regard to offences set forth in article 2 shall be deemed to be modified as between States
Parties to the extent that they are incompatible with this Convention.
Article 12
1. States Parties shall afford one another the greatest measure of assistance in connection with
criminal investigations or criminal or extradition proceedings in respect of the offences set
forth in article 2, including assistance in obtaining evidence in their possession necessary for
the proceedings.
2. States Parties may not refuse a request for mutual legal assistance on the ground of bank
secrecy.
3. The requesting Party shall not transmit or use information or evidence furnished by the
requested Party for investigations, prosecutions or proceedings other than those stated in the
request without the prior consent of the requested Party.
4. Each State Party may give consideration to establishing mechanisms to share with other
States Parties information or evidence needed to establish criminal, civil or administrative
liability pursuant to article 5.
5. States Parties shall carry out their obligations under paragraphs 1 and 2 in conformity with
any treaties or other arrangements on mutual legal assistance or information exchange that
may exist between them. In the absence of such treaties or arrangements, States Parties shall
afford one another assistance in accordance with their domestic law.
Article 13
None of the offences set forth in article 2 shall be regarded, for the purposes of extradition or
mutual legal assistance, as a fiscal offence. Accordingly, States Parties may not refuse a request
for extradition or for mutual legal assistance on the sole ground that it concerns a fiscal offence.
Article 14
None of the offences set forth in article 2 shall be regarded for the purposes of extradition or
mutual legal assistance as a political offence or as an offence connected with a political offence
or as an offence inspired by political motives. Accordingly, a request for extradition or for
mutual legal assistance based on such an offence may not be refused on the sole ground that it
concerns a political offence or an offence connected with a political offence or an offence
inspired by political motives.
Article 15
Nothing in this Convention shall be interpreted as imposing an obligation to extradite or to
afford mutual legal assistance, if the requested State Party has substantial grounds for
believing that the request for extradition for offences set forth in article 2 or for mutual legal
assistance with respect to such offences has been made for the purpose of prosecuting or
punishing a person on account of that person’s race, religion, nationality, ethnic origin or
political opinion or that compliance with the request would cause prejudice to that person’s
position for any of these reasons.
Article 16
1. A person who is being detained or is serving a sentence in the territory of one State Party
whose presence in another State Party is requested for purposes of identification, testimony or
otherwise providing assistance in obtaining evidence for the investigation or prosecution of
offences set forth in article 2 may be transferred if the following conditions are met:
(a) The person freely gives his or her informed consent;
(b) The competent authorities of both States agree, subject to such conditions as those States
may deem appropriate.
2. For the purposes of the present article:
(a) The State to which the person is transferred shall have the authority and obligation to
keep the person transferred in custody, unless otherwise requested or authorized by the
State from which the person was transferred;
(b) The State to which the person is transferred shall without delay implement its obligation
to return the person to the custody of the State from which the person was transferred as
agreed beforehand, or as otherwise agreed, by the competent authorities of both States;
(c) The State to which the person is transferred shall not require the State from which the
person was transferred to initiate extradition proceedings for the return of the person;
(d) The person transferred shall receive credit for service of the sentence being served in the
State from which he or she was transferred for time spent in the custody of the State to
which he or she was transferred.
3. Unless the State Party from which a person is to be transferred in accordance with the
present article so agrees, that person, whatever his or her nationality, shall not be prosecuted
or detained or subjected to any other restriction of his or her personal liberty in the territory of
the State to which that person is transferred in respect of acts or convictions anterior to his or
her departure from the territory of the State from which such person was transferred.
Article 17
Any person who is taken into custody or regarding whom any other measures are taken or
proceedings are carried out pursuant to this Convention shall be guaranteed fair treatment,
including enjoyment of all rights and guarantees in conformity with the law of the State in the
territory of which that person is present and applicable provisions of international law,
including international human rights law.
Article 18
1. States Parties shall cooperate in the prevention of the offences set forth in article 2 by taking
all practicable measures, inter alia, by adapting their domestic legislation, if necessary, to
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prevent and counter preparations in their respective territories for the commission of those
offences within or outside their territories, including:
(a) Measures to prohibit in their territories illegal activities of persons and organizations that
knowingly encourage, instigate, organize or engage in the commission of offences set
forth in article 2;
(b) Measures requiring financial institutions and other professions involved in financial
transactions to utilize the most efficient measures available for the identification of their
usual or occasional customers, as well as customers in whose interest accounts are
opened, and to pay special attention to unusual or suspicious transactions and report
transactions suspected of stemming from a criminal activity. For this purpose, States
Parties shall consider:
(i) Adopting regulations prohibiting the opening of accounts, the holders or beneficiaries of
which are unidentified or unidentifiable, and measures to ensure that such
institutions verify the identity of the real owners of such transactions;
(ii) With respect to the identification of legal entities, requiring financial institutions, when
necessary, to take measures to verify the legal existence and the structure of the
customer by obtaining, either from a public register or from the customer or both,
proof of incorporation, including information concerning the customer’s name, legal
form, address, directors and provisions regulating the power to bind the entity;
(iii) Adopting regulations imposing on financial institutions the obligation to report promptly
to the competent authorities all complex, unusual large transactions and unusual
patterns of transactions, which have no apparent economic or obviously lawful
purpose, without fear of assuming criminal or civil liability for breach of any
restriction on disclosure of information if they report their suspicions in good faith;
(iv) Requiring financial institutions to maintain, for at least five years, all necessary records on
transactions, both domestic and international.
2. States Parties shall further cooperate in the prevention of offences set forth in article 2 by
considering:
(a) Measures for the supervision, including, for example, the licensing, of all money-
transmission agencies;
(b) Feasible measures to detect or monitor the physical cross-border transportation of cash
and bearer negotiable instruments, subject to strict safeguards to ensure proper use of
information and without impeding in any way the freedom of capital movements.
3. States Parties shall further cooperate in the prevention of the offences set forth in article 2
by exchanging accurate and verified information in accordance with their domestic law and
coordinating administrative and other measures taken, as appropriate, to prevent the
commission of offences set forth in article 2, in particular by:
(a) Establishing and maintaining channels of communication between their competent
agencies and services to facilitate the secure and rapid exchange of information
concerning all aspects of offences set forth in article 2;
(b) Cooperating with one another in conducting inquiries, with respect to the offences set
forth in article 2, concerning:
(i) The identity, whereabouts and activities of persons in respect of whom reasonable
suspicion exists that they are involved in such offences;
(ii) The movement of funds relating to the commission of such offences.
4. States Parties may exchange information through the International Criminal Police
Organization (Interpol).
Article 19
The State Party where the alleged offender is prosecuted shall, in accordance with its domestic
law or applicable procedures, communicate the final outcome of the proceedings to the
Secretary-General of the United Nations, who shall transmit the information to the other
States Parties.
Article 20
The States Parties shall carry out their obligations under this Convention in a manner
consistent with the principles of sovereign equality and territorial integrity of States and that
of non-intervention in the domestic affairs of other States.
Article 21
Nothing in this Convention shall affect other rights, obligations and responsibilities of States
and individuals under international law, in particular the purposes of the Charter of the
United Nations, international humanitarian law and other relevant conventions.
Article 22
Nothing in this Convention entitles a State Party to undertake in the territory of another State
Party the exercise of jurisdiction or performance of functions which are exclusively reserved
for the authorities of that other State Party by its domestic law.
Article 23
1. The annex may be amended by the addition of relevant treaties:
(a) That are open to the participation of all States;
(b) That have entered into force;
(c) That have been ratified, accepted, approved or acceded to by at least twenty-two States
Parties to the present Convention.
2. After the entry into force of this Convention, any State Party may propose such an
amendment. Any proposal for an amendment shall be communicated to the depositary in
written form. The depositary shall notify proposals that meet the requirements of paragraph 1
to all States Parties and seek their views on whether the proposed amendment should be
adopted.
3. The proposed amendment shall be deemed adopted unless one third of the States Parties
object to it by a written notification not later than 180 days after its circulation.
4. The adopted amendment to the annex shall enter into force 30 days after the deposit of the
twenty-second instrument of ratification, acceptance or approval of such amendment for all
those States Parties that have deposited such an instrument. For each State Party ratifying,
accepting or approving the amendment after the deposit of the twenty-second instrument, the
amendment shall enter into force on the thirtieth day after deposit by such State Party of its
instrument of ratification, acceptance or approval.
Article 24
1. Any dispute between two or more States Parties concerning the interpretation or application
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of this Convention which cannot be settled through negotiation within a reasonable time shall,
at the request of one of them, be submitted to arbitration. If, within six months from the date
of the request for arbitration, the parties are unable to agree on the organization of the
arbitration, any one of those parties may refer the dispute to the International Court of
Justice, by application, in conformity with the Statute of the Court.
2. Each State may at the time of signature, ratification, acceptance or approval of this
Convention or accession thereto declare that it does not consider itself bound by paragraph 1.
The other States Parties shall not be bound by paragraph 1 with respect to any State Party
which has made such a reservation.
3. Any State which has made a reservation in accordance with paragraph 2 may at any time
withdraw that reservation by notification to the Secretary-General of the United Nations.
Article 25
1. This Convention shall be open for signature by all States from 10 January 2000 to 31
December 2001 at United Nations Headquarters in New York.
2. This Convention is subject to ratification, acceptance or approval. The instruments of
ratification, acceptance or approval shall be deposited with the Secretary-General of the
United Nations.
3. This Convention shall be open to accession by any State. The instruments of accession shall
be deposited with the Secretary-General of the United Nations.
Article 26
1. This Convention shall enter into force on the thirtieth day following the date of the deposit
of the twenty-second instrument of ratification, acceptance, approval or accession with the
Secretary-General of the United Nations.
2. For each State ratifying, accepting, approving or acceding to the Convention after the
deposit of the twenty-second instrument of ratification, acceptance, approval or accession, the
Convention shall enter into force on the thirtieth day after deposit by such State of its
instrument of ratification, acceptance, approval or accession.
Article 27
1. Any State Party may denounce this Convention by written notification to the Secretary-
General of the United Nations.
2. Denunciation shall take effect one year following the date on which notification is received
by the Secretary-General of the United Nations.
Article 28
The original of this Convention, of which the Arabic, Chinese, English, French, Russian and
Spanish texts are equally authentic, shall be deposited with the Secretary-General of the
United Nations who shall send certified copies thereof to all States.
IN WITNESS WHEREOF, the undersigned, being duly authorized thereto by their respective
Governments, have signed this Convention, opened for signature at United Nations
Headquarters in New York on 10 January 2000.
Annex 2
1. Convention for the Suppression of Unlawful Seizure of Aircraft, done at The Hague on
16 December 1970.
2. Convention for the Suppression of Unlawful Acts against the Safety of Civil Aviation,
done at Montreal on 23 September 1971.
3. Convention on the Prevention and Punishment of Crimes against Internationally
Protected Persons, including Diplomatic Agents, adopted by the General Assembly of the
United Nations on 14 December 1973.
4. International Convention against the Taking of Hostages, adopted by the General
Assembly of the United Nations on 17 December 1979.
5. Convention on the Physical Protection of Nuclear Material, adopted at Vienna on 3
March 1980.
6. Protocol for the Suppression of Unlawful Acts of Violence at Airports Serving
International Civil Aviation, supplementary to the Convention for the Suppression of
Unlawful Acts against the Safety of Civil Aviation, done at Montreal on 24 February
1988.
7. Convention for the Suppression of Unlawful Acts against the Safety of Maritime
Navigation, done at Rome on 10 March 1988.
8. Protocol for the Suppression of Unlawful Acts against the Safety of Fixed Platforms
located on the Continental Shelf, done at Rome on 10 March 1988.
9. International Convention for the Suppression of Terrorist Bombings, adopted by the
General Assembly of the United Nations on 15 December 1997.
Financial Action Task Force Guidance for
Financial Institutions in Detecting Terrorism*
A. Introduction
At its extraordinary Plenary meeting on 29–30 October 2001, the Financial Action
Task Force on Money Laundering (FATF) agreed to develop special guidance for
financial institutions to help them detect the techniques and mechanisms used in the
financing of terrorism. The FATF subsequently brought together experts from its
member countries to gather information on and study the issue of terrorist financing
as part of its annual exercise on money laundering methods and trends. One goal of
this exercise was to begin establishing such guidance for financial institutions that
could be issued along with the annual FATF Report on Money Laundering
Methods and Trends. Material derived from the exercise, along with contributions
from the Egmont Group and other international bodies, was used in developing the
present document. The information contained in it represents a first attempt at
providing necessary guidance for financial institutions in this area.
The goal in providing this guidance is to ensure that financial institutions do not
unwittingly hide or move terrorist funds. Financial institutions will thus be better
able to protect themselves from being used as a conduit for such activity. To help
build awareness of how terrorists, their associates or those who support terrorism
may use the financial system, this document describes the general characteristics of
terrorist financing. The accompanying case studies illustrate the manner in which
competent law enforcement authorities or financial intelligence units (FIUs) are able
to establish a terrorist-financing link based on information reported by financial
institutions. Annex 1 contains a series of characteristics of financial transactions that
have been linked to terrorist activity in the past. When one or several of these
potentially suspicious or unusual factors is present as regards a specific financial
transaction – especially when the individual or entity may appear on one of the lists
of suspected terrorists, terrorist organizations or associated individuals and entities
(see Annex 2: Sources of Information) – then a financial institution would have cause
* 24 April 2002.

147
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to increase its scrutiny of the transaction and any associated individuals or entities.
In certain instances, this scrutiny could result in reporting the transaction to
authorities under applicable suspicious or unusual transaction reporting systems.
B. Terrorist Financing and risks to Financial Institutions
A financial institution that carries out a transaction, knowing that the funds or
property involved are owned or controlled by terrorists or terrorist organizations, or
that the transaction is linked to, or likely to be used in, terrorist activity, may be
committing a criminal offence under the laws of many jurisdictions. Such an offence
may exist regardless of whether the assets involved in the transaction were the
proceeds of criminal activity or were derived from lawful activity but intended for
use in support of terrorism.
Regardless of whether the funds in a transaction are related to terrorists for the
purposes of national criminal legislation, business relationships with such individuals
or other closely associated persons or entities could, under certain circumstances,
expose a financial institution to significant reputational, operational, and legal risk.
This risk is even more serious if the person or entity involved is later shown to have
benefited from the lack of effective monitoring or wilful blindness of a particular
institution and thus was to carry out terrorist acts.
C. Reinforcing Existing Requirements
Consideration of the factors contained in this guidance is intended to clarify,

complement and/or reinforce existing due diligence requirements, along with current
policies and procedures imposed by national anti-money laundering programmes. It
should be stressed, however, that this guidance does not constitute an additional rule
or regulation. Rather it represents advice from the operational experts of FATF
members as to factors associated with financial transactions that should trigger
further questions on the part of the financial institution. The FATF encourages all
financial institutions to consider these factors along with policies, practices and
procedures already in place for ensuring compliance with appropriate laws and
regulations and for minimising reputational risks. It should be noted as well that,
while the characteristics indicated in this document may apply specifically to terrorist
financing, most of them may also apply in identifying suspicious transactions
generally. Financial institutions in many jurisdictions may already be aware of these
characteristics through existing guidance notes or other sources.
In providing this guidance, the FATF intends it to be consistent with applicable
criminal and civil laws, as well as relevant regulations, to which financial institutions
Financial Action Task Force Guidance for Financial Institutions 149
may be subject in their particular jurisdiction. It should be noted however that this
guidance does not replace or supersede any obligations under the current national
laws or regulations. In particular, implementing the measures proposed by this
guidance should not be construed as necessarily protecting a financial institution
from any action that a jurisdiction might choose to take against it. Furthermore, this
guidance does not supersede or modify requirements imposed by national or
regional authorities, which call for the freezing of assets of individuals and entities
suspected of being terrorists or terrorist related, as part of implementing relevant
United Nations Security Council Resolutions (see Annex 2: Sources of Information).
D. Determining when increased scrutiny is necessary
Financial institutions are encouraged to develop practices and procedures that will
help to detect and deter those transactions that may involve funds used in terrorist
financing. The increased scrutiny that may be warranted for some transactions
should be seen as a further application of the institution’s due diligence and anti-
money laundering policies and procedures and should lead, when appropriate, to
reporting of such financial activity as suspicious or unusual under applicable
transaction reporting regimes for a particular jurisdiction. To ensure that the
practical steps are taken to increase scrutiny of certain transactions when necessary,
it may be useful for a financial institution to review its practices in this area as part of
its general internal and external audit processes.
Example 1: Front for individual with suspected terrorist links revealed by

suspicious transaction report
The FIU in Country D received a suspicious transaction report from a domestic
financial institution regarding an account held by an individual residing in a
neighbouring country. The individual managed European-based companies and had
filed two loan applications on their behalf with the reporting institution. These loan
applications amounted to several million US dollars and were ostensibly intended for
the purchase of luxury hotels in Country D. The bank did not grant any of the loans.
The analysis by the FIU revealed that the funds for the purchase of the hotels were
to be channelled through the accounts of the companies represented by the
individual. One of the companies making the purchase of these hotels would then
have been taken over by an individual from another country. This second person
represented a group of companies whose activities focused on hotel and leisure
sectors, and he appeared to be the ultimate buyer of the real estate. On the basis of
the analysis within the FIU, it appeared that the subject of the suspicious transaction
report was acting as a front for the second person. The latter as well as his family are
suspected of being linked to terrorism.
The manner in which a financial institution may choose to apply this Guidance will
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vary depending on the extent of the risk determined to exist by each institution as a
general matter, given its normal business operations. It will also vary according to the
individual factors of each case as it occurs. Financial institutions should exercise
reasonable judgement in modifying and implementing policies and procedures in this
area. This Guidance should not be interpreted as discouraging or prohibiting financial
institutions from doing business with any legitimate customer. Indeed, it has been
designed solely as a means of assisting financial institutions in determining whether a
transaction merits additional scrutiny so that the institution is thus better able to
identify, report (when appropriate) and ultimately avoid transactions involving the
funds supporting or associated with the financing of terrorism.
Example 2: Individual’s account activity and inclusion on UN list show

