Wednesday, January 09, 2013

Joel Slawotsky : " Rethinking Financial Crimes and Violations of International Law"

Joel Slawotsky, lecturer at the Radzyner School of Law, Interdisciplinary Center, Herzliya, Israel; and the Law and Business Schools of the College of Management, Rishon LeZion, Israel has written an excellent essay: Rethinking Financial Crimes and Violations of International Law.

(Pix from Financial Crimes, FBI Releases Annual ‘Report to the Public’, March 7, 2007)

The essay follows below.

Rethinking Financial Crimes and Violations of International Law
Joel Slawotsky

The question of whether corporations are liable for violations of international law is one of the critical questions concerning law and international business and is currently pending before the U.S. Supreme Court in the Kiobel suit. (Kiobel v. Shell: Litigation Documents, Law at the End of the Day, Sept. 25, 2012). The corporate liability issue developed in the context of claims filed pursuant to the Alien Tort Statute (“ATS”) alleging corporate liability for serious violations of international law. The Court may decide there is no corporate liability in ATS cases or to limit it based upon the doctrine of extraterritoriality.  (Jess Bravin, Justices Probe 'Alien Tort' Law, Wall Street Journal, Oct. 1, 2012). However, presuming the Court does in fact uphold corporate liability (or at a minimum allows liability where the principle of extraterritoriality is inapplicable), the question arises with regard to the parameters of such liability. Generally, corporations accused of violating customary international law are alleged to be complicit in various human rights abuses. Indeed, ATS suits - a primary mechanism by which corporations have been sought to be held accountable in the United States – typically allege corporate complicity in torture, displacement of villagers and non-judicial execution, slavery, war crimes and crimes against humanity. (The Alien Tort Statute, International Human Rights Clinic, Harvard Law School).

In contrast to human rights violations, courts have almost mechanically rejected financial crimes as predicate offenses; limiting the ATS’s scope to suits seeking compensation for personal injuries. (IIT v. VENCAP, LTD. 411 F.Supp. 1094 (1975) United States District Court, S. D. New York. November 26, 1975).  Commercial claims have not survived motions to dismiss for lack of subject matter jurisdiction as courts have held such conduct does not amount to violations of the “law of nations.” (ARNDT v. UBS AG, 342 F.Supp.2d 132 (2004), United States District Court, E.D. New York. November 1, 2004).  However, the time has arrived to re-think whether financial crime may constitute a violation of international law. Recent headlines and developments on global financial technology make this re-examination imperative. Global financial crime affects millions of citizens in devastating ways as well as millions of financial end-users (Libor’s Trillion-Dollar Question, Bloomberg (View), Aug. 27, 2012), causes billions if not trillions of dollars in losses, and enables rogue leaders to plunder national wealth and engage in severe violations of international law. (Libor’s Trillion-Dollar Question, Bloomberg (View), Aug. 27, 2012).

Whether we are talking about international drug gangs laundering their profits or rogue leaders looting their nation’s natural resource wealth or mass hunger resulting from the plundering of aid programs, financial crime is essential in advancing the conduct. Most nations agree that today’s vital issues include: global drug trafficking, empowerment of dictators and the looting of national wealth. What has been under appreciated is the role played by finance – in particular financial institutions – in helping perpetrate such conduct. While human rights abuses certainly violate international law, strong arguments exist for finding certain acts of financial crime – such as money laundering and corruption - violations of international law. There are two principle reasons. First, the effects on victims of financial crime are not soft core. To the contrary, the injuries can be severe such as mass starvation. In considering this point, one should note the number of people affected by such misconduct dwarfs the number of people who are victims of the traditional human rights violation.

Second, the financial criminal conduct also serves to facilitate the human rights abuses by empowering rogue regimes and allowing them to impoverish their citizens and commit violations of international law. The amount of money involved is staggering and literally hundreds of billions of dollars (Illicit Financial Flows from Developing Countries: 2001-2010: A December 2012 Report from Global Financial Integrity, REPORT HERE) has been taken out of such nations. The monetary gain the governments possess allows them to perpetrate and provides incentive to commit violations.

