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Journal of South Pacific Law |
Working Paper 4 of Volume 3 1999
Money Laundering
& The Law
In
The Republics of Fiji and Vanuatu
A Critical Analysis
By: Anselm Herman
© Anselm Herman
USP Law School, 1999.
Table of Contents
An overview of the environment in which Money Laundering operates.
Global Organized Crime has been said to be a "Big Business". It is evident that profit and personal gain motivate many criminals. It is these profits that are essential for the funding of the business and thus the expansion of its criminal activities. Theoretically, it would be an effective deterrent to "attack" the profits of organized crime,
which shall be dealt with in the next Chapter.
Wealth and consequently "criminal profits" are thought to be effectively hidden by reposing it in Offshore sanctuaries. Once offshore, wealth can be brought back onshore after obscuring the true identity of its ownership. This is in essence, the process by which money is laundered. The international trust business has been said to be the cornerstone of international wealth planning and that at present rates of growth, all private wealth would, by the year 2010 be held through trust structures of one form or the other.
It is submitted that International Criminal Wealth Planning would also be viable in offshore sanctuaries such as Vanuatu and even Fiji with its well-established financial systems. To put this in to context, gross income for Port Vila’s (Vanuatu) accountancy, trust, legal and banking firms totaled about $US20.36 million in the first three quarters of 1998 according to Reserve Bank of Vanuatu.
It has also been stated that Transnational criminal activities such as money laundering usually employ the use of banks, particularly international banks for laundering secret or dirty money. To augment this, Financial Institutions in the South Pacific region have in the current decade experienced the impact of globalisation, where, there was a marvelous rise in net capital flows from industrial countries to developing economies such as ours. This has been due to the greatly increased interest by international asset holders in the emerging market economies. These developments created the prospect of a more efficient, worldwide allocation, of savings and investment than was possible in the past. However, this has meant exposing small island states like ours to the inevitable, which is "Money Laundering".
Therefore it is submitted that due to Globalisation, Transnational Financial Institutions, Offshore Investment Sanctuaries, Corruption and increased Dependence, Pacific States are now more then ever, at a greater risk of being the vehicles for the movement, safekeeping, disguise and "washing" of proceeds of global economic crime. Ultimately, the paper may induce recognition of the existence of money laundering here in the Pacific, a current issue hidden and draped with legitimacy, bank secrecy laws, scrupulous lawyers, accountants, trust companies, politicians and other financial institutions.
The Republic Of Vanuatu
Vanuatu is one of the few pure tax havens in the world and it hosts the most established financial centre in the South Pacific Region. The finance centre was established in 1971 and has inter alia the following features:
• Establishment of Discretionary Trusts to hold Assets directly whereby the trustee company acts only on the instructions of the person forming the trust. There are no reporting requirements and hence secrecy of financial information is ensured.
It is submitted that Vanuatu’s legitimate Finance Center is the ideal superstructure in which criminal enterprise such as money laundering may flourish and develop. The legal and economic regime outlined above is clearly a lure, not only to legitimate foreign capital, but also to the laundering of illegal capital.
After an overview of the special status Vanuatu has, been a Financial Centre, it is now that the paper shall move on to discussing the possible vulnerability of the Republic.
It has been said that Vanuatu, inter alia have become a heavy concentration of financial activity for money laundering by the Russian Mafia using apparently American middlemen.
However, it was stated by Vanuatu’s Financial Services Commissioner that although Vanuatu’s Government received many requests for assistance by foreign government investigators, "We provide assistance where we can, but there’s a difference between fishing for information and specifics".
That aside, it was said that there was a growing criminal interest in the Pacific Islands as a potential laundering ground, because other havens such as the Cayman Islands were toughening up.
Furthermore, there have been four cases reported by the Asia/Pacific Group on Money Laundering Secretariat as examples of Vanuatu as a financial centre being used for money laundering. One case involved an American citizen convicted of defrauding more then 800 people of $US6, 097,155 by falsely claiming that he would invest their monies in securities and commodities. Instead, the money was used for personal expenses in which he had used several bank accounts and Offshore accounts in Vanuatu, Mexico and the Bahamas.
Moreover, and most importantly, it has been recognised that "relationships of corruption provide important market conditions for the profitability of criminal enterprise". Vanuatu’s Ombudsman published a report in 1996 that described a fraudulent financial scheme, in which it was stated "could lead to the bankruptcy of the Republic of Vanuatu". The report further noted that "Vanuatu will now be regarded as a money laundering center by its involvement in this scam through the participation of the Prime Minister and the Minister of Finance".