possible link to terrorist activity
An individual resided in a neighbouring country but had a demand deposit account
and a savings account in Country N. The bank that maintained the accounts noticed
the gradual withdrawal of funds from the accounts from the end of April 2001 onwards
and decided to monitor the accounts more closely. The suspicions of the bank were
subsequently reinforced when a name very similar to the account holder’s appeared in
the consolidated list of persons and/or entities issued by the United Nations Security
Council Committee on Afghanistan (UN Security Council Resolution 1333/2000). The
bank immediately made a report to the FIU. The FIU analyzed the financial
movements relating to the individual’s accounts using records requested from the bank.
It appeared that both of the accounts had been opened by the individual in 1990 and
had been fed mostly by cash deposits. In March 2000 the individual made a sizeable
transfer from his savings account to his checking account. These funds were used to
pay for a single premium life insurance policy and to purchase certificates of deposit.
From the middle of April 2001 the individual made several large transfers from his
savings account to his demand deposit account. These funds were transferred abroad
to persons and companies located in neighbouring countries and in other regions. In
May and June 2001, the individual sold the certificates of deposit he had purchased,
and he then transferred the profits to the accounts of companies based in Asia and to
that of a company established in his country of origin. The individual also cashed in his
life insurance policy before the maturity date and transferred its value to an account at
a bank in his country of origin. The last transaction was carried out on 30 August 2001,
that is, shortly before the 11 September attacks in the United States. Finally, the anti-
money laundering unit in the individual’s county of origin communicated information
related to suspicious operations carried out by him and by the companies that received
the transfers. Many of these names also appeared in the files of the FIU. This case is
currently under investigation.
It should be acknowledged as well that financial institutions would probably be
unable to detect terrorist financing as such. Indeed, the only time that financial
institutions might clearly identify terrorist financing as distinct from other criminal
misuse of the financial system is when a known terrorist or terrorist organization has
opened an account. Financial institutions are, however, in a position to detect

suspicious transactions that, if reported, may later prove to be related to terrorist
financing. It is the competent enforcement authority or the FIU then that is in a
position to determine whether the transaction relates to a particular type of criminal
or terrorist activity and decide on a course of action. For this reason, financial
institutions do not necessarily need to determine the legality of the source or
destination of the funds. Instead, they should ascertain whether transactions are
unusual, suspicious or otherwise indicative of criminal or terrorist activity.
E. Characteristics of terrorist financing
The primary objective of terrorism according to one definition is ‘to intimidate a

population, or to compel a Government of an international organization to do or
abstain from doing any act’.1 In contrast, financial gain is generally the objective of
other types of criminal activities. While the difference in ultimate goals between each
of these activities may be true to some extent, terrorist organizations still require
financial support in order to achieve their aims. A successful terrorist group, like any
criminal organization, is therefore necessarily one that is able to build and maintain
an effective financial infrastructure. For this it must develop sources of funding, a
means of laundering those funds and then finally a way to ensure that the funds can
be used to obtain material and other logistical items needed to commit terrorist acts.
I. Sources of terrorist funds

Experts generally believe that terrorist financing comes from two primary sources.
The first source is the financial support provided by States or organizations with
large enough infrastructures to collect and then make funds available to the terrorist
organization. This so-called State-sponsored terrorism has declined in recent years,
according to some experts, and is increasingly replaced by other types of backing. An
individual with sufficient financial means may also provide substantial funding to
terrorist groups. Osama bin Laden, for example, is thought to have contributed
significant amounts of his personal fortune to the establishment and support of the
Al-Qaeda terrorist network.
Example 3: Diamond trading company possibly linked to terrorist

funding operation
The FIU in Country C received several suspicious transaction reports from different
1
Art. 2, International Convention for the Suppression of the Financing of Terrorism, 9
December 1999.
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banks concerning two persons and a diamond trading company. The individuals and
the company in question were account holders at the various banks. In the space of a
few months, a large number of fund transfers to and from overseas were made from
the accounts of the two individuals. Moreover, soon after the account was opened,
one of the individuals received several USD cheques for large amounts. According to
information obtained by the FIU, one of the accounts held by the company
appeared to have received large US dollar deposit originating from companies active
in the diamond industry. One of the directors of the company, a citizen of Country C
but residing in Africa, maintained an account at another bank in Country C. Several
transfers had been carried out to and from overseas using this account. The transfers
from foreign countries were mainly in US dollars. They were converted into the local
currency and were then transferred to foreign countries and to accounts in Country
C belonging to one of the two subjects of the suspicious transaction report. Police
information obtained by the FIU revealed that an investigation had already been
initiated relating to these individuals and the trafficking of diamonds originating
from Africa. The large funds transfers by the diamond trading company were mainly
sent to the same person residing in another region. Police sources revealed that this
person and the individual that had cashed the cheques were suspected of buying
diamonds from the rebel army of an African country and then smuggling them into
Country C on behalf of a terrorist organization. Further research by the FIU also
revealed links between the subjects of the suspicious transaction report and
individuals and companies already tied to the laundering of funds for organized
crime. This case is currently under investigation.
The second major source of funds for terrorist organizations is income derived
directly from various ‘revenue-generating’ activities. As with criminal organizations,
a terrorist group’s income may be derived from crime or other unlawful activities. A
terrorist group in a particular region may support itself through kidnapping and
extortion. In this scenario, ransoms paid to retrieve hostages, along with a special
‘revolutionary tax’ (in reality a euphemism for protection money) demanded of
businesses, provide needed financial resources but also play a secondary role as one
other means of intimidating the target population. Besides kidnapping and
extortion, terrorist groups may engage in large-scale smuggling, various types of
fraud (for example, through credit cards or charities), thefts and robbery, and
narcotics trafficking.
Funding for terrorist groups, unlike for criminal organizations, however, may
also include income derived from legitimate sources or from a combination of lawful
and unlawful sources. Indeed, this funding from legal sources is a key difference
between terrorist groups and traditional criminal organizations. How much of a role
legal money plays in the support of terrorism varies according to the terrorist group
and whether the source of funds is in the same geographic location as the terrorist
acts the group commits.
Community solicitation and fundraising appeals are one very effective means of
raising funds to support terrorism. Often such fundraising is carried out in the name
of organizations having the status of a charitable or relief organization, and it may
be targeted at a particular community. Some members of the community are led to

believe that they are giving for a good cause. In many cases, the charities to which
donations are given are in fact legitimate in that they do engage in some of the work
they purport to carry out. Most of the members of the organization, however, have
no knowledge that a portion of the funds raised by the charity is being diverted to
terrorist causes. For example, the supporters of a terrorist movement from one
country may carry out ostensibly legal activities in another country to obtain
financial resources. The movement’s supporters raise these funds by infiltrating and
taking control of institutions within the immigrant community of the second
country. Some of the specific fundraising methods might include: collection of
membership dues and/or subscriptions; sale of publications; speaking tours, cultural
and social events; door-to-door solicitation within the community; appeals to
wealthy members of the community; and donations of a portion of their personal
earnings.
II. Laundering of terrorist-related funds

From a technical perspective, the methods used by terrorists and their associates to
generate funds from illegal sources differ little from those used by traditional
criminal organizations. Although it would seem logical that funding from legitimate
sources would not need to be laundered, there is nevertheless often a need for the
terrorist group to obscure or disguise links between it and its legitimate funding
sources. It follows then that terrorist groups must similarly find ways to launder
these funds in order to be able to use them without drawing the attention of
authorities. In examining terrorist related financial activity, FATF experts have
concluded that terrorists and their support organizations generally use the same
methods as criminal groups to launder funds. Some of the particular methods
detected with respect to various terrorist groups include: cash smuggling (both by
couriers or bulk cash shipments), structured deposits to or withdrawals from bank
accounts, purchases of various types of monetary instruments (travellers’ cheques,
bank cheques, money orders), use of credit or debit cards, and wire transfers. There
have also been indications that some forms of underground banking (particularly the
hawala system2) have had a role in moving terrorist-related funds.
Example 4: Cash deposits to accounts of non-profit organization

allegedly finance terrorist group
The FIU in Country L received a suspicious transaction report from a bank
regarding an account held by an offshore investment company. The bank’s
suspicions arose after the company’s manager made several large cash deposits in
2
For more information on the hawala system of alternate remittance/underground banking,
see the 1999-2000 FATF Report on Money Laundering Typologies, 3 February 2001, at
pp. 4–8.
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different foreign currencies. According to the customer, these funds were intended to
finance companies in the media sector. The FIU requested information from several
financial institutions. Through these enquiries, it learned that the managers of the
offshore investment company were residing in Country L and a bordering country.
They had opened accounts at various banks in Country L under the names of media
companies and a non-profit organization involved in the promotion of cultural
activities. According to the analysis by the FIU, the managers of the offshore
investment company and several other clients had made cash deposits to the
accounts. These funds were ostensibly intended for the financing of media-based
projects. The analysis further revealed that the account held by the non-profit
organization was receiving almost daily deposits in small amounts by third parties.
The manager of this organization stated that the money deposited in this account
was coming from its members for the funding of cultural activities. Police
information obtained by the FIU revealed that the managers of offshore investment
company were known to have been involved in money laundering and that an
investigation was already underway into their activities. The managers appeared to
be members of a terrorist group, which was financed by extortion and narcotics
trafficking. Funds were collected through the non-profit organization from the
different suspects involved in this case. This case is currently under investigation.
The difference between legally and illegally obtained proceeds raises an important
legal problem as far as applying anti-money laundering measures to terrorist
financing. Money laundering has generally been defined as a process whereby funds
obtained through or generated by criminal activity are moved or concealed in order
to obscure the link between the crime and generated funds. The terrorist’s ultimate
aim on the other hand is not to generate profit from his or her fundraising
mechanisms but to obtain resources to support his or her operations. In a number of
countries, terrorist financing thus may not yet be included as a predicate offence for
money laundering, and it may be impossible therefore to apply preventive and
repressive measures specifically targeting this terrorist activity.
When terrorists or terrorist organizations obtain their financial support from legal
sources (donations, sales of publications, etc.), there are certain factors that make
detecting and tracing these funds more difficult. For example, charities or non-profit
organizations and other legal entities have been cited as playing an important role in
the financing of some terrorist groups. The apparent legal source of this funding may
mean that there are few, if any, indicators that would make an individual financial
transaction or series of transactions stand out as linked to terrorist activities.
Other important aspects of terrorist financing that make its detection more
difficult are the size and nature of the transactions involved. Several FATF experts
have mentioned that the funding needed to mount a terrorist attack does not always
call for large sums of money, and the associated transactions are usually not
complex. For example, an examination of the financial connections among the 11
September hijackers showed that most of the individual transactions were small
sums, that is, below the usual cash transaction reporting thresholds, and in most
cases the operations consisted of only wire transfers. The individuals were ostensibly
foreign students who appeared to be receiving money from their parents or in the
form of grants for their studies, thus the transactions would not have been identified
as needing additional scrutiny by the financial institutions involved.
Example 5: High account turnover indicates fraud allegedly used to

finance terrorist organization
An investigation in Country B arose as a consequence of a suspicious transaction
report. A financial institution reported that an individual who allegedly earned a
salary of just over USD 17,000 per annum had a turnover in his account of nearly
USD 356,000. Investigators subsequently learned that this individual did not exist
and that the account had been fraudulently obtained. Further investigation revealed
that the account was linked to a foreign charity and was used to facilitate funds
collection for a terrorist organization through a fraud scheme. In Country B, the
government provides matching funds to charities in an amount equivalent to 42 per
cent of donations received. Donations to this charity were being paid into to the
account under investigation, and the government matching funds were being claimed
by the charity. The original donations were then returned to the donors so that
effectively no donation had been given to the charity. The charity retained the
matching funds. This fraud resulted in over USD 1.14 million being fraudulently
obtained. This case is currently under investigation.
Example 6: Lack of clear business relationship appears to point terrorist

connection
The manager of a chocolate factory (CHOCCo) introduced the manager of his bank
accounts to two individuals, both company managers, who were interested in
opening commercial bank accounts. The two companies were established within a
few days of each other, but in different countries. The first company (TEXTCo) was
involved in the textile trade while the second one was a real estate (REALCo) non-
trading company. The companies had different managers and their activities were
not connected.
The bank manager opened the accounts for the two companies, which thereafter
remained dormant. After several years, the manager of the chocolate factory
announced the arrival of a credit transfer issued by the REALCo to the account of
the TEXTCo. This transfer was ostensibly an advance on an order of tablecloths. No
invoice was shown. However, once the account of TEXTCo received the funds, its
manager asked for them to be made available in cash at a bank branch near the
border. There, accompanied by the manager of CHOCCo, the TEXTCo manager
withdrew the cash. The bank reported this information to the FIU. The FIU’s
research showed that the two men crossed the border with the money after making
the cash withdrawal. The border region is one in which terrorist activity occurs, and
further information from the intelligence services indicated links between the
managers of TEXTCo and REALCo and terrorist organizations active in that region.
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Annex 1: Characteristics of Financial Transactions that May Be a Cause

for Increased Scrutiny
As a normal part of carrying out their work, financial institutions should be aware of elements
of individual transactions that could indicate funds involved in terrorist financing. The
following list of potentially suspicious or unusual activities is meant to show types of
transactions that could be a cause for additional scrutiny. This list is not exhaustive, nor does
it take the place of any legal obligations related to reporting suspicious or unusual transactions
that may be imposed by individual national authorities.
This list of characteristics should be taken into account by financial institutions along with
other available information (including any lists of suspected terrorists, terrorist groups, and
associated individuals and entities issued by the United Nations3
Financial institutions should pay particular attention to:
A. Accounts
(1) Accounts that receive relevant periodical deposits and are dormant at other periods. These
accounts are then used in creating an apparently legitimate financial background through
which additional fraudulent activities may be carried out.
(2) A dormant account containing a minimal sum suddenly receives a deposit or series of
deposits followed by daily cash withdrawals that continue until the transferred sum has been
removed.
(3) When opening an account, the customer refuses to provide information required by the
financial institution, attempts to reduce the level of information provided to the minimum or
provides information that is misleading or difficult to verify.
(4) An account for which several persons have signature authority, yet these persons appear to
have no relation among each other (either family ties or business relationship).
(5) An account opened by a legal entity or an organization that has the same address as other
legal entities or organizations but for which the same person or persons have signature
authority, when there is no apparent economic or legal reason for such an arrangement (for
example, individuals serving as company directors for multiple companies headquartered at
the same location, etc.).
(6) An account opened in the name of a recently formed legal entity and in which a higher than
expected level of deposits are made in comparison with the income of the founders of the
entity.
(7) The opening by the same person of multiple accounts into which numerous small deposits
are made that in aggregate are not commensurate with the expected income of the customer.
(8) An account opened in the name of a legal entity that is involved in the activities of an
association or foundation whose aims are related to the claims or demands of a terrorist
organization.
(9) An account opened in the name of a legal entity, a foundation or an association, which
3
This guidance does not supersede or modify requirements imposed by national or regional
authorities, which call for the freezing of assets of individuals and entities suspected of
being terrorists or terrorist related, as part of implementing relevant United Nations
Security Council Resolutions.
may be linked to a terrorist organization and that shows movements of funds above the
expected level of income.
B. Deposits and withdrawals

(1) Deposits for a business entity in combinations of monetary instruments that are atypical of
the activity normally associated with such a business (for example, deposits that include a mix of
business, payroll and social security cheques).
(2) Large cash withdrawals made from a business account not normally associated with cash
transactions.
(3) Large cash deposits made to the account of an individual or legal entity when the apparent
business activity of the individual or entity would normally be conducted in cheques or other
payment instruments.
(4) Mixing of cash deposits and monetary instruments in an account in which such
transactions do not appear to have any relation to the normal use of the account.
(5) Multiple transactions carried out on the same day at the same branch of a financial
institution but with an apparent attempt to use different tellers.
(6) The structuring of deposits through multiple branches of the same financial institution or
by groups of individuals who enter a single branch at the same time.
(7) The deposit or withdrawal of cash in amounts which fall consistently just below
identification or reporting thresholds.
(8) The presentation of uncounted funds for a transaction. Upon counting, the transaction is
reduced to an amount just below that which would trigger reporting or identification
requirements.
(9) The deposit or withdrawal of multiple monetary instruments at amounts which fall
consistently just below identification or reporting thresholds, particularly if the instruments
are sequentially numbered.
C. Wire transfers
(1) Wire transfers ordered in small amounts in an apparent effort to avoid triggering
identification or reporting requirements.
(2) Wire transfers to or for an individual where information on the originator, or the person on
whose behalf the transaction is conducted, is not provided with the wire transfer, when the
inclusion of such information would be expected.
(3) Use of multiple personal and business accounts or the accounts of non-profit organizations
or charities to collect and then funnel funds immediately or after a short time to a small
number of foreign beneficiaries.
(4) Foreign exchange transactions that are performed on behalf of a customer by a third party
followed by wire transfers of the funds to locations having no apparent business connection
with the customer or to countries of specific concern.
D. Characteristics of the customer or his/her business activity

(1) Funds generated by a business owned by individuals of the same origin or involvement of
multiple individuals of the same origin from countries of specific concern acting on behalf of
similar business types.
(2) Shared address for individuals involved in cash transactions, particularly when the address
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is also a business location and/or does not seem to correspond to the stated occupation (for
example student, unemployed, self-employed, etc.).
(3) Stated occupation of the transactor is not commensurate with the level or type of activity
(for example, a student or an unemployed individual who receives or sends large numbers of
wire transfers, or who makes daily maximum cash withdrawals at multiple locations over a
wide geographic area).
(4) Regarding non-profit or charitable organizations, financial transactions for which there
appears to be no logical economic purpose or in which there appears to be no link between the
stated activity of the organization and the other parties in the transaction.
(5) A safe deposit box is opened on behalf of a commercial entity when the business activity of
the customer is unknown or such activity does not appear to justify the use of a safe deposit
box.
(6) Unexplained inconsistencies arising from the process of identifying or verifying the
customer (for example, regarding previous or current country of residence, country of issue of
the passport, countries visited according to the passport, and documents furnished to confirm
name, address and date of birth).
E. Transactions linked to locations of concern