A. The Scope of Financial Venality

Recent admissions, settlements and investigations demonstrate widespread global racketeering and fraud engaged in by large global corporations more reminiscent of organized crime than of banking (Jessica Silver Greenberg, Regulator Says British Bank Helped Iran Hide Deals, New York Times, Aug. 6, 2012).  The financial institutional activity includes: admissions of price fixing (Barclays) (see Peter J. Henning, What the Barclays Settlement Means for Other Banks, New York Times, July 12, 2012), settlement of bid-rigging claims (J.P. Morgan) (see Eric Dash, JPMorgan Settles Bond Bid-Rigging Case for $211 Million, New York Times, July 7, 2011), confession of money laundering (HSBC) (Richard Blackden, HSBC's 'money-laundering' apology, Telegraph (UK), July 12, 2012),  and settlement of money laundering charges (Standard Chartered) (Jessica Silver Greenberg, , Regulator Says British Bank Helped Iran Hide Deals, New York Times, Aug. 6, 2012).

In Libya for example, an astounding sum of $200 billion was allegedly diverted by former leader Col. Khadafy into bank accounts, real estate, stock investments and businesses abroad. Paul Richter, As Libya takes stock, Moammar Kadafi's hidden riches astound, Los Angeles Times, Oct. 21, 2011). The investments were held in the name of the Libyan sovereign wealth fund (“SWF”) and other national institutions but as the rogue leader, Khadafy and his family considered and treated those assets as their own personal wealth. Financial crime undertaken by financial institutions aided and abetted this heist. The Libyan SWF is being investigated and attempts are being made to track down the plundered assets. (Joe Palazzolo, Libya Rebels Investigate Corruption At Sovereign Fund, Wall Street Journal, Aug. 25, 2011).  The asset transfer, investments and bank accounts were all accomplished by financial institutions who garnered large profits. It is difficult to believe these financial institutions and their compliance departments were unaware of the business and political relationship between Khadafy and the Libyan SWF.

B. The Severe Effects of Financial Crime

Fraud, money laundering and corruption can have devastating effects on society. In India, “350 million families liv[e] below India’s poverty line of 50 cents a day.” (Statement of Shri Montek Singh Ahluwalia, Deputy Chairman, Planning Commission (For the Press Conference on 3rd October, 2011)). While financial aid to lessen the poverty exists, this money has been siphoned off.

[A]s much as $14.5 billion in food was looted by corrupt politicians and their criminal syndicates over the past decade in Kishen’s home state of Uttar Pradesh alone, according to data compiled by Bloomberg. The theft blunted the country’s only weapon against widespread starvation -- a five-decade-old public distribution system that has failed to deliver record harvests to the plates of India’s hungriest. (Mehul Srivastava & Andrew MacAskill, Poor in India Starve as Politicians Steal $14.5 Billion of Food, Bloomberg, Aug. 28, 2012).

Often, governments and elites enjoy immense wealth while the pubic is in dire need of foreign financial aid. These resource rich nations are corruptly managed for the benefit of select elites who allow their nation’s infrastructure to decay, the health and education systems to be chronically outdated, and their citizen’s standard of living to languish. There are nations where the citizenry lies in poverty while their leaders invest abroad. Ironically, these nations are “rich” as proven by their SWFs, yet often receive international welfare. Algeria, Libya and Nigeria are all examples of nations receiving financial aid while simultaneously possessing SWFs.

Fraud and corruption also reduce the available number of skilled government workers, reduce tax compliance and revenues, cause government expenditures to be inflated, and results in wholly undemocratic ways of governance and doing business.

C. The Role of Financial Institutions

The endemic role of financial institutions in facilitating the financial interests of rogue nations and leaders is undisputable. Without such financial services, these regimes and leaders would not be in a position to allow mass incarceration, starvation, murder of political opponents or engage in acts designed to crush opposition. Revelations that large banking houses such have done business with rogue regimes is not surprising. (Jessica Silver Greenberg, Deutsche Bank’s Business With Sanctioned Nations Under Scrutiny, New York Times, Aug. 17, 2012).  Large profits can be made by working with, managing the assets of and providing financial services to rogue regimes. (Jessica Silver Greenberg, Regulator Says British Bank Helped Iran Hide Deals, New York Times, Aug. 6, 2012).  Fees and commissions can serve as a lucrative enticement to large financial institutions to do business with oil rich failed states, well-financed terrorists and cash rich drug cartels.

