Losing the War Against Dirty Money: Rethinking Global Standards on Preventing Money Laundering and Terrorism Financing

Following a brief overview in Part I.A of the overall system to prevent money laundering, Part I.B describes the role of the private sector, which is to identify customers, create a profile of their legitimate activities, keep detailed records of clients and their transactions, monitor their transactions to see if they conform to their profile, examine further any unusual transactions, and report to the government any suspicious transactions. Part I.C continues the description of the preventive measures system by describing the government\u27s role, which is to assist the private sector in identifying suspicious transactions, ensure compliance with the preventive measures requirements, and analyze suspicious transaction reports to determine those that should be investigated. Parts I.D and I.E examine the effectiveness of this system. Part I.D discusses successes and failures in the private sector\u27s role. Borrowing from theory concerning the effectiveness of private sector unfunded mandates, this Part reviews why many aspects of the system are failing, focusing on the subjectivity of the mandate, the disincentives to comply, and the lack of comprehensive data on client identification and transactions. It notes that the system includes an inherent contradiction: the public sector is tasked with informing the private sector how best to detect launderers and terrorists, but to do so could act as a road map on how to avoid detection should such information fall into the wrong hands. Part I.D discusses how financial institutions do not and cannot use scientifically tested statistical means to determine if a particular client or set of transactions is more likely than others to indicate criminal activity. Part I.D then turns to a discussion of a few issues regarding the impact the system has but that are not related to effectiveness, followed by a summary and analysis of how flaws might be addressed. Part I.E continues by discussing the successes and failures in the public sector\u27s role. It reviews why the system is failing, focusing on the lack of assistance to the private sector in and the lack of necessary data on client identification and transactions. It also discusses how financial intelligence units, like financial institutions, do not and cannot use scientifically tested statistical means to determine probabilities of criminal activity. Part I concludes with a summary and analysis tying both private and public roles together. Part II then turns to a review of certain current techniques for selecting income tax returns for audit. After an overview of the system, Part II first discusses the limited role of the private sector in providing tax administrators with information, comparing this to the far greater role the private sector plays in implementing preventive measures. Next, this Part turns to consider how tax administrators, particularly the U.S. Internal Revenue Service, select taxpayers for audit, comparing this to the role of both the private and public sectors in implementing preventive measures. It focuses on how some tax administrations use scientifically tested statistical means to determine probabilities of tax evasion. Part II then suggests how flaws in both private and public roles of implementing money laundering and terrorism financing preventive measures might be theoretically addressed by borrowing from the experience of tax administration. Part II concludes with a short summary and analysis that relates these conclusions to the preventive measures system. Referring to the analyses in Parts I and II, Part III suggests changes to the current preventive measures standard. It suggests that financial intelligence units should be uniquely tasked with analyzing and selecting clients and transactions for further investigation for money laundering and terrorism financing. The private sector\u27s role should be restricted to identifying customers, creating an initial profile of their legitimate activities, and reporting such information and all client transactions to financial intelligence units

On the Use and Abuse of Standards for Law: Global Governance and Offshore Financial Centers

Current trends in international legal scholarship have shifted from a paradigm of state actors working within recognized sources of international law to one that includes networks of domestic regulators that develop and implement best practices or standards on a global basis. The new paradigm can be seen in operation in the efforts by onshore jurisdictions (most of which are financial centers themselves) to restrict the activities of offshore financial centers. Onshore jurisdictions enlisted these regulatory networks, as well as key international organizations, such as the Organization for Economic Co-operation and Development and the International Monetary Fund, to advance new standards for income taxation, prudential regulation, and money laundering in offshore centers. By 25, offshore centers’ compliance with financial, regulatory, and money laundering standards was largely complete, while there was less success with income tax standards. The current financial crisis, however, has spurred renewed efforts, particularly with respect to the latter. An analysis of this experience suggests that the new paradigm should view regulatory networks in the context of a complex system of states and international organizations that possess the qualities of such regulatory networks. A system of global governance that includes both regulatory networks and these international organizations advances fairness and objectivity and, in particular, may protect weak states from the coercive power of the stronger