Overall, there is little doubt that Vanuatu is a prime spot here in the region for transnational criminals, and thus the vulnerability of being a conduit for the movement, safekeeping and "washing" of the proceeds of economic crime. Nevertheless, it must be stated that the legitimate purpose of an offshore center is not to launder money. Suffice it to say that the favorable market conditions do have the potential to be used for such transnational criminal activities. The Legislative provisions for the combating of money laundering which are in play shall be examined later and thus its effectiveness ascertained.
The Republic of Fiji
Fiji seems to be a more regulated economy then Vanuatu, concerning exchange control, administered by the Reserve Bank under section 48 of the Reserve Bank of Fiji Act. However, it must be stated that the current Exchange Control policies support the Governments move towards Deregulation. These policies have been influenced by the Reserve Banks Monetary Policy and its membership to the International Monetary Fund and the World Trade Organization.
Outlines of these policies are as follows:
The above does not provide a comprehensive analysis of the Fijian Economy in light of Monetary Policy and the financial system. Nevertheless, it is submitted that the policies outlined are designed to increase the liberalization of International Trade in a Capital Market Oriented, Global Economy.
There is no doubt that there are many advantages attached to these policies for purposes of intensifying Foreign Investment and International Trade in a small island state such as Fiji. However, it is submitted that coupled with the advantages, comes the Vulnerability, that is, Money Laundering.
To take an example, the opening of an External Bank Account in a Commercial Bank, by a non-resident in foreign currency does not need the Reserve Banks Approval.
Secondly, the Offshore borrowing and repayment facility does not require Reserve Bank Approval for transactions less then F$100,000 per application, which in essence means money can be brought in and out of the country without the Reserve Banks knowledge.
The question to ask is what if there are multiple transactions just below
F $100,000 by the same entity based on false documents? In the alternative, there could also be multiple transactions just below the reporting limit, using legitimate documents and different accounts under different names. Perhaps, the loophole of the law, and the benefit of the launderer?
Finally, the Repatriation of Funds by Foreign Investors. It has been stated that All funds brought into Fiji (exceeding F$100,000) and reported to the Reserve Bank may be repatriated, and any income earned from business operations. The question here is where did the money come from in the first place to invest in Fiji. Alternatively, is Fiji being used by fraudsters and Con-artist to legitimize their money obtained and then repatriates it?
As Evidence of "its" existence, it was stated by the Director of the Fiji Intelligence Services, that there could be as many as ten money laundering operations working in the country (Fiji). He also stated that "local entrepreneurs may unwittingly become involved in such schemes because launderers attract unsuspecting clients through financial institutions by offering them a stake in seemingly lucrative business ventures at a low cost"
In a regional perspective the Secretary General of the Forum Secretariat, stated the forum views at the United Nations that "the fragility of small island states went beyond economic factors to include vulnerability to external threats such as the increasing use of small islands for money laundering" In considering the above the paper shall now examine the Law.
3. Money Laundering – The Offence in Fiji & Vanuatu
The Legislation which criminalises money laundering are the Proceeds of Crime Act, 1997 for Fiji and The Serious Offences (Confiscation of Proceeds) Act, 1989 of Vanuatu.
Other legislation incidental to the enforcement and inquiry of the offence are, the Mutual Assistance in Criminal Matters Act, 1997 for Fiji and the Mutual Assistance In Criminal Matters Act, 1989 of Vanuatu. It should be noted that the scope of this paper is such that only the Offence of Money Laundering shall be analyzed and it’s elements discussed. Further, a brief summary of the main provisions in the Acts shall be outlined.
The Republic of the Fiji Islands
Section 69, Part V of the Proceeds of Crime Act states at subsection 2:
A person who after the commencement of this Act, engages in money laundering commits an offence and is liable on conviction, to
It goes on to state the elements in subsection 3:
A person shall be taken to engage in money laundering if, and only if:
and the person knows, or ought reasonably to know, that the money or other property is derived or realized, directly or indirectly, from some form of unlawful activity.
At the outset, it should be noted that "save as otherwise provided in this Act, any question of fact to be decided by the court in proceedings under this Act is to be decided on the Balance of Probabilities" It should be noted that there is nothing provided in the section dealing with the offence of money laundering to state the contrary, nevertheless, it is submitted that the Criminal Standard Beyond Reasonable Doubt is the applicable standard to apply in Fiji with regard to the offence.