(1) Transactions involving foreign currency exchanges that are followed within a short time by
wire transfers to locations of specific concern (for example, countries designated by national
authorities, FATF non-cooperative countries and territories, etc.).
(2) Deposits are followed within a short time by wire transfers of funds, particularly to or
through a location of specific concern (for example, countries designated by national
authorities, FATF non-cooperative countries and territories, etc.).
(3) A business account through which a large number of incoming or outgoing wire transfers
take place and for which there appears to be no logical business or other economic purpose,
particularly when this activity is to, through or from locations of specific concern.
(4) The use of multiple accounts to collect and then funnel funds to a small number of foreign
beneficiaries, both individuals and businesses, particularly when these are in locations of
specific concern.
(5) A customer obtains a credit instrument or engages in commercial financial transactions
involving movement of funds to or from locations of specific concern when there appears to be
no logical business reasons for dealing with those locations.
(6) The opening of accounts of financial institutions from locations of specific concern.
(7) Sending or receiving funds by international transfers from and/or to locations of specific
concern.
Annex 2: Sources of Information

Several sources of information exist that may help financial institutions in determining
whether a potentially suspicious or unusual transaction could indicate funds involved in the
financing of terrorism and thus be subject to reporting obligations under national anti-money
laundering or antiterrorism laws and regulations.
A. United Nations lists

Committee on S/RES/1267 (1999) website:
http://www.un.org/Docs/sc/committees/AfghanTemplate.htm
B. Other lists
(1) Financial Action Task Force

FATF Identification of Non-Cooperative Countries and Territories
FATF website:
http://www.fatf-gafi.org/NCCT_en.htm
(2) United States

Executive Order 13224, 23 September 2001 (with updates)
US Department of the Treasury website:
http://www.ustreas.gov/terrorism.html
(3) Council of the European Union

Council Regulation 467/2001 of 6 March 2001 OJ 2001 L67 (on freezing Taliban funds)
Council Decision 927/2001 of 27 December 2001 (list of terrorist and terrorist organizations
whose assets should be frozen in accordance with Council Regulation 2580/2001)
Council Common Position of 27 December 2001 on application of specific measures to
combat terrorism (list of persons, groups and entities involved in terrorist acts)
EUR-lex website:
http://europa.eu.int/eur-lex/en/index.html
C. Standards
(1) Financial Action Task Force

FA TF Special Recommendations on Terrorist Financing
FATF website: http://www.fatf-gafi.org/TerFinance_en.htm
FATF Forty Recommendations on Money Laundering
FATF website: http://www.fatf-gafi.org/40Recs_en.htm
(2) UN Conventions and Resolutions

International Convention on the Suppression of Terrorist Financing
Website: http://untreaty.un.org/English/Terrorism.asp
UN Security Council Resolutions on Terrorism
Website: http://www.un.org/terrorism/sc.htm
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(3) Council of the European Union

Council Regulation 2580/2001 of 27 December 2001 on specific restrictive measures directed
against certain persons and entities with a view to combating terrorism
EUR-lex website: http://europa.eu.int/eur-lex/en/index.html
International Convention for the Suppression
of the Financing of Terrorism
The General Assembly,

Recalling all its relevant resolutions, including resolution 46/51 of 9 December 1991,
resolution 49/60 of 9 December 1994, by which it adopted the Declaration on
Measures to Eliminate International Terrorism, and resolutions 51/210 of 17
December 1996 and 53/108 of 8 December 1998,
Having considered the text of the draft international convention for the suppression
of the financing of terrorism prepared by the Ad Hoc Committee established by
General Assembly resolution 51/210 of 17 December 1996 and the Working Group
of the Sixth Committee,*
1. Adopts the International Convention for the Suppression of the Financing of
Terrorism annexed to the present resolution, and requests the Secretary-General to
open it for signature at United Nations Headquarters in New York from 10 January
2000 to 31 December 2001;
2. Urges all States to sign and ratify, accept, approve or accede to the Convention.
76th plenary meeting

9 December 1999
Preamble
The States Parties to this Convention,

Bearing in mind the purposes and principles of the Charter of the United Nations
concerning the maintenance of international peace and security and the promotion
of good-neighbourliness and friendly relations and cooperation among States,
* /A/C.6/54/L.2, annex I.

© 1999 United Nation. Printed in the Netherlands.
161
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Deeply concerned about the worldwide escalation of acts of terrorism in all its forms
and manifestations,
Recalling the Declaration on the Occasion of the Fiftieth Anniversary of the United
Nations, contained in General Assembly resolution 50/6 of 24 October 1995,
Recalling also all the relevant General Assembly resolutions on the matter, including
resolution 49/60 of 9 December 1994 and the annex thereto on the Declaration on
Measures to Eliminate International Terrorism, in which the States Members of the
United Nations solemnly reaffirmed their unequivocal condemnation of all acts,
methods and practices of terrorism as criminal and unjustifiable, wherever and by
whomever committed, including those which jeopardize the friendly relations among
States and peoples and threaten the territorial integrity and security of States,
Noting that the Declaration on Measures to Eliminate International Terrorism also
encouraged States to review urgently the scope of the existing international legal
provisions on the prevention, repression and elimination of terrorism in all its forms
and manifestations, with the aim of ensuring that there is a comprehensive legal
framework covering all aspects of the matter,
Recalling paragraph 3 (f) of General Assembly resolution 51/210 of 17 December
1996, in which the Assembly called upon all States to take steps to prevent and
counteract, through appropriate domestic measures, the financing of terrorists and
terrorist organizations, whether such financing is direct or indirect through
organizations which also have or claim to have charitable, social or cultural goals
or which are also engaged in unlawful activities such as illicit arms trafficking, drug
dealing and racketeering, including the exploitation of persons for purposes of
funding terrorist activities, and in particular to consider, where appropriate,
adopting regulatory measures to prevent and counteract movements of funds
suspected to be intended for terrorist purposes without impeding in any way the
freedom of legitimate capital movements and to intensify the exchange of
information concerning international movements of such funds,
Recalling also General Assembly resolution 52/165 of 15 December 1997, in which
the Assembly called upon States to consider, in particular, the implementation of the
measures set out in paragraphs 3 (a) to (f) of its resolution 51/210,
Recalling further General Assembly resolution 53/108 of 8 December 1998, in which
the Assembly decided that the Ad Hoc Committee established by General Assembly
resolution 51/210 of 17 December 1996 should elaborate a draft international
convention for the suppression of terrorist financing to supplement related existing
international instruments,
Considering that the financing of terrorism is a matter of grave concern to the
international community as a whole,
Noting that the number and seriousness of acts of international terrorism depend on
the financing that terrorists may obtain,
International Convention for the Suppression of the Financing of Terrorism 163
Noting also that existing multilateral legal instruments do not expressly address such
financing,
Being convinced of the urgent need to enhance international cooperation among
States in devising and adopting effective measures for the prevention of the financing
of terrorism, as well as for its suppression through the prosecution and punishment
of its perpetrators,
Have agreed as follows:
Article 1
For the purposes of this Convention:
1. ‘Funds’ means assets of every kind, whether tangible or intangible, movable
or immovable, however acquired, and legal documents or instruments in
any form, including electronic or digital, evidencing title to, or interest in,
such assets, including, but not limited to, bank credits, travellers cheques,
bank cheques, money orders, shares, securities, bonds, drafts and letters of
credit.
2. ‘State or government facility’ means any permanent or temporary facility or
conveyance that is used or occupied by representatives of a State, members of
Government, the legislature or the judiciary or by officials or employees of a
State or any other public authority or entity or by employees or officials of an
intergovernmental organization in connection with their official duties.
3. ‘Proceeds’ means any funds derived from or obtained, directly or indirectly,
through the commission of an offence set forth in article 2.
Article 2
1. Any person commits an offence within the meaning of this Convention if that
person by any means, directly or indirectly, unlawfully and wilfully, provides
or collects funds with the intention that they should be used or in the
knowledge that they are to be used, in full or in part, in order to carry out:
(a) An act which constitutes an offence within the scope of and as defined
in one of the treaties listed in the annex; or
(b) Any other act intended to cause death or serious bodily injury to a civilian,
or to any other person not taking an active part in the hostilities in a
situation of armed conflict, when the purpose of such act, by its nature or
context, is to intimidate a population, or to compel a Government or an
international organization to do or to abstain from doing any act.
2. (a) On depositing its instrument of ratification, acceptance, approval or
accession, a State Party which is not a party to a treaty listed in the
annex may declare that, in the application of this Convention to the
State Party, the treaty shall be deemed not to be included in the annex
referred to in paragraph 1, subparagraph (a). The declaration shall cease
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to have effect as soon as the treaty enters into force for the State Party,
which shall notify the depositary of this fact;
(b) When a State Party ceases to be a party to a treaty listed in the annex, it
may make a declaration as provided for in this article, with respect to
that treaty.
3. For an act to constitute an offence set forth in paragraph 1, it shall not be
necessary that the funds were actually used to carry out an offence referred to
in paragraph 1, subparagraph (a) or (b).
4. Any person also commits an offence if that person attempts to commit an
offence as set forth in paragraph 1 of this article.
5. Any person also commits an offence if that person:
(a) Participates as an accomplice in an offence as set forth in paragraph 1 or
4 of this article;
(b) Organizes or directs others to commit an offence as set forth in
paragraph 1 or 4 of this article;
(c) Contributes to the commission of one or more offences as set forth in
paragraph 1 or 4 of this article by a group of persons acting with a
common purpose. Such contribution shall be intentional and shall either:
(i) Be made with the aim of furthering the criminal activity or criminal
purpose of the group, where such activity or purpose involves the
commission of an offence as set forth in paragraph 1 of this article;
or
(ii) Be made in the knowledge of the intention of the group to commit
an offence as set forth in paragraph 1 of this article.
Article 3
This Convention shall not apply where the offence is committed within a single State,
the alleged offender is a national of that State and is present in the territory of that
State and no other State has a basis under article 7, paragraph 1 or 2, to exercise
jurisdiction, except that the provisions of articles 12 to 18 shall, as appropriate, apply
in those cases.
Article 4
Each State Party shall adopt such measures as may be necessary:
(a) To establish as criminal offences under its domestic law the offences as
set forth in article 2;
(b) To make those offences punishable by appropriate penalties which take
into account the grave nature of the offences.
Article 5
1. Each State Party, in accordance with its domestic legal principles, shall take
the necessary measures to enable a legal entity located in its territory or

organized under its laws to be held liable when a person responsible for the
management or control of that legal entity has, in that capacity, committed
an offence as set forth in article 2. Such liability may be criminal, civil or
administrative.
2. Such liability is incurred without prejudice to the criminal liability of
individuals who have committed the offences.
3. Each State Party shall ensure, in particular, that legal entities liable in
accordance with paragraph 1 above are subject to effective, proportionate
and dissuasive criminal, civil or administrative sanctions. Such sanctions may
include monetary sanctions.
Article 6
Each State Party shall adopt such measures as may be necessary, including, where
appropriate, domestic legislation, to ensure that criminal acts within the scope of this
Convention are under no circumstances justifiable by considerations of a political,
philosophical, ideological, racial, ethnic, religious or other similar nature.
Article 7
1. Each State Party shall take such measures as may be necessary to establish its
jurisdiction over the offences set forth in article 2 when:
(a) The offence is committed in the territory of that State;
(b) The offence is committed on board a vessel flying the flag of that State
or an aircraft registered under the laws of that State at the time the
offence is committed;
(c) The offence is committed by a national of that State.
2. A State Party may also establish its jurisdiction over any such offence when:
(a) The offence was directed towards or resulted in the carrying out of an
offence referred to in article 2, paragraph 1, subparagraph (a) or (b), in
the territory of or against a national of that State;
(b) The offence was directed towards or resulted in the carrying out of an
offence referred to in article 2, paragraph 1, subparagraph (a) or (b),
against a State or government facility of that State abroad, including
diplomatic or consular premises of that State;
(c) The offence was directed towards or resulted in an offence referred to in
article 2, paragraph 1, subparagraph (a) or (b), committed in an attempt
to compel that State to do or abstain from doing any act;
(d) The offence is committed by a stateless person who has his or her
habitual residence in the territory of that State;
(e) The offence is committed on board an aircraft which is operated by the
Government of that State.
3. Upon ratifying, accepting, approving or acceding to this Convention, each
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State Party shall notify the Secretary-General of the United Nations of the
jurisdiction it has established in accordance with paragraph 2. Should any
change take place, the State Party concerned shall immediately notify the
Secretary-General.
4. Each State Party shall likewise take such measures as may be necessary to
establish its jurisdiction over the offences set forth in article 2 in cases where
the alleged offender is present in its territory and it does not extradite that
person to any of the States Parties that have established their jurisdiction in
accordance with paragraphs 1 or 2.
5. When more than one State Party claims jurisdiction over the offences set
forth in article 2, the relevant States Parties shall strive to coordinate their
actions appropriately, in particular concerning the conditions for prosecution
and the modalities for mutual legal assistance.
6. Without prejudice to the norms of general international law, this Convention
does not exclude the exercise of any criminal jurisdiction established by a
State Party in accordance with its domestic law.
Article 8
l. Each State Party shall take appropriate measures, in accordance with its
domestic legal principles, for the identification, detection and freezing or
seizure of any funds used or allocated for the purpose of committing the
offences set forth in article 2 as well as the proceeds derived from such
offences, for purposes of possible forfeiture.
2. Each State Party shall take appropriate measures, in accordance with its
domestic legal principles, for the forfeiture of funds used or allocated for the
purpose of committing the offences set forth in article 2 and the proceeds
derived from such offences.
3. Each State Party concerned may give consideration to concluding agreements
on the sharing with other States Parties, on a regular or case-by-case basis, of
the funds derived from the forfeitures referred to in this article.
4. Each State Party shall consider establishing mechanisms whereby the funds
derived from the forfeitures referred to in this article are utilized to
compensate the victims of offences referred to in article 2, paragraph 1,
subparagraph (a) or (b), or their families.
5. The provisions of this article shall be implemented without prejudice to the
rights of third parties acting in good faith.
Article 9
1. Upon receiving information that a person who has committed or who is alleged
to have committed an offence set forth in article 2 may be present in its territory,
the State Party concerned shall take such measures as may be necessary under
its domestic law to investigate the facts contained in the information.
2. Upon being satisfied that the circumstances so warrant, the State Party in
whose territory the offender or alleged offender is present shall take the
appropriate measures under its domestic law so as to ensure that person’s
presence for the purpose of prosecution or extradition.
3. Any person regarding whom the measures referred to in paragraph 2 are
being taken shall be entitled:
(a) To communicate without delay with the nearest appropriate represen-
tative of the State of which that person is a national or which is
otherwise entitled to protect that person’s rights or, if that person is a
stateless person, the State in the territory of which that person
habitually resides;
(b) To be visited by a representative of that State;
(c) To be informed of that person’s rights under subparagraphs (a) and (b).
4. The rights referred to in paragraph 3 shall be exercised in conformity with the
laws and regulations of the State in the territory of which the offender or
alleged offender is present, subject to the provision that the said laws and
regulations must enable full effect to be given to the purposes for which the
rights accorded under paragraph 3 are intended.
5. The provisions of paragraphs 3 and 4 shall be without prejudice to the right
of any State Party having a claim to jurisdiction in accordance with article 7,
paragraph 1, subparagraph (b), or paragraph 2, subparagraph (b), to invite
the International Committee of the Red Cross to communicate with and visit
the alleged offender.
6. When a State Party, pursuant to the present article, has taken a person into
custody, it shall immediately notify, directly or through the Secretary-
General of the United Nations, the States Parties which have established
jurisdiction in accordance with article 7, paragraph 1 or 2, and, if it considers
it advisable, any other interested States Parties, of the fact that such person is
in custody and of the circumstances which warrant that person’s detention.
The State which makes the investigation contemplated in paragraph 1 shall
promptly inform the said States Parties of its findings and shall indicate
whether it intends to exercise jurisdiction.
Article 10
1. The State Party in the territory of which the alleged offender is present shall,
in cases to which article 7 applies, if it does not extradite that person, be
obliged, without exception whatsoever and whether or not the offence was
committed in its territory, to submit the case without undue delay to its
competent authorities for the purpose of prosecution, through proceedings in
accordance with the laws of that State. Those authorities shall take their
decision in the same manner as in the case of any other offence of a grave
nature under the law of that State.
2. Whenever a State Party is permitted under its domestic law to extradite or
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otherwise surrender one of its nationals only upon the condition that the
person will be returned to that State to serve the sentence imposed as a result
of the trial or proceeding for which the extradition or surrender of the person
was sought, and this State and the State seeking the extradition of the person
agree with this option and other terms they may deem appropriate, such a
conditional extradition or surrender shall be sufficient to discharge the
obligation set forth in paragraph 1.
Article 11
1. The offences set forth in article 2 shall be deemed to be included as
extraditable offences in any extradition treaty existing between any of the
States Parties before the entry into force of this Convention. States Parties
undertake to include such offences as extraditable offences in every
extradition treaty to be subsequently concluded between them.
2. When a State Party which makes extradition conditional on the existence of a
treaty receives a request for extradition from another State Party with which
it has no extradition treaty, the requested State Party may, at its option,
consider this Convention as a legal basis for extradition in respect of the
offences set forth in article 2. Extradition shall be subject to the other
conditions provided by the law of the requested State.
3. States Parties which do not make extradition conditional on the existence of a
treaty shall recognize the offences set forth in article 2 as extraditable offences
between themselves, subject to the conditions provided by the law of the
requested State.
4. If necessary, the offences set forth in article 2 shall be treated, for the
purposes of extradition between States Parties, as if they had been committed
not only in the place in which they occurred but also in the territory of the
States that have established jurisdiction in accordance with article 7,
paragraphs 1 and 2.
5. The provisions of all extradition treaties and arrangements between States
Parties with regard to offences set forth in article 2 shall be deemed to be
modified as between States Parties to the extent that they are incompatible
with this Convention.
Article 12
1. States Parties shall afford one another the greatest measure of assistance in
connection with criminal investigations or criminal or extradition proceed-
ings in respect of the offences set forth in article 2, including assistance in
obtaining evidence in their possession necessary for the proceedings.
2. States Parties may not refuse a request for mutual legal assistance on the
ground of bank secrecy.
3. The requesting Party shall not transmit or use information or evidence
furnished by the requested Party for investigations, prosecutions or

proceedings other than those stated in the request without the prior consent
of the requested Party.
4. Each State Party may give consideration to establishing mechanisms to share
with other States Parties information or evidence needed to establish
criminal, civil or administrative liability pursuant to article 5.
5. States Parties shall carry out their obligations under paragraphs 1 and 2 in
conformity with any treaties or other arrangements on mutual legal
assistance or information exchange that may exist between them. In the
absence of such treaties or arrangements, States Parties shall afford one
another assistance in accordance with their domestic law.
Article 13
None of the offences set forth in article 2 shall be regarded, for the purposes of
extradition or mutual legal assistance, as a fiscal offence. Accordingly, States Parties
may not refuse a request for extradition or for mutual legal assistance on the sole
ground that it concerns a fiscal offence.
Article 14
None of the offences set forth in article 2 shall be regarded for the purposes of
extradition or mutual legal assistance as a political offence or as an offence connected
with a political offence or as an offence inspired by political motives. Accordingly, a
request for extradition or for mutual legal assistance based on such an offence may not
be refused on the sole ground that it concerns a political offence or an offence
connected with a political offence or an offence inspired by political motives.
Article 15
Nothing in this Convention shall be interpreted as imposing an obligation to extradite
or to afford mutual legal assistance, if the requested State Party has substantial grounds
for believing that the request for extradition for offences set forth in article 2 or for
mutual legal assistance with respect to such offences has been made for the purpose of
prosecuting or punishing a person on account of that person’s race, religion,
nationality, ethnic origin or political opinion or that compliance with the request
would cause prejudice to that person’s position for any of these reasons.
Article 16
l. A person who is being detained or is serving a sentence in the territory of one
State Party whose presence in another State Party is requested for purposes
of identification, testimony or otherwise providing assistance in obtaining
evidence for the investigation or prosecution of offences set forth in article 2
may be transferred if the following conditions are met:
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(a) The person freely gives his or her informed consent;