The potential profits serve as a keen incentive for global banking powerhouses to conduct business with rogue nations.
Since 2009, the Justice Department, the Treasury Department and the Manhattan district attorney’s office, working largely in concert, have brought charges against five foreign banks, contending they moved billions of dollars through their American subsidiaries on behalf of Iran, Cuba and North Korea, sponsors of terrorism and drug cartels. (Jessica Silver Greenberg, Deutsche Bank’s Business With Sanctioned Nations Under Scrutiny, New York Times, Aug. 17, 2012).
The specter of earning significant profits is powerful and can serve as incentive for financial institutions violate the law. “In 2007, Deutsche Bank decided to ‘not engage in new business with counterparties such as Iran, Syria and North Korea and to exit existing business, if any, to the extent legally possible,’ according to a 2008 securities filing.” (European Lenders Keep Ties to Iran).  However, working with and profiting from the business association is profitable and evidently an enduring relationship:
At least several European banks that vowed to stop doing business with Iran have kept handling billions of euros in transactions for Iranian entities and foreign companies with operations there, a review of regulatory filings and other documents by The Wall Street Journal shows.
Exact figures on the volume of transactions aren't publicly known, but the Journal's review shows that European banks have billions of euros in long-term trade-finance contracts in Iran. The dealings are a sign of Iran's continued access to the global financial system despite U.S. efforts to isolate Iran, and go against a perception among some observers that the banks have cut ties to Iran completely. (Ibid).
Fees can be quite generous as even modestly wealthy clients can generate large fees.  (Terence O'Hara and Carrie Johnson, Tax Shelter Cases Shed Light on Banks' Role, The Washington Post, Aug. 31, 2005). Deep pocketed and resource rich nations provide a source of lucrative and highly profitable clients. Indeed, the crooked leaders often amassed their fortunes by plundering their citizenry. The wealth is staggering and the fee generation possibilities tantalizing.

In Kenya, $4 billion disappeared during the presidency of Daniel Arap Moi’s 24 years in power…
The country’s Central Bank was looted, money was stolen by making fictitious payments on foreign debt, kickbacks were collected on all public contracts and when that didn’t supply enough cash, politicians awarded themselves phony contracts. (Corruption in Africa, Washington Times, Nov. 4, 2006). 

The same article relates that according to Transparency International’s former director Jerome Pope: The international banks, the western businessmen who bribe to get the contract, those who are in cahoots with all the millionaires, they are all up to their eyeballs in what is taking place. When it comes to moral standing, everybody belongs in the gutter together.

The United States Senate Investigations on financial crime is instructive. The investigation revealed a wide array of exemplars demonstrating the extent global financial institutions have aided and abetted plundering of national wealth. The Senate Report unequivocally states that banks are the facilitators of asset transfers and money laundering. In one example, a political strongman ruling of Equitorial Guienea transferred large sums out of the country. “[O]ver a two-month period in 2006, Mr. Obiang was able to move $73 million from Equatorial Guinea into the United States using wire transfer systems operated by Wachovia Bank; and over a four-year period from 2002 to 2006, he was able to move $37 million through wire transfer systems operated by Citibank.” Keeping Foreign Corruption Out of the United States: Four Case Histories, United States Senate Permanent Subcommittee on Investigations, Committee on Homeland Security and Governmental Affairs, Feb. 4, 2010.  As the Senate Report notes:

This case history shows how a controversial political figure, from the ruling family of acountry plagued by corruption, moved vast amounts of wealth into the U.S. financial system, by employing American professionals such as attorneys, real estate and escrow agents to help him bypass U.S. AML and PEP controls, and by taking advantage of U.S. wire systems unequipped to screen out high-dollar transfers sent by PEPs from high-risk countries. Over a four year period, from 2004 to 2008, Teodoro Obiang was able to move over $100 million in suspect funds into or through the US. financial system. (Ibid.).

Another section of the Senate Report had the following to add:

Federal law requires U.S. financial institutions to identify the name and address of the originator of each wire transfer, in part as an AML safeguard. Yet from 1999 to 2003, Bank of America allowed accounts for Pierre, Sonia, and Vincente Falcone to receive over $3.6 million in wire transfers from unnamed clients using accounts in such known secrecy jurisdictions as the Cayman Islands, Luxembourg, and Switzerland. From September 2001 to December 2003, the Monthigne account also received a series of payments from hidden “clients,” ranging from $100,000 to $400,000 at a time, most often from “one of our clients” using a UBS account in Singapore. In just over two years, the payments to Monthigne added up to nearly $2.5 million. (Ibid).

The investigation by the US Senate on relationship between financial institutions and former Chilean dictator, Augusto Pinochet is equally compelling.