The Elements of the offence:
There are four elements that must be established by the prosecution to make out an offence under section 69, and these are:
This is an act of a specified kind, that is, engaging in a transaction, receiving, possessing, concealing, disposing of or bringing into Fiji. From the above it can be stated that the section not only contemplates the original offender but also a third party. Thus, the section expands the offence to those who provide money-laundering services for primary offenders by assisting them to conceal the fact of their criminality.
Property has been defined by section 3 to include "money or any other property, real or personal, things in action or other intangible or incorporeal property". It is thus submitted that this should pose little problem to the prosecution in proving that property was involved in a transaction.
Transaction has been defined as including "the receiving, or making, of a gift". It is thus submitted that transaction is also meant to be construed broadly.
It is submitted that the major difficulty for the prosecution may be proving that the property is proceeds of crime. Section 3 defines Proceeds of Crime as:
Serious offence has been defined by section 3 as:
The circumstances that money or property is proceeds of crime may be proved directly or indirectly. In R v Sbarra a case relating to the offence of receiving stolen goods, it was held that the circumstances in which a defendant receives stolen goods may of themselves prove that goods were stolen, although there may be no other evidence of the principal offence, the theft.
In addition, it is submitted that it is not necessary to show that the principal offender has been convicted of a crime, however it must be proved on the balance of probabilities that the property was proceeds of crime. The proof that property was proceeds of crime seems to be remarkably difficult, especially when the primary offence has occurred outside Fiji.
Thus, the dilemma arises, the more complex the money laundering scheme, the more difficult it would be to reconstruct the money trail and show that the moneys or property is the proceeds of crime. The reconstruction of the money trail has been said to be even more difficult especially when a group of interlocking subsidiaries located in different jurisdictions are used.
Nevertheless, it is submitted that although proof of this element may cause problems, a person should not be subjected to severe penalties for money-laundering if it cannot be shown that the property was derived from some identifiable "form of unlawful activity"
(d) Mens Rea
The prosecution must prove under section 69 that "a person knows or ought reasonably to know" that the money or other property is derived or realized, directly or indirectly, from some form of unlawful activity.
It is submitted that the prosecution must prove that the defendant with his or her actual knowledge or capacity ought to have known in the situation in which he or she was placed, that property was derived or realized from some form of "unlawful activity". "Unlawful activity" has been defined by section 3 as "an act or omission that constitutes an offence against a law in force in Fiji or a foreign country".
In addition, it has been stated that willful blindness can also amount to an offence when reasonable steps are not taken to ascertain whether the property is a benefit of unlawful activity.
However, it is also submitted that knowledge could be inferred from objective factual circumstances. It should be noted that to date, the judiciary in Fiji has not interpreted whether a subjective or objective test was contemplated by Parliament about adducing knowledge of the defendant. Nevertheless, it appears internationally acceptable in this area of law to adopt, as policy, an objective standard.
The Republic Of Vanuatu
Section 19, Part 5 of the Serious Offences (Confiscation of Proceeds) Act states at subsection 2:
A person who after the commencement of this Act, engages in money laundering is guilty of an offence punishable, upon conviction, by-
Section 19, subsection 1 states:
For the purposes of this section, a person shall be taken to engage in money laundering if, and only if:
and the person knows, or ought reasonably to know, that the money or other property is derived or realized, directly or indirectly, from some form of unlawful activity.
It is submitted that as in Fiji, the offence and elements that constitute the offence of money laundering in Vanuatu, are basically identical, therefore the same analysis as stated above in the Fijian legislative provision may apply also to the Vanuatu provisions and thus do not need further comment.
The only difference is that, in Fiji the Maximum term of Imprisonment upon conviction is 20 years whereas in Vanuatu it is 15 years. In addition, it is important to note that there seems to be silence on the Standard of Proof in Vanuatu in relation to the offence of money laundering. However, it is reasonable to state that the proper standard would be Beyond Reasonable Doubt.
Therefore, on the whole it would be reasonable to state that both Fiji and Vanuatu have made a tremendous legislative effort in combating money laundering. However, as has been seen above, the major limitation from a law enforcement perspective would be the difficulty in proving that property was proceeds of crime. Recommendations on the law shall be dealt with later.
Investigation & Orders
The Proceeds of Crime Act in Fiji and the Serious Offences Act in Vanuatu have the following features regarding Remedies and Investigation of Money Laundering.
From the above it may be noted that Fiji has a far more effective legislation concerning the investigative powers of law enforcement agencies. It must be stated that Vanuatu does not have provisions for forfeiture of tainted property, neither does it provide for the lifting of the corporate veil. Most importantly, there is no provision for Monitoring Orders or Obligations required of the Financial Institutions. Finally, disclosure by government is not stipulated.