(b) The competent authorities of both States agree, subject to such
conditions as those States may deem appropriate.
2. For the purposes of the present article:
(a) The State to which the person is transferred shall have the authority and
obligation to keep the person transferred in custody, unless otherwise
requested or authorized by the State from which the person was
transferred;
(b) The State to which the person is transferred shall without delay
implement its obligation to return the person to the custody of the State
from which the person was transferred as agreed beforehand, or as
otherwise agreed, by the competent authorities of both States;
(c) The State to which the person is transferred shall not require the State
from which the person was transferred to initiate extradition proceed-
ings for the return of the person;
(d) The person transferred shall receive credit for service of the sentence
being served in the State from which he or she was transferred for time
spent in the custody of the State to which he or she was transferred.
3. Unless the State Party from which a person is to be transferred in
accordance with the present article so agrees, that person, whatever his or
her nationality, shall not be prosecuted or detained or subjected to any
other restriction of his or her personal liberty in the territory of the State to
which that person is transferred in respect of acts or convictions anterior to
his or her departure from the territory of the State from which such person
was transferred.
Article 17
Any person who is taken into custody or regarding whom any other measures are
taken or proceedings are carried out pursuant to this Convention shall be guaranteed
fair treatment, including enjoyment of all rights and guarantees in conformity with
the law of the State in the territory of which that person is present and applicable
provisions of international law, including international human rights law.
Article 18
1. States Parties shall cooperate in the prevention of the offences set forth in
article 2 by taking all practicable measures, inter alia, by adapting their
domestic legislation, if necessary, to prevent and counter preparations in their
respective territories for the commission of those offences within or outside
their territories, including:
(a) Measures to prohibit in their territories illegal activities of persons and
organizations that knowingly encourage, instigate, organize or engage
in the commission of offences set forth in article 2;
(b) Measures requiring financial institutions and other professions involved

in financial transactions to utilize the most efficient measures available
for the identification of their usual or occasional customers, as well as
customers in whose interest accounts are opened, and to pay special
attention to unusual or suspicious transactions and report transactions
suspected of stemming from a criminal activity. For this purpose, States
Parties shall consider:
(i) Adopting regulations prohibiting the opening of accounts, the
holders or beneficiaries of which are unidentified or unidentifiable,
and measures to ensure that such institutions verify the identity of
the real owners of such transactions;
(ii) With respect to the identification of legal entities, requiring
financial institutions, when necessary, to take measures to verify
the legal existence and the structure of the customer by obtaining,
either from a public register or from the customer or both, proof of
incorporation, including information concerning the customer’s
name, legal form, address, directors and provisions regulating the
power to bind the entity;
(iii) Adopting regulations imposing on financial institutions the
obligation to report promptly to the competent authorities all
complex, unusual large transactions and unusual patterns of
transactions, which have no apparent economic or obviously
lawful purpose, without fear of assuming criminal or civil liability
for breach of any restriction on disclosure of information if they
report their suspicions in good faith;
(iv) Requiring financial institutions to maintain, for at least five years, all
necessary records on transactions, both domestic and international.
2. States Parties shall further cooperate in the prevention of offences set forth in
article 2 by considering:
(a) Measures for the supervision, including, for example, the licensing, of
all money-transmission agencies;
(b) Feasible measures to detect or monitor the physical cross-border
transportation of cash and bearer negotiable instruments, subject to
strict safeguards to ensure proper use of information and without
impeding in any way the freedom of capital movements.
3. States Parties shall further cooperate in the prevention of the offences set
forth in article 2 by exchanging accurate and verified information in
accordance with their domestic law and coordinating administrative and
other measures taken, as appropriate, to prevent the commission of offences
set forth in article 2, in particular by:
(a) Establishing and maintaining channels of communication between their
competent agencies and services to facilitate the secure and rapid
exchange of information concerning all aspects of offences set forth in
article 2;
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(b) Cooperating with one another in conducting inquiries, with respect to

the offences set forth in article 2, concerning:
(i) The identity, whereabouts and activities of persons in respect of
whom reasonable suspicion exists that they are involved in such
offences;
(ii) The movement of funds relating to the commission of such
offences.
4. States Parties may exchange information through the International Criminal
Police Organization (Interpol).
Article 19
The State Party where the alleged offender is prosecuted shall, in accordance with its
domestic law or applicable procedures, communicate the final outcome of the
proceedings to the Secretary-General of the United Nations, who shall transmit the
information to the other States Parties.
Article 20
The States Parties shall carry out their obligations under this Convention in a
manner consistent with the principles of sovereign equality and territorial integrity of
States and that of non-intervention in the domestic affairs of other States.
Article 21
Nothing in this Convention shall affect other rights, obligations and responsibilities
of States and individuals under international law, in particular the purposes of the
Charter of the United Nations, international humanitarian law and other relevant
conventions.
Article 22
Nothing in this Convention entitles a State Party to undertake in the territory of
another State Party the exercise of jurisdiction or performance of functions which
are exclusively reserved for the authorities of that other State Party by its domestic
law.
Article 23
1. The annex may be amended by the addition of relevant treaties:
(a) That are open to the participation of all States;
(b) That have entered into force;
(c) That have been ratified, accepted, approved or acceded to by at least
twenty-two States Parties to the present Convention.
2. After the entry into force of this Convention, any State Party may propose
such an amendment. Any proposal for an amendment shall be communicated
to the depositary in written form. The depositary shall notify proposals that
meet the requirements of paragraph 1 to all States Parties and seek their
views on whether the proposed amendment should be adopted.
3. The proposed amendment shall be deemed adopted unless one third of the
States Parties object to it by a written notification not later than 180 days
after its circulation.
4. The adopted amendment to the annex shall enter into force 30 days after the
deposit of the twenty-second instrument of ratification, acceptance or
approval of such amendment for all those States Parties that have deposited
such an instrument. For each State Party ratifying, accepting or approving
the amendment after the deposit of the twenty-second instrument, the
amendment shall enter into force on the thirtieth day after deposit by such
State Party of its instrument of ratification, acceptance or approval.
Article 24
1. Any dispute between two or more States Parties concerning the interpretation
or application of this Convention which cannot be settled through
negotiation within a reasonable time shall, at the request of one of them,
be submitted to arbitration. If, within six months from the date of the request
for arbitration, the parties are unable to agree on the organization of the
arbitration, any one of those parties may refer the dispute to the
International Court of Justice, by application, in conformity with the Statute
of the Court.
2. Each State may at the time of signature, ratification, acceptance or approval
of this Convention or accession thereto declare that it does not consider itself
bound by paragraph 1. The other States Parties shall not be bound by
paragraph 1 with respect to any State Party which has made such a
reservation.
3. Any State which has made a reservation in accordance with paragraph 2 may
at any time withdraw that reservation by notification to the Secretary-
General of the United Nations.
Article 25
1. This Convention shall be open for signature by all States from 10 January
2000 to 31 December 2001 at United Nations Headquarters in New York.
2. This Convention is subject to ratification, acceptance or approval. The
instruments of ratification, acceptance or approval shall be deposited with
the Secretary-General of the United Nations.
3. This Convention shall be open to accession by any State. The instruments of
accession shall be deposited with the Secretary-General of the United
Nations.
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Article 26
1. This Convention shall enter into force on the thirtieth day following the date
of the deposit of the twenty-second instrument of ratification, acceptance,
approval or accession with the Secretary-General of the United Nations.
2. For each State ratifying, accepting, approving or acceding to the Convention
after the deposit of the twenty-second instrument of ratification, acceptance,
approval or accession, the Convention shall enter into force on the thirtieth
day after deposit by such State of its instrument of ratification, acceptance,
approval or accession.
Article 27
1. Any State Party may denounce this Convention by written notification to the
Secretary-General of the United Nations.
2. Denunciation shall take effect one year following the date on which
notification is received by the Secretary-General of the United Nations.
Article 28
The original of this Convention, of which the Arabic, Chinese, English, French,
Russian and Spanish texts are equally authentic, shall be deposited with the Secretary-
General of the United Nations who shall send certified copies thereof to all States.
IN WITNESS WHEREOF, the undersigned, being duly authorized thereto by their
respective Governments, have signed this Convention, opened for signature at
United Nations Headquarters in New York on 10 January 2000.
Annex
1. Convention for the Suppression of Unlawful Seizure of Aircraft, done at The Hague on 16
December 1970.
2. Convention for the Suppression of Unlawful Acts against the Safety of Civil Aviation, done
at Montreal on 23 September 1971.
3. Convention on the Prevention and Punishment of Crimes against Internationally Protected
Persons, including Diplomatic Agents, adopted by the General Assembly of the United
Nations on 14 December 1973.
4. International Convention against the Taking of Hostages, adopted by the General
Assembly of the United Nations on 17 December 1979.
5. Convention on the Physical Protection of Nuclear Material, adopted at Vienna on 3 March
1980.
6. Protocol for the Suppression of Unlawful Acts of Violence at Airports Serving International
Civil Aviation, supplementary to the Convention for the Suppression of Unlawful Acts
against the Safety of Civil Aviation, done at Montreal on 24 February 1988.
7. Convention for the Suppression of Unlawful Acts against the Safety of Maritime
Navigation, done at Rome on 10 March 1988.
8. Protocol for the Suppression of Unlawful Acts against the Safety of Fixed Platforms located
on the Continental Shelf, done at Rome on 10 March 1988.
9. International Convention for the Suppression of Terrorist Bombings, adopted by the
General Assembly of the United Nations on 15 December 1997.
Council Common Position of 27 December 2001
on the Application of Specific Measures to
Combat Terrorism
(2001/931/CFSP)
THE COUNCIL OFTHE EUROPEAN UNION,

Having regard to the Treaty on European Union, and in particular Articles 15 and
34 thereof,
Whereas:
(1) At its extraordinary meeting on 21 September 2001, the European Council
declared that terrorism is a real challenge to the world and to Europe and that
the fight against terrorism will be a priority objective of the European Union.
(2) On 28 September 2001, the United Nations Security Council adopted
Resolution 1373(2001) laying out wide-ranging strategies to combat
terrorism and in particular the fight against the financing of terrorism.
(3) On 8 October 2001, the Council reiterated the Union’s determination to attack
the sources which fund terrorism, in close cooperation with the United States.
(4) On 26 February 2001, pursuant to UNSC Resolution 1333(2000), the Council
adopted Common Position 2001/154/CFSP (1) which provides inter alia for
the freezing of funds of Usama bin Laden and individuals and entities
associated with him. Consequently, those persons, groups and entities are not
covered by this Common Position.
(5) The European Union should take additional measures in order to implement
UNSC Resolution 1373(2001).
(6) Member States have transmitted to the European Union the information
necessary to implement some of those additional measures.
(7) Action by the Community is necessary in order to implement some of those
additional measures; action by the Member States is also necessary, in
particular as far as the application of forms of police and judicial cooperation
in criminal matters is concerned,
HAS ADOPTED THIS COMMON POSITION:

© 2001 Official Journal of the European Communities. Printed in the Netherlands.
177
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Article 1
1. This Common Position applies in accordance with the provisions of the
following Articles to persons, groups and entities involved in terrorist acts
and listed in the Annex.
2. For the purposes of this Common Position, ‘persons, groups and entities
involved in terrorist acts’ shall mean:
persons who commit, or attempt to commit, terrorist acts or who
participate in, or facilitate, the commission of terrorist acts,
groups and entities owned or controlled directly or indirectly by such
persons; and persons, groups and entities acting on behalf of, or under the
direction of, such persons, groups and entities, including funds derived or
generated from property owned or controlled directly or indirectly by such
persons and associated persons, groups and entities.
3. For the purposes of this Common Position, ‘terrorist act’ shall mean one of
the following intentional acts, which, given its nature or its context, may
seriously damage a country or an international organisation, as defined as an
offence under national law, where committed with the aim of:
(i) seriously intimidating a population, or
(ii) unduly compelling a Government or an international organisation to
perform or abstain from performing any act, or
(iii) seriously destabilising or destroying the fundamental political, constitu-
tional, economic or social structures of a country or an international
organisation:
(a) attacks upon a person’s life which may cause death;
(b) attacks upon the physical integrity of a person;
(c) kidnapping or hostage taking;
(d) causing extensive destruction to a Government or public facility, a
transport system, an infrastructure facility, including an informa-
tion system, a fixed platform located on the continental shelf, a
public place or private property, likely to endanger human life or
result in major economic loss;
(e) seizure of aircraft, ships or other means of public or goods
transport;
(f) manufacture, possession, acquisition, transport, supply or use of
weapons, explosives or of nuclear, biological or chemical weapons,
as well as research into, and development of, biological and
chemical weapons;
(g) release of dangerous substances, or causing fires, explosions or
floods the effect of which is to endanger human life;
(h) interfering with or disrupting the supply of water, power or any
other fundamental natural resource, the effect of which is to
endanger human life; (i) threatening to commit any of the acts
listed under (a) to (h);
Council Common Position of 27 December 2001 179
(j) directing a terrorist group;

(k) participating in the activities of a terrorist group, including by
supplying information or material resources, or by funding its
activities in any way, with knowledge of the fact that such
participation will contribute to the criminal activities of the group.
For the purposes of this paragraph, ‘terrorist group’ shall mean a
structured group of more than two persons, established over a
period of time and acting in concert to commit terrorist acts.
‘Structured group’ means a group that is not randomly formed for
the immediate commission of a terrorist act and that does not need
to have formally defined roles for its members, continuity of its
membership or a developed structure.
4. The list in the Annex shall be drawn up on the basis of precise information or
material in the relevant file which indicates that a decision has been taken by
a competent authority in respect of the persons, groups and entities
concerned, irrespective of whether it concerns the instigation of investigations
or prosecution for a terrorist act, an attempt to perpetrate, participate in or
facilitate such an act based on serious and credible evidence or clues, or
condemnation for such deeds. Persons, groups and entities identified by the
Security Council of the United Nations as being related to terrorism and
against whom it has ordered sanctions may be included in the list. For the
purposes of this paragraph ‘competent authority’ shall mean a judicial
authority, or, where judicial authorities have no competence in the area
covered by this paragraph, an equivalent competent authority in that area.
5. The Council shall work to ensure that names of natural or legal persons,
groups or entities listed in the Annex have sufficient particulars appended to
permit effective identification of specific human beings, legal persons, entities
or bodies, thus facilitating the exculpation of those bearing the same or
similar names.
6. The names of persons and entities on the list in the Annex shall be reviewed at
regular intervals and at least once every six months to ensure that there are
grounds for keeping them on the list.
Article 2
The European Community, acting within the limits of the powers conferred on it by
the Treaty establishing the European Community, shall order the freezing of the
funds and other financial assets or economic resources of persons, groups and
entities listed in the Annex.
Article 3
The European Community, acting within the limits of the powers conferred on it by
the Treaty establishing the European Community, shall ensure that funds, financial
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assets or economic resources or financial or other related services will not be made
available, directly or indirectly, for the benefit of persons, groups and entities listed
in the Annex.
Article 4
Member States shall, through police and judicial cooperation in criminal matters
within the framework of Title VI of the Treaty on European Union, afford each
other the widest possible assistance in preventing and combating terrorist acts. To
that end they shall, with respect to enquiries and proceedings conducted by their
authorities in respect of any of the persons, groups and entities listed in the Annex,
fully exploit, upon request, their existing powers in accordance with acts of the
European Union and other international agreements, arrangements and conventions
which are binding upon Member States.
Article 5
This Common Position shall take effect on the date of its adoption.
Article 6
This Common Position shall be kept under constant review.
Article 7
This Common Position shall be published in the Official Journal.
Done at Brussels, 27 December 2001.
For the Council
The President
L. MICHEL
Annex
First list of persons, groups and entities referred to in Article 11
1. Persons
*— ABAUNZA MARTINEZ, Javier (E.T.A. Activist) born 1.1.1965 in Guernica (Biscay),
identity card No 78.865.882,
*— ALBERDI URANGA, Itziar (E.T.A. Activist) born 7.10.1963 in Durango (Biscay),
1
Persons marked with an * shall be the subject of Article 4 only.
*— ALBISU IRIARTE, Miguel (E.T.A. Activist; Member of Gestoras Pro-amnistía) born