Terrorism Financing Indicators for Financial Institutions in the United States

At least since the Financial Action Task Force (FATF) first published its Forty Recommendations, financial institutions in FATF-compliant jurisdictions have been required to implement preventive measures that require FIs to identify customers, establish client profiles, monitor for unusual transactions, review those transactions to see if there was suspicion that they involved the proceeds of crime and, if so, report the transaction to the authorities in the form of a suspicious transaction report (STR). When these requirements were first established, neither financial institutions nor their supervisors/regulators had much experience as to what in a client\u27s profile and the client\u27s patterns of transactions might indicate money laundering. However, based on an expanding knowledge of how criminals tend to launder their money, over time financial institutions have developed increasingly effective detection and reporting systems. By studying known examples of laundering, the FATF, FATF-Style Regional Bodies, and national competent authorities (especially financial intelligence units) have identified patterns or indicators of possible money laundering, and made them available to financial institutions as money laundering typologies. In addition, there has been some feedback from financial intelligence units and other competent authorities to financial institutions with respect to their anti-money laundering programs. Using these sources, financial institutions have been able to develop systems to help them determine which transactions carry a materially greater risk that laundering is involved

On the Use and Abuse of Standards for Law: Global Governance and Offshore Financial Centers

Current trends in international legal scholarship have shifted from a paradigm of state actors working within recognized sources of international law to one that includes networks of domestic regulators that develop and implement best practices or standards on a global basis. The new paradigm can be seen in operation in the efforts by onshore jurisdictions (most of which are financial centers themselves) to restrict the activities of offshore financial centers. Onshore jurisdictions enlisted these regulatory networks, as well as key international organizations, such as the Organization for Economic Co-operation and Development and the International Monetary Fund, to advance new standards for income taxation, prudential regulation, and money laundering in offshore centers. By 25, offshore centers’ compliance with financial, regulatory, and money laundering standards was largely complete, while there was less success with income tax standards. The current financial crisis, however, has spurred renewed efforts, particularly with respect to the latter. An analysis of this experience suggests that the new paradigm should view regulatory networks in the context of a complex system of states and international organizations that possess the qualities of such regulatory networks. A system of global governance that includes both regulatory networks and these international organizations advances fairness and objectivity and, in particular, may protect weak states from the coercive power of the stronger

Introduction: Capitalizing on the Success of Entrepreneurship: IPOS, Private Sales, Tax Aspects, Residual Interest of Entrepreneurs after Sales of IPOS

Panel discussion on Capitalizing on the Success of Entrepreneurship: IPOS, Private Sales, Tax Aspects, Residual Interest of Entrepreneurs after Sales of IPOS from the The Canada-United States Law Institute Conference on Comparative Legal Aspects of Entrepreneurship in Canada and the United States - Cleveland, Ohio April 13-14, 2007

Tryst or Terrorists? Financial Institutions and the Search for Bad Guys

Under international standards, financial institutions are required to freeze the accounts of customers identified by government as terrorists or the supporters of terrorism. Financial institutions are also required to monitor client transactions to determine if they suggest terrorism financing. However, financial institutions have been given little guidance as to when a pattern of transactions might suggest terrorism financing. By outsourcing the identification of such patters to financial institutions, governments have abdicated their responsibility and reduced the availability of financial services for clients who fit a popular but inaccurate profile of a terrorist

Terrorism Financing Indicators for Financial Institutions in the United States

At least since the Financial Action Task Force (FATF) first published its Forty Recommendations, financial institutions in FATF-compliant jurisdictions have been required to implement preventive measures that require FIs to identify customers, establish client profiles, monitor for unusual transactions, review those transactions to see if there was suspicion that they involved the proceeds of crime and, if so, report the transaction to the authorities in the form of a suspicious transaction report (STR). When these requirements were first established, neither financial institutions nor their supervisors/regulators had much experience as to what in a client\u27s profile and the client\u27s patterns of transactions might indicate money laundering. However, based on an expanding knowledge of how criminals tend to launder their money, over time financial institutions have developed increasingly effective detection and reporting systems. By studying known examples of laundering, the FATF, FATF-Style Regional Bodies, and national competent authorities (especially financial intelligence units) have identified patterns or indicators of possible money laundering, and made them available to financial institutions as money laundering typologies. In addition, there has been some feedback from financial intelligence units and other competent authorities to financial institutions with respect to their anti-money laundering programs. Using these sources, financial institutions have been able to develop systems to help them determine which transactions carry a materially greater risk that laundering is involved