It is submitted that although Vanuatu’s legislation was enacted in 1989 as opposed to Fiji’s relatively new 1997 legislation. The clear omission by the drafters implies that the Political will in Vanuatu is lacking.
4. Global & Regional Enforcement Agencies
Since 1988, the International community has used both the criminal law and the regulation of the financial industry in its efforts to curtail the laundering of funds derived from economic crime including drug trafficking.
The 1988 UN Convention
The UN Convention was adopted in Vienna on 19 December 1988 and came into force on 11 November 1990. By 1997, 136 countries had signed and ratified the Convention, while 13 more had signed but not ratified it.
Article 2(1) of the Convention states:
The purpose of this Convention is to promote co-operation among the Parties so that they may address more effectively the various aspects of illicit traffic in narcotic drugs and psychotropic substances having an international dimension.
The Convention established a basis for placing international controls on money laundering, thus setting the standard for international anti-money laundering efforts to follow. It did so under Article 3 by:
Regarding bank secrecy, Article 5(3) states:
In order to carry out the measures referred to in this article, each Party shall empower its courts or other competent authorities to order that bank, financial or commercial records be made available or be seized. A Party shall not decline to act under the provisions of this paragraph on the ground of bank secrecy.
The Convention also imposed on Parties an obligation to afford each other the widest measure of legal assistance with respect to the offences established under Article 3. Article 7(2)(g) expressly states that mutual legal assistance may be requested in respect of the identification or tracing of "proceeds, property, instrumentality’s or other things for evidentiary purposes." Of relevance for financial institutions, Article 7(5) declares similarly to 5(3) that "A Party shall not decline to render mutual legal assistance under this article on the ground of bank secrecy."
Finally, Art. 9(1) requires parties to co-operate closely in aiming to suppress the crimes dealt with under the Convention. Art 9(1)(b)(ii) expressly applies this duty to inquiries relating to the movement of proceeds or property derived from the commission of offences dealt with under the Convention.
Overall, each of these provisions may have some relevance for those working in, investigating or regulating the financial services industry. In a sense, the UN Convention, intended as it was for ratification by the international community at large, basically set out minimal standards or procedures.
The Basle Committee
The Basle Committee on Banking Supervision consists of representatives from the central banks and supervisory authorities of the G-10 group of industrialized nations. It exists to improve banking supervision and strengthen prudential standards in member, and increasingly in non-member, countries. It issued its Statement of principles on the prevention of Money Laundering on December 12 1988.
Its function is to "encourage the banking sector to adopt a common position in order to ensure that banks are not used to hide or launder funds acquired through criminal activities and, in particular, through drug trafficking."
The Basle Committee statement presented banks and their supervisors with a new task to include a duty to discourage certain types of (laundering-related) transactions. The rationale for this was that:
Part II of the statement indicates that banks should make reasonable efforts to learn the true identity of all those seeking to use its services, including those holding or seeking to open accounts.
Part III asks bank management to adhere to high legal and ethical standards, stating that although it might not always be possible to know whether (particularly foreign) laws are being broken, banks should not offer services or provide active assistance in transactions which they have good reason to suppose are associated with money laundering.
Part IV urges banks to give full co-operation to national law enforcement authorities to the extent that specific local confidentiality regulations permit.
The scheme laid out by the Basle Committee is fundamental to the way in which banks have come to be regulated in this area. Its basic philosophy of preventative regulation continues to be the defining one. Although non-binding itself, the Statement contemplates that bank management will be required by local law or policy to put in place procedures designed to prevent 'dirty money' from entering the system.
The Financial Action Task Force
The Financial Action Task Force was established by the G7 at the Paris Economic Summit in 1989. It has now has 28 members and is the leading international body on money laundering policy. Its most important report, was its first, of April 1990. This report reviewed the nature and extent of money laundering, considered programs in place nationally and internationally to address it, and made 40 recommendations for a co-operative international regime. The recommendations fall into three main areas: the improvement of national legal systems, the enhancement of the role of the financial system, and the strengthening of international co-operation.
The recommendations may be summarized as follows:
* National authorities should seek to apply these recommendations to both bank and non-bank financial institutions.
* With regard to customer identification, financial institutions should record and "know" the identity of their clients when establishing relations or conducting transactions, should not keep anonymous accounts, and should keep relevant records for at least five years from the transaction date. Records should be available to competent authorities for purposes of criminal investigation or prosecution.