7.6.1961 in San Sebastián (Guipúzcoa), identity card No 15.954.596,
*— ALCALDE LINARES, Angel (E.T.A. Activist; Member of Herri Batasuna/E.H/
Batasuna) born 2.5.1943 in Portugalete (Vizcaya), identity card 14.390.353,
— AL-MUGHASSIL, Ahmad Ibrahim (a.k.a. ABU OMRAN; a.k.a.AL-MUGHASSIL,
Ahmed Ibrahim) born 26.6.1967 in Qatif-Bab al Shamal, Saudi Arabia; citizen Saudi Arabia,
— AL-NASSER, Abdelkarim Hussein Mohamed, born in Al Ihsa, Saudi Arabia; citizen
Saudi Arabia,
— AL YACOUB, Ibrahim Salih Mohammed, born 16.10.1996 in Tarut, Saudi Arabia; citizen
Saudi Arabia,
*— ARZALLUS TAPIA, Eusebio (E.T.A. Activist) born 8.11.1957 in Regil (Guipúzcoa),
— ATWA, Ali (a.k.a. BOUSLIM, Ammar Mansour; a.k.a. SALIM, Hassan Rostom),
Lebanon, born 1960 in Lebanon; citizen Lebanon,
*— ELCORO AYASTUY, Paulo (E.T.A. Activist; Member of Jarrai/Haika/Segi) born
22.10.1973 in Vergara (Guipúzcoa), identity card No 15.394.062,
— EL-HOORIE, Ali Saed Bin Ali (a.k.a. AL-HOURI, Ali Saed Bin Ali; a.k.a EL-HOURI,
Ali Saed Bin Ali) born 10.7.1965 alt. 11.7.1965 in El Dibabiya, Saudi Arabia; citizen Saudi
Arabia,
*— FIGAL ARRANZ, Antonio Agustín (E.T.A. Activist; Member of Kas/Ekin) born
2.12.1972 in Baracaldo (Biscay), identity card No 20.172.692,
*— GOGEASCOECHEA ARRONATEGUI, Eneko (E.T.A. Activist), born 29.4.1967 in
Guernica (Biscay), identity card No 44.556.097,
*— GOIRICELAYA GONZALEZ, Cristina (E.T.A. Activist; Member of Herri Batasuna/
E.H/Batasuna), born 23.12.1967 in Vergara (Guipúzcoa), identity card No 16.282.556,
*— IPARRAGUIRRE GUENECHEA, Ma Soledad (E.T.A. Activist) born 25.4.1961 in
Escoriaza (Navarre), identity card No 16.255.819,
— IZZ-AL-DIN, Hasan (a.k.a GARBAYA, AHMED; a.k.a. SA-ID; a.k.a. SALWWAN,
Samir), Lebanon, born 1963 in Lebanon, citizen Lebanon,
— MOHAMMED, Khalid Shaikh (a.k.a. ALI, Salem; a.k.a. BIN KHALID, Fahd Bin
Adballah; a.k.a. HENIN, Ashraf Refaat Nabith; a.k.a. WADOOD, Khalid Adbul) born
14.4.1965 alt. 1.3.1964 in Kuwait; citizen Kuwait,
*— MORCILLO TORRES, Gracia (E.T.A. Activist; Member of Kas/Ekin) born 15.3.1967 in
San Sebastián (Guipúzcoa), identity card No 72.439.052,
*— MÚGICA GOÑI, Ainhoa (E.T.A. Activist) born 27.6.1970 in San Sebastián (Guipúzcoa),
— MUGHNIYAH, Imad Fa’iz (a.k.a. MUGHNIYAH, Imad Fayiz), Senior Intelligence
Officer of HIZBALLAH, born 7.12.1962 in Tayr Dibba, Lebanon, passport No 432298
(Lebanon),
*— MUÑOA ORDOZGOITI, Aloña (E.T.A. Activist; Member of Kas/Ekin) born 6.7.1976
in Segura (Guipúzcoa), identity card No 35.771.259,
*— NARVÁEZ GOÑI, Juan Jesús (E.T.A. Activist) born 23.2.1961 in Pamplona (Navarra),
*— OLARRA GURIDI, Juan Antonio (E.T.A. Activist) born 11.9.1967 in San Sebastián
(Guipúzcoa), identity card No 34.084.504,
*— ORBE SEVILLANO, Zigor (E.T.A. Activist; Member of Jarrai/Haika/Segi) born
22.9.1975 in Basauri (Biscay), identity card No 45.622.851,
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*— OTEGUI UNANUE, Mikel (E.T.A. Activist; Member of Jarrai/Haika/Segi) born

8.10.1972 in Itsasondo (Guipúzcoa), identity card No 44.132.976,
*— PEREZ ARAMBURU, Jon Iñaki (E.T.A. Activist; Member of Jarrai/Haika/Segi) born
18.9.1964 in San Sebastián (Guipúzcoa), identity card No 15.976.521,
*— SAEZ DE EGUILAZ MURGUIONDO, Carlos (E.T.A. Activist; Member of Kas/Ekin)
born 9.12.1963 in San Sebastián (Guipúzcoa), identity card No 15.962.687,
*— URANGA ARTOLA, Kemen (E.T.A. Activist; Member of Herri Batasuna/E.H/
Batasuna) born 25.5.1969 in Ondarroa (Biscay), identity card No 30.627.290,
*— VILA MICHELENA, Fermín (E.T.A. Activist; Member of Kas/Ekin) born 12.3.1970 in
Irún (Guipúzcoa), identitycard No 15.254.214;
2. GROUPS AND ENTITIES
*— Continuity Irish Republican Army (CIRA)
*— Euskadi Ta Askatasuna/Tierra Vasca y Libertad/Basque Fatherland and Liberty (E.T.A.)
(The following organisations are part of the terrorist group E.T.A.: K.a.s., Xaki; Ekin, Jarrai-
Haika-Segi, Gestoras pro-amnistía.)
*— Grupos de Resistencia Antifascista Primero de Octubre/Antifascist Resistance Groups
First of October (G.R.A.P.O.)
— Hamas-Izz al-Din al-Qassem (terrorist wing of Hamas)
*—Loyalist Volunteer Force (LVF)
*— Orange Volunteers (OV)
— Palestinian Islamic Jihad (PIJ)
*— Real IRA
*— Red Hand Defenders (RHD)
*— Revolutionary Nuclei/Epanastatiki Pirines
*— Revolutionary Organisation 17 November/Dekati Evdomi Noemvri
*— Revolutionary Popular Struggle/Epanastatikos Laikos Agonas (ELA)
*— Ulster Defence Association/Ulster Freedom Fighters (UDA/UFF)
Council Common Position of 27 December 2001
on combating terrorism
(2001/930/CFSP)
THE COUNCIL OFTHE EUROPEAN UNION
Having regard to the Treaty on European Union, and in particular Articles 15 and
34 thereof,
Whereas:
(1) At its extraordinary meeting on 21 September 2001, the European Council
declared that terrorism is a real challenge to the world and to Europe and that
the fight against terrorism will be a priority objective of the European Union.
(2) On 28 September 2001, the United Nations Security Council adopted
resolution 1373(2001), reaffirming that terrorist acts constitute a threat to
peace and security and setting out measures aimed at combating terrorism
and in particular the fight against the financing of terrorism and the
provision of safe havens for terrorists.
(3) On 8 October 2001, the Council reaffirmed the determination of the EU and
its Member States to play their full part, in a coordinated manner, in the
global coalition against terrorism, under the aegis of the United Nations. The
Council also reiterated the Union’s determination to attack the sources which
fund terrorism, in close cooperation with the United States.
(4) On 19 October 2001, the European Council declared that it is determined to
combat terrorism in every form throughout the world and that it will continue
its efforts to strengthen the coalition of the international community to combat
terrorism in every shape and form, for example by the increased cooperation
between the operational services responsible for combating terrorism: Europol,
Eurojust, the intelligence services, police forces and judicial authorities.
(5) Action has already been taken to implement some of the measures listed below.
(6) Under these extraordinary circumstances, action by the Community is
needed in order to implement some of the measures listed below,
HAS ADOPTED THIS COMMON POSITION:

© 2001 Official Journal of the European Communities. Printed in the Netherlands.
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Article 1
The wilful provision or collection, by any means, directly or indirectly, of funds by
citizens or within the territory of each of the Member States of the European Union
with the intention that the funds should be used, or in the knowledge that they are to
be used, in order to carry out terrorist acts shall be criminalized.
Article 2
Funds and other financial assets or economic resources of:
persons who commit, or attempt to commit, terrorist acts or participate in or
facilitate the commission of terrorist acts;
entities owned or controlled, directly or indirectly, by such persons; and
persons and entities acting on behalf of or under the direction of such persons
and entities, including funds derived or generated from property owned or
controlled directly or indirectly by such persons and associated persons and
entities, shall be frozen.
Article 3
Funds, financial assets or economic resources or financial or other related services
shall not be made available, directly or indirectly, for the benefit of:
persons who commit or attempt to commit or facilitate or participate in the
commission of terrorist acts;
entities owned or controlled, directly or indirectly, by such persons; and
persons and entities acting on behalf of or under the direction of such persons.
Article 4
Measures shall be taken to suppress any form of support, active or passive, to
entities or persons involved in terrorist acts, including measures aimed at suppressing
the recruitment of members of terrorist groups and eliminating the supply of
weapons to terrorists.
Article 5
Steps shall be taken to prevent the commission of terrorist acts, including by the
provision of early warning among Member States or between Member States and
third States by exchange of information.
Article 6
Safe haven shall be denied to those who finance, plan, support, or commit terrorist
acts, or provide safe havens.
Article 7
Persons who finance, plan, facilitate or commit terrorist acts shall be prevented from
using the territories of the Member States of the European Union for those purposes
against Member States or third States or their citizens.
Article 8
Persons who participate in the financing, planning, preparation or perpetration of
terrorist acts or in supporting terrorist acts shall be brought to justice; such terrorist
acts shall be established as serious criminal offences in laws and regulations of
Member States and the punishment shall duly reflect the seriousness of such terrorist
acts.
Article 9
Member States shall afford one another, as well as third States, the greatest measure
of assistance in connection with criminal investigations or criminal proceedings
relating to the financing or support of terrorist acts in accordance with international
and domestic law, including assistance in obtaining evidence in the possession of a
Member State or a third State which is necessary for the proceedings.
Article 10
The movement of terrorists or terrorist groups shall be prevented by effective border
controls and controls on the issuing of identity papers and travel documents, and
through measures for preventing counterfeiting, forgery or fraudulent use of identity
papers and travel documents. The Council notes the Commission’s intention to put
forward proposals in this area, where appropriate.
Article 11
Steps shall be taken to intensify and accelerate the exchange of operational
information, especially regarding actions or movements of terrorist persons or
networks; forged or falsified travel documents; traffic in arms, explosives or sensitive
materials; use of communication technologies by terrorist groups; and the threat
posed by the possession of weapons of mass destruction by terrorist groups.
Article 12
Information shall be exchanged among Member States or between Member States
and third States in accordance with international and national law, and cooperation
shall be enhanced among Member States or between Member States and third
States on administrative and judicial matters to prevent the commission of terrorist
acts.
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Article 13
Cooperation among Member States or between Member States and third States,
particularly through bilateral and multilateral arrangements and agreements, to
prevent and suppress terrorist attacks and take action against perpetrators of
terrorist acts shall be enhanced.
Article 14
Member States shall become parties as soon as possible to the relevant international
conventions and protocols relating to terrorism listed in the Annex.
Article 15
Member States shall increase cooperation and fully implement the relevant
international conventions and protocols relating to terrorism and United Nations
Security Council Resolutions 1269(1999) and 1368(2001).
Article 16
Appropriate measures shall be taken in accordance with the relevant provisions of
national and international law, including international standards of human rights,
before granting refugee status, for the purpose of ensuring that the asylumseeker has
not planned, facilitated or participated in the commission of terrorist acts. The
Council notes the Commission’s intention to put forward proposals in this area,
where appropriate.
Article 17
Steps shall be taken in accordance with international law to ensure that refugee
status is not abused by the perpetrators, organisers or facilitators of terrorist acts
and that claims of political motivation are not recognised as grounds for refusing
requests for the extradition of alleged terrorists. The Council notes the Commission’s
intention to put forward proposals in this area, where appropriate.
Article 18
This Common Position shall take effect on the date of its adoption.
Article 19
This Common Position shall be published in the Official Journal.
Done at Brussels, 27 December 2001.
For the Council
The President
L. MICHEL
Annex
List of international conventions and protocols relating to terrorism referred to in Article 14
1. Convention on Offenses and Certain Other Offenses Committed on Board Aircraft –
Tokyo 14.9.1963
2. Convention for the Unlawful Seizure of Aircraft – The Hague 16.12.1970
3. Convention for the Suppression of Unlawful Acts Against the Safety of Aircraft –
Montreal 23.9.1971
4. Convention on the Prevention and Punishment of Crimes Against Internationally
Protected Persons, Including Diplomatic Personnel – New York 14.12.1973
5. European Convention for the Suppression of Terrorism – Strasbourg 27.1.1977
6. Convention Against the Taking of Hostages – New York 17.12.1979
7. Convention on the Physical Protection of Nuclear Materials – Vienna 3.3.1980
8. Protocol for the Suppression of Unlawful Acts of Violence at Airports Serving
International Aviation, complementary to the Convention for the Suppression of
Unlawful Acts Against the Safety of Aircraft – Montreal 24.2.1988
9. Convention for the Suppression of unlawful Acts Against the Safety of Maritime
Navigation – Rome 10.3.1988
10. Protocol for the Suppression of Unlawful Acts Against the Safety of Fixed Platforms on
the Continental Shelf – Rome 10.3.1988
11. Convention on the Marking of Plastic Explosives for the Purpose of Detection –
Montreal 1.3.1991
12. UN Convention for the Suppression of Terrorist Bombings – New York 15.12.1997
13. UN Convention for the Suppression of Financing of Terrorism – New York, 9.12.1999
Customer Due Diligence for Banks*
A. Introduction
Supervisors around the world are increasingly recognizing the importance of

ensuring that their banks have adequate controls and procedures in place so that
they know the customers with whom they are dealing. Adequate due diligence on
new and existing customers is a key part of these controls. Without this due
diligence, banks can become subject to reputational, operational, legal and
concentration risks, which can result in significant financial cost.
In reviewing the findings of an internal survey of cross-border banking in 1999,
the Basel Committee identified deficiencies in a large number of countries’ know-
your-customer (KYC) policies for banks. Judged from a supervisory perspective,
KYC policies in some countries have significant gaps and in others they are non-
existent. Even among countries with well-developed financial markets, the extent of
KYC robustness varies. Consequently, the Basel Committee asked the Working
Group on Cross-border Banking 1 to examine the KYC procedures currently in place
and to draw up recommended standards applicable to banks in all countries. The
resulting paper was issued as a consultative document in January 2001. Following a
review of the comments received, the Working Group has revised the paper and the
Basel Committee is now distributing it worldwide in the expectation that the KYC
framework presented here will become the benchmark for supervisors to establish
national practices and for banks to design their own programmes. It is important to
acknowledge that supervisory practices of some jurisdictions already meet or exceed
the objective of this paper and, as a result, they may not need to implement any
changes.
KYC is most closely associated with the fight against money-laundering, which is
essentially the province of the Financial Action Task Force (FATF).2 It is not the
* Bank for International Settlements, Basel Committee on Banking Supervision, October 2001.
1
This is a joint group consisting of members of the Basel Committee and of the Offshore
Group of Banking Supervisors.
2
The FATF is an inter-governmental body which develops and promotes policies, both
nationally and internationally, to combat money laundering. It has 29 member countries
and two regional organisations. It works in close cooperation with other international

© 2001 Bank for International Settlements. Printed in the Netherlands.
189
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Committee’s intention to duplicate the efforts of the FATF. Instead, the

Committee’s interest is from a wider prudential perspective. Sound KYC policies
and procedures are critical in protecting the safety and soundness of banks and the
integrity of banking systems. The Basel Committee and the Offshore Group of
Banking Supervisors (OGBS) continue to support strongly the adoption and
implementation of the FATF recommendations, particularly those relating to banks,
and intend the standards in this paper to be consistent with the FATF
recommendations. The Committee and the OGBS will also consider the adoption
of any higher standards introduced by the FATF as a result of its current review of
the 40 Recommendations. Consequently, the Working Group has been and will
remain in close contact with the FATF as it develops its thoughts.
The Basel Committee’s approach to KYC is from a wider prudential, not just
anti-money laundering, perspective. Sound KYC procedures must be seen as a
critical element in the effective management of banking risks. KYC safeguards go
beyond simple account opening and record-keeping and require banks to formulate
a customer acceptance policy and a tiered customer identification programme that
involves more extensive due diligence for higher risk accounts, and includes
proactive account monitoring for suspicious activities.
The Basel Committee’s interest in sound KYC standards originates from its
concerns for market integrity and has been heightened by the direct and indirect
losses incurred by banks due to their lack of diligence in applying appropriate
procedures. These losses could probably have been avoided and damage to the
banks’ reputation significantly diminished had the banks maintained effective KYC
programmes.
This paper reinforces the principles established in earlier Committee papers by
providing more precise guidance on the essential elements of KYC standards and
their implementation. In developing this guidance, the Working Group has drawn
on practices in member countries and taken into account evolving supervisory
developments. The essential elements presented in this paper are guidance as to
minimum standards for worldwide implementation for all banks. These standards
may need to be supplemented and/or strengthened, by additional measures
tailored to the risks of particular institutions and risks in the banking system of
individual countries. For example, enhanced diligence is required in the case of
higher-risk accounts or for banks that specifically aim to attract high net-worth
customers. In a number of specific sections in this paper, there are recommenda-
tions for higher standards of due diligence for higher risk areas within a bank,
where applicable.
The need for rigorous customer due diligence standards is not restricted to banks.
cont.
Prevention, the Council of Europe, the Asia-Pacific Group on Money Laundering and the
Caribbean Financial Action Task Force. The FATF defines money laundering as the
processing of criminal proceeds in order to disguise their illegal origin.
The Basel Committee believes similar guidance needs to be developed for all non-
bank financial institutions and professional intermediaries of financial services such
as lawyers and accountants.
B. Importance of KYC Standards for Supervisors and Banks
The FATF and other international groupings have worked intensively on KYC
issues, and the FATF’s 40 Recommendations on combating money-laundering 3 have
international recognition and application. It is not the intention of this paper to
duplicate that work.
At the same time, sound KYC procedures have particular relevance to the safety
and soundness of banks, in that:
they help to protect banks’ reputation and the integrity of banking systems by
reducing the likelihood of banks becoming a vehicle for or a victim of financial
crime and suffering consequential reputational damage;
they constitute an essential part of sound risk management (e.g., by providing
the basis for identifying, limiting and controlling risk exposures in assets and
liabilities, including assets under management).
The inadequacy or absence of KYC standards can subject banks to serious
customer and counterparty risks, especially reputational, operational, legal and
concentration risks. It is worth noting that all these risks are interrelated. However,
any one of them can result in significant financial cost to banks (e.g., through the
withdrawal of funds by depositors, the termination of inter-bank facilities, claims
against the bank, investigation costs, asset seizures and freezes, and loan losses), as
well as the need to divert considerable management time and energy to resolving
problems that arise.
Reputational risk poses a major threat to banks, since the nature of their business
requires maintaining the confidence of depositors, creditors and the general
marketplace. Reputational risk is defined as the potential that adverse publicity
regarding a bank’s business practices and associations, whether accurate or not, will
cause a loss of confidence in the integrity of the institution. Banks are especially
vulnerable to reputational risk because they can so easily become a vehicle for or a
victim of illegal activities perpetrated by their customers. They need to protect
themselves by means of continuous vigilance through an effective KYC programme.
Assets under management, or held on a fiduciary basis, can pose particular
reputational dangers.
Operational risk can be defined as the risk of direct or indirect loss resulting
3
See FATF recommendations 10 to 19 which are reproduced in Annex 2.
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from inadequate or failed internal processes, people and systems or from external
events. Most operational risk in the KYC context relates to weaknesses in the
implementation of banks’ programmes, ineffective control procedures and failure
to practise due diligence. A public perception that a bank is not able to manage its
operational risk effectively can disrupt or adversely affect the business of the
bank.
Legal risk is the possibility that lawsuits, adverse judgements or contracts that
turn out to be unenforceable can disrupt or adversely affect the operations or
condition of a bank. Banks may become subject to lawsuits resulting from the
failure to observe mandatory KYC standards or from the failure to practise due
diligence. Consequently, banks can, for example, suffer fines, criminal liabilities
and special penalties imposed by supervisors. Indeed, a court case involving a bank
may have far greater cost implications for its business than just the legal costs.
Banks will be unable to protect themselves effectively from such legal risks if they
do not engage in due diligence in identifying their customers and understanding
their business.
Supervisory concern about concentration risk mostly applies on the assets side of
the balance sheet. As a common practice, supervisors not only require banks to have
information systems to identify credit concentrations but most also set prudential
limits to restrict banks’ exposures to single borrowers or groups of related borrowers.
Without knowing precisely who the customers are, and their relationship with other
customers, it will not be possible for a bank to measure its concentration risk. This is
particularly relevant in the context of related counterparties and connected lending.
On the liabilities side, concentration risk is closely associated with funding risk,
particularly the risk of early and sudden withdrawal of funds by large depositors,
with potentially damaging consequences for the bank’s liquidity. Funding risk is
more likely to be higher in the case of small banks and those that are less active in the
wholesale markets than large banks. Analyzing deposit concentrations requires
banks to understand the characteristics of their depositors, including not only their
identities but also the extent to which their actions may be linked with those of other
depositors. It is essential that liabilities managers in small banks not only know but
maintain a close relationship with large depositors, or they will run the risk of losing
their funds at critical times.
Customers frequently have multiple accounts with the same bank, but in offices
located in different countries. To effectively manage the reputational, compliance
and legal risk arising from such accounts, banks should be able to aggregate and
monitor significant balances and activity in these accounts on a fully consolidated
worldwide basis, regardless of whether the accounts are held on balance sheet, off
balance sheet, as assets under management, or on a fiduciary basis.
Both the Basel Committee and the Offshore Group of Banking Supervisors are
fully convinced that effective KYC practices should be part of the risk
management and internal control systems in all banks worldwide. National
supervisors are responsible for ensuring that banks have minimum standards and
internal controls that allow them to adequately know their customers. Voluntary
codes of conduct4 issued by industry organisations or associations can be of

considerable value in underpinning regulatory guidance, by giving practical advice
to banks on operational matters. However, such codes cannot be regarded as a
substitute for formal regulatory guidance.
C. Essential elements of KYC standards
The Basel Committee’s guidance on KYC has been contained in the following three
papers and they reflect the evolution of the supervisory thinking over time. The
Prevention of Criminal Use of the Banking System for the Purpose of Money-
Laundering issued in 1988 stipulates the basic ethical principles and encourages
banks to put in place effective procedures to identify customers, decline suspicious
transactions and cooperate with law enforcement agencies. The 1997 Core Principles
for Effective Banking Supervision states, in a broader discussion of internal controls,
that banks should have adequate policies, practices and procedures in place,
including strict ‘know-your-customer’ rules; specifically, supervisors should en-
courage the adoption of the relevant recommendations of the FATF. These relate to
customer identification and record-keeping, increased diligence by financial
institutions in detecting and reporting suspicious transactions, and measures to deal
with countries with inadequate anti-money laundering measures. The 1999 Core
Principles Methodology further elaborates the Core Principles by listing a number of
essential and additional criteria. (Annex 1 sets out the relevant extracts from the
Core Principles and the Methodology.)
All banks should be required to ‘have in place adequate policies, practices and
procedures that promote high ethical and professional standards and prevent the bank
from being used, intentionally or unintentionally, by criminal elements’.5 Certain key
elements should be included by banks in the design of KYC programmes. Such
essential elements should start from the banks’ risk management and control
procedures and should include (1) customer acceptance policy, (2) customer
identification, (3) on-going monitoring of high risk accounts and (4) risk management.
Banks should not only establish the identity of their customers, but should also monitor
account activity to determine those transactions that do not conform with the normal
or expected transactions for that customer or type of account. KYC should be a core
feature of banks’ risk management and control procedures, and be complemented by
regular compliance reviews and internal audit. The intensity of KYC programmes
beyond these essential elements should be tailored to the degree of risk.
4
An example of an industry code is the ‘Global anti-money-laundering guidelines for Private
Banking’ (also called the Wolfsberg Principles) that was drawn up in October 2000 by
twelve major banks with significant involvement in private banking.
5
Core Principles Methodology, Essential Criterion 1.
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I. Customer acceptance policy

Banks should develop clear customer acceptance policies and procedures, including a
description of the types of customer that are likely to pose a higher than average risk
to a bank. In preparing such policies, factors such as customers’ background,
country of origin, public or high profile position, linked accounts, business activities
or other risk indicators should be considered. Banks should develop graduated
customer acceptance policies and procedures that require more extensive due
diligence for higher risk customers. For example, the policies may require the most
basic account-opening requirements for a working individual with a small account
balance. It is important that the customer acceptance policy is not so restrictive that
it results in a denial of access by the general public to banking services, especially for
people who are financially or socially disadvantaged. On the other hand, quite
extensive due diligence would be essential for an individual with a high net worth
whose source of funds is unclear. Decisions to enter into business relationships with
higher risk customers, such as politically exposed persons (see section 2.2.3 below),
should be taken exclusively at senior management level.
II. Customer identification

Customer identification is an essential element of KYC standards. For the purposes
of this paper, a customer includes:
the person or entity that maintains an account with the bank or those on whose
behalf an account is maintained (i.e., beneficial owners);
the beneficiaries of transactions conducted by professional intermediaries; and
any person or entity connected with a financial transaction who can pose a
significant reputational or other risk to the bank.
Banks should establish a systematic procedure for identifying new customers and
should not establish a banking relationship until the identity of a new customer is
satisfactorily verified.
Banks should ‘document and enforce policies for identification of customers and
those acting on their behalf’.6 The best documents for verifying the identity of
customers are those most difficult to obtain illicitly and to counterfeit. Special
attention should be exercised in the case of non-resident customers and in no case
should a bank short-circuit identity procedures just because the new customer is
unable to present himself for interview. The bank should always ask itself why the
customer has chosen to open an account in a foreign jurisdiction.
The customer identification process applies naturally at the outset of the
relationship. To ensure that records remain up-to-date and relevant, there is a need
for banks to undertake regular reviews of existing records.7 An appropriate time to
6
7
The application of new KYC standards to existing accounts is currently subject to FATF
review.
do so is when a transaction of significance takes place, when customer

documentation standards change substantially, or when there is a material change
in the way that the account is operated. However, if a bank becomes aware at any
time that it lacks sufficient information about an existing customer, it should take
steps to ensure that all relevant information is obtained as quickly as possible.
Banks that offer private banking services are particularly exposed to reputational
risk, and should therefore apply enhanced due diligence to such operations. Private
banking accounts, which by nature involve a large measure of confidentiality, can be
opened in the name of an individual, a commercial business, a trust, an intermediary
or a personalized investment company. In each case reputational risk may arise if the
bank does not diligently follow established KYC procedures. All new clients and new
accounts should be approved by at least one person, of appropriate seniority, other
than the private banking relationship manager. If particular safeguards are put in
place internally to protect confidentiality of private banking customers and their
business, banks must still ensure that at least equivalent scrutiny and monitoring of
these customers and their business can be conducted, e.g. they must be open to
review by compliance officers and auditors.
Banks should develop ‘clear standards on what records must be kept on customer
identification and individual transactions and their retention period’.8 Such a
practice is essential to permit a bank to monitor its relationship with the customer, to
understand the customer’s on-going business and, if necessary, to provide evidence
in the event of disputes, legal action, or a financial investigation that could lead to
criminal prosecution. As the starting point and natural follow-up of the
identification process, banks should obtain customer identification papers and
retain copies of them for at least five years after an account is closed. They should
also retain all financial transaction records for at least five years after the transaction
has taken place.
1. General identification requirements

Banks need to obtain all information necessary to establish to their full satisfaction
the identity of each new customer and the purpose and intended nature of the
business relationship. The extent and nature of the information depends on the type
of applicant (personal, corporate, etc.) and the expected size of the account. National
supervisors are encouraged to provide guidance to assist banks in designing their
own identification procedures. The Working Group intends to develop essential
elements of customer identification requirements.
When an account has been opened, but problems of verification arise in the
banking relationship which cannot be resolved, the bank should close the account
and return the monies to the source from which they were received.9
8
9
Subject to any national legislation concerning handling of suspicious transactions.
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While the transfer of an opening balance from an account in the customer’s name
in another bank subject to the same KYC standard may provide some comfort,
banks should nevertheless consider the possibility that the previous account manager
may have asked for the account to be removed because of a concern about dubious
activities. Naturally, customers have the right to move their business from one bank
to another. However, if a bank has any reason to believe that an applicant is being
refused banking facilities by another bank, it should apply enhanced diligence
procedures to the customer.
Banks should never agree to open an account or conduct ongoing business with a
customer who insists on anonymity or who gives a fictitious name. Nor should
confidential numbered10 accounts function as anonymous accounts but they should
be subject to exactly the same KYC procedures as all other customer accounts, even
if the test is carried out by selected staff. Whereas a numbered account can offer
additional protection for the identity of the account-holder, the identity must be
known to a sufficient number of staff to operate proper due diligence. Such accounts
should in no circumstances be used to hide the customer identity from a bank’s
compliance function or from the supervisors.
2. Specific identification issues

There are a number of more detailed issues relating to customer identification which
need to be addressed. Several of these are currently under consideration by the
FATF as part of a general review of its 40 recommendations, and the Working
Group recognizes the need to be consistent with the FATF.
(A) TRUST, NOMINEE AND FIDUCIARY ACCOUNTS

Trust, nominee and fiduciary accounts can be used to circumvent customer
identification procedures. While it may be legitimate under certain circumstances to
provide an extra layer of security to protect the confidentiality of legitimate private
banking customers, it is essential that the true relationship is understood. Banks
should establish whether the customer is taking the name of another customer,
acting as a ‘front’, or acting on behalf of another person as trustee, nominee or other
intermediary. If so, a necessary precondition is receipt of satisfactory evidence of the
identity of any intermediaries, and of the persons upon whose behalf they are acting,
as well as details of the nature of the trust or other arrangements in place.
Specifically, the identification of a trust should include the trustees, settlors/grantors
and beneficiaries.11
10
In a numbered account, the name of the beneficial owner is known to the bank but is
substituted by an account number or code name in subsequent documentation.
11
Beneficiaries should be identified as far as possible when defined. It is recognized that it
may not be possible to identify the beneficiaries of trusts precisely at the outset. For
example, some beneficiaries may be unborn children and some may be conditional on the
(B) CORPORATE VEHICLES

Banks need to be vigilant in preventing corporate business entities from being used
by natural persons as a method of operating anonymous accounts. Personal asset
holding vehicles, such as international business companies, may make proper
identification of customers or beneficial owners difficult. A bank should understand
the structure of the company, determine the source of funds, and identify the
beneficial owners and those who have control over the funds.
Special care needs to be exercised in initiating business transactions with companies
that have nominee shareholders or shares in bearer form. Satisfactory evidence of the
identity of beneficial owners of all such companies needs to be obtained. In the case of
entities which have a significant proportion of capital in the form of bearer shares,
extra vigilance is called for. A bank may be completely unaware that the bearer shares
have changed hands. The onus is on banks to put in place satisfactory procedures to
monitor the identity of material beneficial owners. This may require the bank to
immobilize the shares, for example, by holding the bearer shares in custody.
(C) INTRODUCED BUSINESS

The performance of identification procedures can be time consuming and there is a
natural desire to limit any inconvenience for new customers. In some countries, it has
therefore become customary for banks to rely on the procedures undertaken by other
banks or introducers when business is being referred. In doing so, banks risk placing
excessive reliance on the due diligence procedures that they expect the introducers to
have performed. Relying on due diligence conducted by an introducer, however
reputable, does not in any way remove the ultimate responsibility of the recipient bank
to know its customers and their business. In particular, banks should not rely on
introducers that are subject to weaker standards than those governing the banks’ own
KYC procedures or that are unwilling to share copies of due diligence documentation.
The Basel Committee recommends that banks that use introducers should carefully
assess whether the introducers are ‘fit and proper’ and are exercising the necessary due
diligence in accordance with the standards set out in this paper. The ultimate
responsibility for knowing customers always lies with the bank. Banks should use the
following criteria to determine whether an introducer can be relied upon: 12
it must comply with the minimum customer due diligence practices identified in
this paper;
the customer due diligence procedures of the introducer should be as rigorous
as those which the bank would have conducted itself for the customer;
cont.
occurrence of specific events. In addition, beneficiaries being specific classes of individuals
(e.g., employee pension funds) may be appropriately dealt with as pooled accounts as
referred to in paragraphs 38–9.
12
The FATF is currently engaged in a review of the appropriateness of eligible introducers.
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the bank must satisfy itself as to the reliability of the systems put in place by the
introducer to verify the identity of the customer;
the bank must reach agreement with the introducer that it will be permitted to
verify the due diligence undertaken by the introducer at any stage; and
all relevant identification data and other documentation pertaining to the
customer’s identity should be immediately submitted by the introducer to the
bank, who must carefully review the documentation provided. Such informa-
tion must be available for review by the supervisor and the financial
intelligence unit or equivalent enforcement agency, where appropriate legal
authority has been obtained.
In addition, banks should conduct periodic reviews to ensure that introducers on
which they rely continue to conform to the criteria set out above.
(D) CLIENT ACCOUNTS OPENED BY PROFESSIONAL INTERMEDIARIES

When a bank has knowledge or reason to believe that a client account opened by a
professional intermediary is on behalf of a single client, that client must be identified.
Banks often hold ‘pooled’ accounts managed by professional intermediaries on
behalf of entities such as mutual funds, pension funds and money funds. Banks also
hold pooled accounts managed by lawyers or stockbrokers that represent funds held
on deposit or in escrow for a range of clients. Where funds held by the intermediary
are not co-mingled at the bank, but where there are ‘sub-accounts’ which can be
attributable to each beneficial owner, all beneficial owners of the account held by the
intermediary must be identified.
Where the funds are co-mingled, the bank should look through to the beneficial
owners. There can be circumstances where the bank may not need to look beyond
the intermediary, for example, when the intermediary is subject to the same
regulatory and money-laundering legislation and procedures, and in particular is
subject to the same due diligence standards in respect of its client base as the bank.
National supervisory guidance should clearly set out those circumstances in which
banks need not look beyond the intermediary. Banks should accept such accounts
only on the condition that they are able to establish that the intermediary has
engaged in a sound due diligence process and has the systems and controls to
allocate the assets in the pooled accounts to the relevant beneficiaries. In assessing
the due diligence process of the intermediary, the bank should apply the criteria set
out in paragraph 36 above, in respect of introduced business, in order to determine
whether a professional intermediary can be relied upon.
Where the intermediary is not empowered to furnish the required information on
beneficiaries to the bank, for example, lawyers13 bound by professional secrecy codes
or when that intermediary is not subject to due diligence standards equivalent to
13
The FATF is currently engaged in a review of KYC procedures governing accounts opened
by lawyers on behalf of clients.
those set out in this paper or to the requirements of comprehensive anti-money

laundering legislation, then the bank should not permit the intermediary to open an
account.
(E) POLITICALLY EXPOSED PERSONS

Business relationships with individuals holding important public positions and with
persons or companies clearly related to them may expose a bank to significant
reputational and/or legal risks. Such politically exposed persons (‘PEPs’) are
individuals who are or have been entrusted with prominent public functions,
including heads of State or of government, senior politicians, senior government,
judicial or military officials, senior executives of publicly-owned corporations and
important political party officials. There is always a possibility, especially in
countries where corruption is widespread, that such persons abuse their public
powers for their own illicit enrichment through the receipt of bribes, embezzlement,
and so on.
Accepting and managing funds from corrupt PEPs will severely damage the
bank’s own reputation and can undermine public confidence in the ethical standards
of an entire financial centre, since such cases usually receive extensive media
attention and strong political reaction, even if the illegal origin of the assets is often
difficult to prove. In addition, the bank may be subject to costly information
requests and seizure orders from law enforcement or judicial authorities (including
international mutual assistance procedures in criminal matters) and could be liable
to actions for damages by the State concerned or the victims of a regime. Under
certain circumstances, the bank and/or its officers and employees themselves can be
exposed to charges of money laundering, if they know or should have known that the
funds stemmed from corruption or other serious crimes.
Some countries have recently amended or are in the process of amending their
laws and regulations to criminalize active corruption of foreign civil servants and
public officers in accordance with the relevant international convention.14 In these
jurisdictions foreign corruption becomes a predicate offence for money laundering
and all the relevant anti-money laundering laws and regulations apply (e.g.,
reporting of suspicious transactions, prohibition on informing the customer, internal
freeze of funds, etc.). But even in the absence of such an explicit legal basis in
criminal law, it is clearly undesirable, unethical and incompatible with the fit and
proper conduct of banking operations to accept or maintain a business relationship
if the bank knows or must assume that the funds derive from corruption or misuse of
public assets. There is a compelling need for a bank considering a relationship with a
person whom it suspects of being a PEP to identify that person fully, as well as
people and companies that are clearly related to him or her.
14
See OECD Convention on Combating Bribery of Foreign Public Officials in International
Business Transactions, adopted by the Negotiating Conference on 21 November 1997.
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Banks should gather sufficient information from a new customer, and check
publicly available information, in order to establish whether or not the customer is
a PEP. Banks should investigate the source of funds before accepting a PEP. The
decision to open an account for a PEP should be taken at a senior management
level.
(F) NON-FACE-TO-FACE CUSTOMERS