* Financial institutions should pay special attention to all unusual or suspicious transactions. Legal provisions should be established to protect financial institutions and their employees from civil or criminal liability for breach of confidentiality where disclosure of suspected criminal activity is made in good faith to competent authorities.
* Financial institutions reporting to authorities, whether under a mandatory or a voluntary reporting scheme, should in so doing comply with the instructions of the competent authorities, developing compliance programs as necessary.
* Special vigilance should be accorded transactions related to countries that do not apply these recommendations in full or in part, and to branches and subsidiaries located abroad.
* The feasibility of measures to monitor cash crossing over borders should be studied, subject to safeguards ensuring both proper use of the information and the freedom of capital movements. Countries should also consider the feasibility and utility of a system where financial institutions and intermediaries would report all currency transactions of a fixed amount to a central agency which would make the information available for use in money laundering cases. Countries should encourage a general movement away from cash transfers towards other secure techniques of money management (like credit cards, cheques, and direct deposits).
* In each country, the competent authorities should ensure that institutions have adequate money laundering prevention programs. Such authorities should co-operate on money laundering investigations. They should ensure effective implementation of these regulations in other professions dealing with cash. They should establish guidelines to assist financial institutions in their efforts to comply, and should seek to prevent the influence or take-over of financial institutions by criminal organizations or their associates.
The FATF has been and remains the most significant nexus in the emerging international regime against money laundering. It designed the regime, it administers the process whereby member states review each other's implementation of it, and it undertakes the research necessary to ensure that the regime responds adequately to emerging technologies, new laundering trends, and law enforcement needs. The impetus provided by the FATF is largely responsible for the fact that there is an international anti-money laundering regime of which to speak today.
Regional Initiatives
Closer to home, at the 1997 South Pacific Forum in the Cook Islands, Forum leaders endorsed the "Aitutaki Declaration on Regional Security Cooperation" in the South Pacific. The Secretary General of the South Pacific Forum Secretariat stated that "Progress in this area would assist in establishing a regional legislative framework to combat transnational crime".
Further, the Aitutaki Declaration broadened the framework of the security environment in the region beyond traditional law enforcement issues to include transnational crime, unwanted financial activities such as money laundering and unlawful challenges to the national integrity of a state.
To augment this, the region has also set up an "Asia/Pacific Group" to battle money laundering. The second fully-fledged meeting was held in Tokyo during March of 1999. There is no doubt that the Forum island countries have recognised the need for addressing transnational crimes.
To use the words of the Honorable Prime-Minister of the Cook Islands "The modern age has come to the Pacific Islands, bringing both challenges and opportunities, some of these challenges are, in fact serious security threats that the Forum can only address in a comprehensive manner by working in close coordination with other members of the international community." Money laundering is one such challenge.
5. Recommendations on the Law in Fiji and Vanuatu.
At the outset, it must be stated that the recommendations made in this section on the law, only deal with the offence of money laundering in the two Republics. Firstly, the proving that an individual has laundered money or property that is proceeds of crime has been said to be difficult to prove. The reason for this is the proving that property was "proceeds of crime", especially when the primary offence has occurred outside either of the Republics.
As has been seen, the complexity of the money-laundering scheme would determine the possibility of reconstructing a money trail. This situation is made worse because the primary law enforcement agencies, which investigate the crime in the two republics, are Police Officers.
It is submitted that this is a major drawback in the law because, given the nature of money laundering, that is the use by launderers of professionals such as Accountants, Bankers, Lawyers, Companies and Trusts it would be impossible, for a police officer, unaided, to investigate such complex white collar crimes. What needs to be realized is that "money laundering" is not as simple an offence as it seems theoretically.
There are several components needed in Fiji and Vanuatu to ensure efficiency in the combating of money laundering. First, there needs to be special training given to the operational level personnel, that is the Police, DPP’s Office, and Bankers. Secondly, there is a need for the Governments to accept the need for greater transparency and foresight of their economies. In addition governments need to acknowledge, at the international level that crime and corruption are in itself questions of development and not only of law enforcement.
Therefore, it is recommended that the Fiji and Vanuatu legislature set up an independent money laundering task force, comprised of professionals from Banking Institutions such as the Reserve Bank who are experts in international and domestic finance, members of the Accountancy and Legal fraternity, legal regulators, together with the main law enforcement personnel such as the DPP's Office and the Police Force. What is needed is TEAMWORK, which is the Pacific Way! This I think is the Regional Solution to a Global Problem.
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