Banks are increasingly asked to open accounts on behalf of customers who do not
present themselves for personal interview. This has always been a frequent event in
the case of non-resident customers, but it has increased significantly with the recent
expansion of postal, telephone and electronic banking. Banks should apply equally
effective customer identification procedures and on-going monitoring standards for
non-face-to-face customers as for those available for interview. One issue that has
arisen in this connection is the possibility of independent verification by a reputable
third party. This whole subject of non-face-to-face customer identification is being
discussed by the FATF, and is also under review in the context of amending the 1991
EEC Directive.
A typical example of a non-face-to-face customer is one who wishes to conduct
electronic banking via the Internet or similar technology. Electronic banking
currently incorporates a wide array of products and services delivered over
telecommunications networks. The impersonal and borderless nature of electronic
banking combined with the speed of the transaction inevitably creates difficulty in
customer identification and verification. As a basic policy, supervisors expect that
banks should proactively assess various risks posed by emerging technologies and
design customer identification procedures with due regard to such risks. 15
Even though the same documentation can be provided by face-to-face and non-
face-to-face customers, there is a greater difficulty in matching the customer with the
documentation in the case of non-face-to-face customers. With telephone and
electronic banking, the verification problem is made even more difficult.
In accepting business from non-face-to-face customers:
banks should apply equally effective customer identification procedures for
non-face-to-face customers as for those available for interview; and
there must be specific and adequate measures to mitigate the higher risk.
Examples of measures to mitigate risk include:
certification of documents presented;
requisition of additional documents to complement those which are required
for face-to-face customers;
independent contact with the customer by the bank;
15
The Electronic Banking Group of the Basel Committee issued a paper on risk management
principles for electronic banking in May 2001.
third party introduction, e.g., by an introducer subject to the criteria

established in paragraph 36; or
requiring the first payment to be carried out through an account in the
customer’s name with another bank subject to similar customer due diligence
standards.
(G) CORRESPONDENT BANKING

Correspondent banking is the provision of banking services by one bank (the
‘correspondent bank’) to another bank (the ‘respondent bank’). Used by banks
throughout the world, correspondent accounts enable banks to conduct business and
provide services that the banks do not offer directly. Correspondent accounts that
merit particular care involve the provision of services in jurisdictions where the
respondent banks have no physical presence. However, if banks fail to apply an
appropriate level of due diligence to such accounts, they expose themselves to the
range of risks identified earlier in this paper, and may find themselves holding and/or
transmitting money linked to corruption, fraud or other illegal activity.
Banks should gather sufficient information about their respondent banks to
understand fully the nature of the respondent’s business. Factors to consider include:
information about the respondent bank’s management, major business activities,
where they are located and its money-laundering prevention and detection efforts;
the purpose of the account; the identity of any third-party entities that will use the
correspondent banking services; and the condition of bank regulation and
supervision in the respondent’s country. Banks should only establish correspondent
relationships with foreign banks that are effectively supervised by the relevant
authorities. For their part, respondent banks should have effective customer
acceptance and KYC policies.
In particular, banks should refuse to enter into or continue a correspondent
banking relationship with a bank incorporated in a jurisdiction in which it has no
physical presence and which is unaffiliated with a regulated financial group (i.e., shell
banks). Banks should pay particular attention when continuing relationships with
respondent banks located in jurisdictions that have poor KYC standards or have
been identified as being ‘noncooperative’ in the fight against anti-money laundering.
Banks should establish that their respondent banks have due diligence standards as
set out in this paper, and employ enhanced due diligence procedures with respect to
transactions carried out though the correspondent accounts.
Banks should be particularly alert to the risk that correspondent accounts might
be used directly by third parties to transact business on their own behalf (e.g.,
payable-through accounts). Such arrangements give rise to most of the same
considerations applicable to introduced business and should be treated in accordance
with the criteria set out in paragraph 36.
III. On-going Monitoring of Accounts and Transactions

On-going monitoring is an essential aspect of effective KYC procedures. Banks can
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only effectively control and reduce their risk if they have an understanding of normal
and reasonable account activity of their customers so that they have a means of
identifying transactions which fall outside the regular pattern of an account’s
activity. Without such knowledge, they are likely to fail in their duty to report
suspicious transactions to the appropriate authorities in cases where they are
required to do so. The extent of the monitoring needs to be risk-sensitive. For all
accounts, banks should have systems in place to detect unusual or suspicious
patterns of activity. This can be done by establishing limits for a particular class or
category of accounts. Particular attention should be paid to transactions that exceed
these limits. Certain types of transactions should alert banks to the possibility that
the customer is conducting unusual or suspicious activities. They may include
transactions that do not appear to make economic or commercial sense, or that
involve large amounts of cash deposits that are not consistent with the normal and
expected transactions of the customer. Very high account turnover, inconsistent with
the size of the balance, may indicate that funds are being ‘washed’ through the
account. Examples of suspicious activities can be very helpful to banks and should be
included as part of a jurisdiction’s anti-money laundering procedures and/or
guidance.
There should be intensified monitoring for higher risk accounts. Every bank
should set key indicators for such accounts, taking note of the background of the
customer, such as the country of origin and source of funds, the type of transactions
involved, and other risk factors. For higher risk accounts:
Banks should ensure that they have adequate management information
systems to provide managers and compliance officers with timely information
needed to identify, analyze and effectively monitor higher risk customer
accounts. The types of reports that may be needed include reports of
missing account opening documentation, transactions made through a
customer account that are unusual, and aggregations of a customer’s total
relationship with the bank.
Senior management in charge of private banking business should know the
personal circumstances of the bank’s high risk customers and be alert to
sources of third-party information. Significant transactions by these customers
should be approved by a senior manager.
Banks should develop a clear policy and internal guidelines, procedures and
controls and remain especially vigilant regarding business relationships with
PEPs and high profile individuals or with persons and companies that are
clearly related to or associated with them. 16 As all PEPs may not be identified
16
It is unrealistic to expect the bank to know or investigate every distant family, political or
business connection of a foreign customer. The need to pursue suspicions will depend on
the size of the assets or turnover, pattern of transactions, economic background, reputation
of the country, plausibility of the customer’s explanations, etc. It should however be noted
that PEPs (or rather their family members and friends) would not necessarily present
initially and since existing customers may subsequently acquire PEP status,
regular reviews of at least the more important customers should be undertaken.
IV. Risk Management

Effective KYC procedures embrace routines for proper management oversight,
systems and controls, segregation of duties, training and other related policies. The
board of directors of the bank should be fully committed to an effective KYC
programme by establishing appropriate procedures and ensuring their effectiveness.
Explicit responsibility should be allocated within the bank for ensuring that the
bank’s policies and procedures are managed effectively and are, at a minimum, in
accordance with local supervisory practice. The channels for reporting suspicious
transactions should be clearly specified in writing, and communicated to all
personnel. There should also be internal procedures for assessing whether the bank’s
statutory obligations under recognized suspicious activity reporting regimes require
the transaction to be reported to the appropriate law enforcement and/or
supervisory authorities.
A bank’s internal audit and compliance functions have important responsibilities
in evaluating and ensuring adherence to KYC policies and procedures. As a general
rule, the compliance function should provide an independent evaluation of the
bank’s own policies and procedures, including legal and regulatory requirements. Its
responsibilities should include ongoing monitoring of staff performance through
sample testing of compliance and review of exception reports to alert senior
management or the Board of Directors if it believes management is failing to address
KYC procedures in a responsible manner.
Internal audit plays an important role in independently evaluating the risk
management and controls, discharging its responsibility to the Audit Committee of
the Board of Directors or a similar oversight body through periodic evaluations of
the effectiveness of compliance with KYC policies and procedures, including related
staff training. Management should ensure that audit functions are staffed adequately
with individuals who are well versed in such policies and procedures. In addition,
internal auditors should be proactive in following-up their findings and criticisms.
All banks must have an ongoing employee-training programme so that bank staff
are adequately trained in KYC procedures. The timing and content of training for
various sectors of staff will need to be adapted by the bank for its own needs.
Training requirements should have a different focus for new staff, front-line staff,
compliance staff or staff dealing with new customers. New staff should be educated
in the importance of KYC policies and the basic requirements at the bank. Front-
line staff members who deal directly with the public should be trained to verify the
cont.
themselves in that capacity, but rather as ordinary (albeit wealthy) business people,
masking the fact they owe their high position in a legitimate business corporation only to
their privileged relation with the holder of the public office.
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identity of new customers, to exercise due diligence in handling accounts of existing

customers on an ongoing basis and to detect patterns of suspicious activity. Regular
refresher training should be provided to ensure that staff are reminded of their
responsibilities and are kept informed of new developments. It is crucial that all
relevant staff fully understand the need for and implement KYC policies
consistently. A culture within banks that promotes such understanding is the key
to successful implementation.
In many countries, external auditors also have an important role to play in
monitoring banks’ internal controls and procedures, and in confirming that they are
in compliance with supervisory practice.
D. The Role of Supervisors
Based on existing international KYC standards, national supervisors are expected to

set out supervisory practice governing banks’ KYC programmes. The essential
elements as presented in this paper should provide clear guidance for supervisors to
proceed with the work of designing or improving national supervisory practice.
In addition to setting out the basic elements for banks to follow, supervisors have a
responsibility to monitor that banks are applying sound KYC procedures and are
sustaining ethical and professional standards on a continuous basis. Supervisors
should ensure that appropriate internal controls are in place and that banks are in
compliance with supervisory and regulatory guidance. The supervisory process should
include not only a review of policies and procedures but also a review of customer files
and the sampling of some accounts. Supervisors should always have the right to access
all documentation related to accounts maintained in that jurisdiction, including any
analysis the bank has made to detect unusual or suspicious transactions.
Supervisors have a duty not only to ensure their banks maintain high KYC
standards to protect their own safety and soundness but also to protect the integrity
of their national banking system. 17 Supervisors should make it clear that they will
take appropriate action, which may be severe and public if the circumstances
warrant, against banks and their officers who demonstrably fail to follow their own
internal procedures and regulatory requirements. In addition, supervisors should
ensure that banks are aware of and pay particular attention to transactions that
involve jurisdictions where standards are considered inadequate. The FATF and
some national authorities have listed a number of countries and jurisdictions that are
considered to have legal and administrative arrangements that do not comply with
international standards for combating money laundering. Such findings should be a
component of a bank’s KYC policies and procedures.
17
Many supervisors also have a duty to report any suspicious, unusual or illegal transactions
that they detect, for example, during onsite examinations.
F. Implementation of KYC Standards in a

Cross-border Context
Supervisors around the world should seek, using their best efforts, to develop and
implement their national KYC standards fully in line with international standards so
as to avoid potential regulatory arbitrage and safeguard the integrity of domestic
and international banking systems. The implementation and assessment of such
standards put to the test the willingness of supervisors to cooperate with each other
in a very practical way, as well as the ability of banks to control risks on a groupwide
basis. This is a challenging task for banks and supervisors alike.
Supervisors expect banking groups to apply an accepted minimum standard of
KYC policies and procedures to both their local and overseas operations. The
supervision of international banking can only be effectively carried out on a
consolidated basis, and reputational risk as well as other banking risks are not
limited to national boundaries. Parent banks must communicate their policies and
procedures to their overseas branches and subsidiaries, including non-banking
entities such as trust companies, and have a routine for testing compliance against
both home- and host-country KYC standards in order for their programmes to
operate effectively globally. Such compliance tests will also be tested by external
auditors and supervisors. Therefore, it is important that KYC documentation is
properly filed and available for their inspection. As far as compliance checks are
concerned, supervisors and external auditors should in most cases examine systems
and controls and look at customer accounts and transactions monitoring as part of a
sampling process.
However small an overseas establishment is, a senior officer should be designated
to be directly responsible for ensuring that all relevant staff are trained in, and
observe, KYC procedures that meet both home and host standards. While this
officer will bear primary responsibility, he should be supported by internal auditors
and compliance officers from both local and head offices as appropriate.
Where the minimum KYC standards of the home and host countries differ,
branches and subsidiaries in the host jurisdictions should apply the higher standard
of the two. In general, there should be no impediment to prevent a bank from
adopting standards that are higher than the minima required locally. If, however,
local laws and regulations (especially secrecy provisions) prohibit the implementa-
tion of home-country KYC standards, where the latter are more stringent, host
country supervisors should use their best endeavours to have the law and regulations
changed. In the meantime, overseas branches and subsidiaries would have to comply
with host country standards, but they should make sure the head office or parent
bank and its home-country supervisor are fully informed of the nature of the
difference.
Criminal elements are likely to be drawn toward jurisdictions with such
impediments. Hence, banks should be aware of the high reputational risk of
conducting business in these jurisdictions. Parent banks should have a procedure for
206 Documentation
reviewing the vulnerability of the individual operating units and implement

additional safeguards where appropriate. In extreme cases, supervisors should
consider placing additional controls on banks operating in those jurisdictions and
ultimately perhaps encouraging their withdrawal.
During on-site inspections, home-country supervisors or auditors should face no
impediments in verifying the unit’s compliance with KYC policies and procedures.
This will require a review of customer files and some random sampling of accounts.
Home-country supervisors should have access to information on sampled individual
customer accounts to the extent necessary to enable a proper evaluation of the
application of KYC standards and an assessment of risk management practices, and
should not be impeded by local bank secrecy laws. Where the home-country
supervisor requires consolidated reporting of deposit or borrower concentrations or
notification of funds under management, there should be no impediments. In
addition, with a view to monitoring deposit concentrations or the funding risk of the
deposit being withdrawn, home supervisors may apply materiality tests and establish
some thresholds so that if a customer’s deposit exceeds a certain percentage of the
balance sheet, banks should report it to the home supervisor. However, safeguards
are needed to ensure that information regarding individual accounts is used
exclusively for lawful supervisory purposes, and can be protected by the recipient in
a satisfactory manner. A statement of mutual cooperation18 to facilitate information
sharing between the two supervisors would be helpful in this regard.
In certain cases there may be a serious conflict between the KYC policies of a
parent bank imposed by its home authority and what is permitted in a cross-border
office. There may, for example, be local laws that prevent inspections by the parent
banks’ compliance officers, internal auditors or home country supervisors, or that
enable bank customers to use fictitious names or to hide behind agents or
intermediaries that are forbidden from revealing who their clients are. In such cases,
the home supervisor should communicate with the host supervisor in order to
confirm whether there are indeed genuine legal impediments and whether they apply
extraterritorially. If they prove to be insurmountable, and there are no satisfactory
alternative arrangements, the home supervisor should make it clear to the host that
the bank may decide for itself, or be required by its home supervisor, to close down
the operation in question. In the final analysis, any arrangements underpinning such
on-site examinations should provide a mechanism that permits an assessment that is
satisfactory to the home supervisor. Statements of cooperation or memoranda of
understanding setting out the mechanics of the arrangements may be helpful. Access
to information by home country supervisors should be as unrestricted as possible,
and at a minimum they should have free access to the banks’ general policies and
procedures for customer due diligence and for dealing with suspicions.
18
See the Basel Committee paper Essential elements of a statement of cooperation between
banking supervisors (May 2001).
Annex 1: Excerpts from Core Principles Methodology

Principle 15: Banking supervisors must determine that banks have adequate policies, practices
and procedures in place, including strict ‘know-your-customer’ rules, that promote high
ethical and professional standards in the financial sector and prevent the bank being used,
intentionally or unintentionally, by criminal elements.
Essential criteria
1. The supervisor determines that banks have in place adequate policies, practices and
procedures that promote high ethical and professional standards and prevent the bank
from being used, intentionally or unintentionally, by criminal elements. This includes the
prevention and detection of criminal activity or fraud, and reporting of such suspected
activities to the appropriate authorities.
2. The supervisor determines that banks have documented and enforced policies for
identification of customers and those acting on their behalf as part of their anti-money
laundering program. There are clear rules on what records must be kept on customer
identification and individual transactions and the retention period.
3. The supervisor determines that banks have formal procedures to recognise potentially
suspicious transactions. These might include additional authorisation for large cash (or
similar) deposits or withdrawals and special procedures for unusual transactions.
4. The supervisor determines that banks appoint a senior officer with explicit responsibility
for ensuring that the bank’s policies and procedures are, at a minimum, in accordance
with local statutory and regulatory anti-money laundering requirements.
5. The supervisor determines that banks have clear procedures, communicated to all
personnel, for staff to report suspicious transactions to the dedicated senior officer
responsible for anti-money laundering compliance.
6. The supervisor determines that banks have established lines of communication both to
management and to an internal security (guardian) function for reporting problems.
7. In addition to reporting to the appropriate criminal authorities, banks report to the
supervisor suspicious activities and incidents of fraud material to the safety, soundness or
reputation of the bank.
8. Laws, regulations and/or banks’ policies ensure that a member of staff who reports
suspicious transactions in good faith to the dedicated senior officer, internal security
function, or directly to the relevant authority cannot be held liable.
9. The supervisor periodically checks that banks’ money laundering controls and their
systems for preventing, identifying and reporting fraud are sufficient. The supervisor has
adequate enforcement powers (regulatory and/or criminal prosecution) to take action
against a bank that does not comply with its anti-money laundering obligations.
10. The supervisor is able, directly or indirectly, to share with domestic and foreign financial
sector supervisory authorities information related to suspected or actual criminal activities.
11. The supervisor determines that banks have a policy statement on ethics and professional
behaviour that is clearly communicated to all staff.
Additional criteria
1. The laws and/or regulations embody international sound practices, such as compliance
with the relevant forty Financial Action Task Force Recommendations issued in 1990
(revised 1996).
208 Documentation
2. The supervisor determines that bank staff is adequately trained on money laundering
detection and prevention.
3. The supervisor has the legal obligation to inform the relevant criminal authorities of any
suspicious transactions.
4. The supervisor is able, directly or indirectly, to share with relevant judicial authorities
information related to suspected or actual criminal activities.
5. If not performed by another agency, the supervisor has in-house resources with specialist
expertise on financial fraud and anti-money laundering obligations.
Annex 2: Excerpts from FATF recommendations
C. Role of the financial system in combating money laundering

Customer Identification and Record-keeping Rules
Financial institutions should not keep anonymous accounts or accounts in obviously
fictitious names: they should be required (by law, by regulations, by agreements between
supervisory authorities and financial institutions or by self-regulatory agreements
among financial institutions) to identify, on the basis of an official or other reliable
identifying document, and record the identity of their clients, either occasional or usual,
when establishing business relations or conducting transactions (in particular opening of
accounts or passbooks, entering into fiduciary transactions, renting of safe deposit
boxes, performing large cash transactions).
In order to fulfil identification requirements concerning legal entities, financial institutions
should, when necessary, take measures:
i) to verify the legal existence and structure of the customer by obtaining either from a
public register or from the customer or both, proof of incorporation, including
information concerning the customer’s name, legal form, address, directors and
provisions regulating the power to bind the entity.
ii) to verify that any person purporting to act on behalf of the customer is so authorised
and identify that person.
11. Financial institutions should take reasonable measures to obtain information about the
true identity of the persons on whose behalf an account is opened or a transaction
conducted if there are any doubts as to whether these clients or customers are acting on
their own behalf, for example, in the case of domiciliary companies (i.e., institutions,
corporations, foundations, trusts, etc. that do not conduct any commercial or
manufacturing business or any other form of commercial operation in the country
where their registered office is located).
12. Financial institutions should maintain, for at least five years, all necessary records on
transactions, both domestic or international, to enable them to comply swiftly with
information requests from the competent authorities. Such records must be sufficient to
permit reconstruction of individual transactions (including the amounts and types of
currency involved if any) so as to provide, if necessary, evidence for prosecution of
criminal behaviour.
Financial institutions should keep records on customer identification (e.g., copies or
records of official identification documents like passports, identity cards, driving licenses
or similar documents), account files and business correspondence for at least five years
after the account is closed.
These documents should be available to domestic competent authorities in the context
of relevant criminal prosecutions and investigations.
13. Countries should pay special attention to money laundering threats inherent in new or
developing technologies that might favour anonymity, and take measures, if needed, to
prevent their use in money laundering schemes.
Increased Diligence of Financial Institutions
14. Financial institutions should pay special attention to all complex, unusual large
transactions, and all unusual patterns of transactions, which have no apparent economic
or visible lawful purpose. The background and purpose of such transactions should, as
far as possible, be examined, the findings established in writing, and be available to help
supervisors, auditors and law enforcement agencies.
15. If financial institutions suspect that funds stem from a criminal activity, they should be
required to report promptly their suspicions to the competent authorities.
16. Financial institutions, their directors, officers and employees should be protected by legal
provisions from criminal or civil liability for breach of any restriction on disclosure of
information imposed by contract or by any legislative, regulatory or administrative
provision, if they report their suspicions in good faith to the competent authorities, even
if they did not know precisely what the underlying criminal activity was, and regardless of
whether illegal activity actually occurred.
17. Financial institutions, their directors, officers and employees, should not, or, where
appropriate, should not be allowed to, warn their customers when information relating to
them is being reported to the competent authorities.
18. Financial institutions reporting their suspicions should comply with instructions from the
competent authorities.
19. Financial institutions should develop programs against money laundering. These
programs should include, as a minimum:
i) the development of internal policies, procedures and controls, including the
designation of compliance officers at management level, and adequate screening
procedures to ensure high standards when hiring employees;
ii) an ongoing employee training programme;
iii) an audit function to test the system.
Annex 3: Working Group on Cross-border Banking

Co-Chairs:
Mr Charles Freeland, Deputy Secretary General, Basel Committee on Banking Supervision

Mr Colin Powell, Chairman, Offshore Group of Banking Supervisors, and Chairman, Jersey
Financial Services Commission
Bermuda Monetary Authority Mr D Munro Sutherland
Cayman Islands Monetary Authority Mr John Bourbon
Mrs Anna McLean
210 Documentation
Banque de France/Commission Bancaire Mr Laurent Ettori

Federal Banking Supervisory Office of Germany Mr Jochen Sanio
Mr Peter Kruschel
Guernsey Financial Services Commission Mr Peter G Crook (until
April 2001)
Mr Philip Marr (since
April 2001)
Banca d’Italia Mr Giuseppe Godano
Financial Services Agency, Japan Mr Kiyotaka Sasaki (until
July 2001)
Mr Hisashi Ono (since
July 2001)
Commission de Surveillance du Secteur Financier, Mr Romain Strock
Luxembourg
Monetary Authority of Singapore Mrs Foo-Yap Siew Hong
Ms Teo Lay Har
Swiss Federal Banking Commission Mr Daniel Zuberbühler
Ms Dina Balleyguier
Financial Services Authority, United Kingdom Mr Richard Chalmers
Board of Governors of the Federal Reserve System Mr William Ryback
Federal Reserve Bank of New York Ms Nancy Bercovici
Office of the Comptroller of the Currency Mr Jose Tuya
Ms Tanya Smith
Secretariat Mr Andrew Khoo
Wolfsberg Group Pledges Anti-
Terrorism Support*
Zurich, October 5, 2001 – In view of the recent events in the United States the
Wolfsberg Group of International Private Banks1 together with Transparency
International 2 and their advisers3 have agreed on the following private sector
initiative to promote the international fight against terrorism:
All member banks of the Wolfsberg Group in their global businesses are fully
committed to supporting all local and international authorities in their tracing
of terrorists as well as their associates and flow of funds. For this the banks
have set up appropriate internal structures.
The Wolfsberg Principles already cover all kinds of serious crime which include
terrorism. Nevertheless, the banks will review the Principles by the end of this
month to explicitly include terrorism as one of the serious offences under the
policy and all the relevant paragraphs.
Last spring the banks started an initiative for closer co-operation between
regulators, law enforcement agencies, international police organizations and
the private sector. Both sides agreed that there is room for closer co-operation
* Press statement; see www.wolfsberg-principles.com.

1
The Wolfsberg Group consists of the following leading international banks: ABN Amro
Bank NV, Banco Santander Central Hispano, S.A., Barclays Bank, Citibank, N.A., Credit
Suisse Group, Deutsche Bank AG, Goldman Sachs, HSBC, JPMorgan Private Bank,
Société Générale, UBS AG and became known when they agreed to a set of global anti-
money-laundering guidelines international private banks a year ago. The guidelines were
jointly announced by the banks and by Transparency International (TI). Wolfsberg is the
location in Switzerland where an important working session to formulate the guidelines
was held.
2
Transparency International (TI) is a Berlin-based non-governmental organization,
dedicated to increasing government accountability and curbing both international and
national corruption.
3
Prof. Mark Pieth is a law professor in Basel, Switzerland. He is Chairman of the OECD
Group on Bribery and Corruption and a former member of the Financial Action Task
Force on Money Laundering (FATF). Stanley E. Morris is an international Consultant on
anti-money-laundering issues. He was head of FinCEN and a member of the Financial
Action Task Force on Money Laundering (FATF).
M. Pieth (Ed.) , Financing Terrorism, 211–212.

© 2001 Wolfsberg Group. Printed in the Netherlands.
211
212 Documentation
in the fight against serious crime which could also include the mutual sharing
of more information.
To bring this dialogue forward the banks will schedule a follow-up meeting
which will focus especially on common ground for intensified fight against
international terrorism which may lead to joint initiatives and actions between
the private and public sector.
The banks welcome the idea that the Financial Action Task Force on Money
Laundering (FATF) should extend their anti-money laundering principles to
the fight against international terrorism and offer their support as industry
advisors.
The Suppression of the Financing of Terrorism –
Wolfsberg Statement
A. Preamble
The Wolfsberg Group of financial institutions (the ‘Wolfsberg Group’1) is

committed to contributing to the fight against terrorism and is making the following
statement to describe the role of financial institutions in preventing the flow of
terrorist funds through the world’s financial system.
This fight presents new challenges. Funds used in the financing of terrorism do
not necessarily derive from criminal activity, which is a requisite element of most
existing money laundering offences. Successful participation in this fight by the
financial sector requires global cooperation by governments with the financial
institutions to an unprecedented degree.
B. Role of Financial Institutions in the Fight Against

Terrorism
Financial institutions can assist governments and their agencies in the fight against
terrorism. They can help this effort through prevention, detection and information
sharing. They should seek to prevent terrorist organizations from accessing their
financial services, assist governments in their efforts to detect suspected terrorist
financing and promptly respond to governmental enquiries.
1
The Wolfsberg Group consists of the following leading international banks ABN Amro
N.V., Banco Santander Central Hispano, S.A., Bank of Tokyo-Mitsubishi, Ltd., Barclays
Bank, Citigroup, Credit Suisse Group, Deutsche Bank AG, Goldman Sachs, HSBC, J.P.
Morgan Chase, Société Générale, UBS AG and became known when they, together with
Transparency International and Mark Pieth, agreed to a set of global anti-money-
laundering guidelines for international private banks in October 2000. Wolfsberg is the
location in Switzerland where an important working session to formulate the guidelines
was held.
M. Pieth (Ed.) , Financing Terrorism, 213–216.

© 2002 Wolfsberg Group. Printed in the Netherlands.
213
214 Documentation
C. Rights of the Individual
The Wolfsberg Group is committed to participating in the fight against terrorism in

a manner which is non-discriminatory and is respectful of the rights of individuals.
D. Know Your Customer
The Wolfsberg Group recognises that adherence to existing ‘Know Your Customer’
policies and procedures is important to the fight against terrorism. Specifically the
proper identification of customers by financial institutions can improve the efficacy
of searches against lists of known or suspected terrorists issued by competent
authorities having jurisdiction over the relevant financial institution (‘applicable
lists’).
In addition to the continued application of existing customer identification,
acceptance and due diligence procedures, the Wolfsberg Group is committed to:
Implementing procedures for consulting applicable lists and taking reasonable
and practicable steps to determine whether a person involved in a prospective
or existing business relationship appears on such a list.
Reporting to the relevant authorities matches from lists of known or suspected
terrorists or terrorist organisations consistent with applicable laws and
regulations regarding the disclosure of customer information.
Exploring with governmental agencies ways of improving information
exchange within and between jurisdictions.
Exploring ways of improving the maintenance of customer information to
facilitate the timely retrieval of such information.
E. High Risk Sectors and Activities
The Wolfsberg Group is committed to applying enhanced and appropriate due

diligence in relation to those of their customers engaged in sectors and activities
which have been identified by competent authorities as being widely used for the
financing of terrorism, such as underground banking businesses or alternative
remittance systems. This will include the adoption, to the extent not already in place,
of specific policies and procedures on acceptance of business from customers
engaged in such sectors or activities, and increased monitoring of activity of
customers who meet the relevant acceptance criteria.
In particular the Wolfsberg Group is committed to restricting their business
relationships with remittance businesses, exchange houses, casas de cambio, bureaux
The Suppression of the Financing of Terrorism – Wolfsberg Statement 215
de change and money transfer agents to those which are subject to appropriate
regulation aimed at preventing such activities and businesses from being used as a
conduit to launder the proceeds of crime and/or finance terrorism.
The Wolfsberg Group recognises that many jurisdictions are currently in the
process of developing and implementing regulations with regard to these businesses
and that appropriate time needs to be given for these regulations to take effect.
F. Monitoring
Recognising the difficulties inherent in identifying financial transactions linked to

the financing of terrorism (many of which appear routine in relation to information
known at the time) the Wolfsberg Group is committed to the continued application
of existing monitoring procedures for identifying unusual or suspicious transactions.
The Wolfsberg Group recognises that while the motive for such transactions may be
unclear, monitoring and then identifying and reporting unusual or suspicious
transactions may assist government agencies by linking seemingly unrelated activity
to the financing of terrorism.
In addition, the Wolfsberg Group is committed to:
Exercising heightened scrutiny in respect of customers engaged in sectors
identified by competent authorities as being widely used for the financing of
terrorism.
Monitoring account and transactional activity (to the extent meaningful
information is available to financial institutions) against lists generated by
competent authorities of known or suspected terrorists or terrorist organisa-
tions.
Working with governments and agencies in order to recognise patterns and
trends identified as related to the financing of terrorism.
Considering the modification of existing monitoring procedures as necessary to
assist in the identification of such patterns and trends.
G. Need for Enhanced Global Co-operation
The Wolfsberg Group is committed to co-operating with and assisting law

enforcement and government agencies in their efforts to combat the financing of
terrorism. The Wolfsberg Group has identified the following areas for discussion
with governmental agencies, with a view to enhancing the contribution financial
institutions are able to make:
The provision of official lists of suspected terrorists and terrorist organisations
216 Documentation
on a globally co-ordinated basis by the relevant competent authority in each

jurisdiction.
The inclusion of appropriate details and information in official lists to assist
financial institutions in efficient and timely searches of their customer bases.
This information should ideally include (where known) in the case of
individuals: date of birth; place of birth; passport or identity card number;
in the case of corporations; place of incorporation or establishment; details of
principals; to the extent possible, reason for inclusion on the list; and
geographic information, such as the location, date and time of the transaction.
Providing prompt feedback to financial institutions on reports made following
circulation of such official lists.
The provision of meaningful information in relation to patterns, techniques
and mechanisms used in the financing of terrorism to assist with monitoring
procedures.
The provision of meaningful information about corporate and other types of
vehicles used to facilitate terrorist financing.
The development of guidelines on appropriate levels of heightened scrutiny in
relation to sectors or activities identified by competent authorities as being
widely used for terrorist financing.
The development by governments and clearing agencies of uniform global
formats for funds transfers that require information which may assist their
efforts to prevent and detect the financing of terrorism.
Ensuring that national legislation:
Permits financial institutions to maintain information derived from official
lists within their own databases and to share such information within their
own groups.
Affords financial institutions protection from civil liability for relying on
such lists.
Permits financial institutions to report unusual or suspicious transactions
that may relate to terrorism to the relevant authorities without breaching
any duty of customer confidentiality or privacy legislation.
Permits the prompt exchange of information between governmental
agencies of different nation States.
The Wolfsberg Group supports the FATF Special Recommendations on Terrorist
Financing as measures conducive to the suppression of the financing of terrorism.

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FINANCING TERRORISM

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KLUWER ACADEMIC PUBLISHERS

©2003 Kluwer Academic Publishers

Print © 2002 Kluwer Academic Publishers

All rights reserved

Created in the United States of America

Visit Kluwer Online at: http://kluweronline.com

Editorial: The Financing of Terrorism – Criminal and Regulatory Reform

Financing of Terrorism – A Predicate Offence to Money Laundering?

Obstacles in Company Law to Anti-Money Laundering International

Financing of Terrorism: Following the Money

FATF Special Recommendations on Terrorist Financing 131

Financial Action Task Force Guidance for Financial Institutions

International Convention for the Suppression of the Financing

Council Common Position of 27 December 2001 on the Application

Customer Due Diligence for Banks 189

Wolfsberg Group Pledges Anti-Terrorism Support 211

The Suppression of the Financing of Terrorism – Wolfsberg Statement 213

M. Pieth (Ed.), Financing Terrorism, 1–3.

financial crime, and Bill Gilmore, Professor at the University of Edinburgh,

I. 11 September 2001: Global Financial Transparency

M. Pieth (Ed.), Financing Terrorism, 5–40.

Philippines, Nigeria, or Somalia, to name only a few, opportunities for anonymity

laundering was recognized in the 1990s as a global problem requiring a global

Minimal due diligence by company formation agents, attorneys, and financial

II. The Capacity Problem

III. Structural Consequences of the Globalization of Money

It may be self-evident that globalization has changed many practical elements of

IV. Practical Impact of Globalized Illicit Finance on Political

The integration of electronic financial payments systems into a globally ubiquitous

diamonds, illicit timber, narcotics, and weapons smuggling. 18 As a consequence of

extraordinarily weak. Some money laundering in Cambodia nevertheless goes

fund secret operations aimed at destablizing India through Muslim rebellion in

V. Terrorist Finance and Civil Conflict

International terrorism represents an obvious threat to global security, just as

Ansari Exchange branch in Abu Dhabi.38 Another account cited an unnamed US

the rules had proven to be largely helpful in reconstructing money laundering or

VI. The Commingling Problem

VII. Existing Initiatives

As Brookings Institution economist Robert Litan has recently stated, successful

1. Cook Islands, used by Russian criminals to loot Russia.

focused on eliminating regulations that could impede international trade or impose

2. Requiring that financial accounts be drawn up for companies organized in

legitimate’. These procedures are supposed to include: (a) taking reasonable

VIII. Global Standards for the Private Sector: Adopting A

* Deputy Secretary General, Basel Committee on Banking Supervision. Charles Freeland is

M. Pieth (Ed.), Financing Terrorism, 41–48.

group on cross-border banking, decided to revert to the issue principally as a result of

On 30 October 2001, the Financial Action Task Force on Money Laundering

M. Pieth (Ed.), Financing Terrorism, 49–56.

gical perspective, it makes sense to legislate to suppress financing of terrorism on the

In its Article 8, the Convention refers to ‘proceeds’ by providing, in so far as is

The misuse of corporate vehicles or entities or structures for money laundering

M. Pieth (Ed.), Financing Terrorism, 57–85.

The Tampere European Council of October 1999, in agreement with the

tions, and secondly, it may be carried out indirectly by increasing the

quantify and cross-compare obstacles to international co-operation between

3. Methodology and data collection procedures

In order to identify the transparency variables and obstacles involved in

4. Analysis of the corporate/company regulative field

4.1 Selection of the legal and non-legal structures susceptible to being

4.2 Identification of thematic areas and transparency variables in