Riggs Bank had secretly opened accounts for the former President of Chile, Augusto Pinochet, created offshore corporations for him, accepted about $8 million in suspect deposits, and secretly couriered millions of dollars in cashiers checks to him in Chile. In 2005, a supplemental report by the Subcommittee showed that Mr. Pinochet and his family members had opened a secret network of over 125 accounts under a variety of names at financial institutions operating in the United States. (Jonathan Kandell, Augusto Pinochet, Dictator Who Ruled by Terror in Chile, Dies at 91, New York Times, Dec. 11, 2006).

According to Senator Carl Levin, “Some banks actively helped him hide his funds, others failed to comply with U.S. regulations requiring banks to know their customers.”  Reuters, Chile’s Pinochet hid millions in secret accounts, Financial Times, March 16, 2005).

D. What Does International Law Say About Financial Crime

In recent years, the global community has commenced recognizing the significance of corruption, fraud and money laundering.

[I[t has become increasingly clear over the past year that the trend across the globe is toward criminalization of foreign bribery. The U.K. Bribery Act took effect in July. Russia recently passed an anti-bribery law; has ratified the U.N. Convention against Corruption; and is expected soon to accede to the OECD Anti-Bribery Convention. China, too, recently passed an anti-bribery law and is an observer at the OECD’s Working Group on Bribery. (Jonathan Cotten, The Foreign Corrupt Practices Act and Mobility, Mobility 65, 68 (Nov. 2012), (Quoting Lanney A. Breuer, Nov. 8, 2001 Speech American Conference Institute) http://mobility).

Misconduct of this genre is almost unanimously acknowledged as destructive and is condemned across the world. The struggle against financial crime is a global fight enjoying the support of the vast majority if not the unanimous agreement of civilized nations. As stated by the United Nations:

There is a collective responsibility now, worldwide, to track stolen money, to share intelligence… (United Nations Department of Public Information, News and Media Division, New York, Convention against Corruption ratified by 30th state, Will enter into force 14 december 2005, Press Release L/T/4389 (Sept. 15, 2005).

In commenting on the significance of the Anti-Bribery Convention, the OECD noted the international nature of the united front in the struggle against global financial crime:

[the] Anti-Bribery Convention [] provides the framework for a united stand against corruption by the international community (Bribery: Does the OECD convention work?,
OECD Observer, No 246-247, December 2004 - January 2005).
The globalized condemnation of financial crime did not arise without compelling reasons. In today’s interconnected financial markets, huge amounts of money can be moved instantaneously and the proceeds of misconduct can be safely stored in a far away land. Dictators and financial tyrants can loot their nation’s assets, pillage the national treasuries and impoverish the citizenry by diverting wealth abroad. Large global corporations can enable such misdeeds and can be enlisted by rogue leaders to launder money and facilitate transfers of wealth.

Moreover, fraudsters can engage in schemes with far reaching effects. Indeed, fraud can have global implications. As the United States SEC’s OIA states:

Technological advances have facilitated the movement of capital across borders and increased investment opportunities for investors. However, these same advances also have enhanced the ability of those who prey on investors to transfer assets abroad or base their scams and fraudulent activities overseas in an effort to avoid detection and prosecution. As a consequence, securities regulators and other law enforcement and governmental agencies may find that reliance on domestic enforcement abilities is no longer sufficient to combat cross-border securities fraud. Strong international cooperation is vital to the quick, effective and appropriate resolution of international enforcement investigations. U.S. Securities and Exchange Commission, International Enforcement Assistance Nov. 13, 2012. 

The effects of financial fraud can now be felt far and wide. Linked markets can facilitate contagion and the explosive rise in derivates can multiply the consequences of fraud many times over. Therefore, based upon the mutual interests of nations, states have banded together to condemn, criminalize, prosecute: fraud, money laundering and corruption, and to retrieve the ill gotten gains arising from such conduct.

The overwhelming international condemnation of financial crime is demonstrated by the numerous international conventions addressing such conduct. Some of these conventions are: The United Nations Convention Against Corruption; The OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions and the UN Convention Against Narcotics Trafficking.

Approximately 40 nations have signed the OECD Convention which obligates parties to enact laws making the bribery of foreign officials in international business and money laundering illegal. International cooperation on these issues is also a hallmark of the OECD Convention.

Another indication of the global condemnation of financial fraud is the World Bank Sanctions Board wherein parties found to have engaged in fraud are debarred from doing business with the World Bank as well as other developmental banks. (World Bank, Cross-Debarment Accord Steps Up Fight Against Corruption, April 9, 2010).  Recently, the World Bank decided to publish their debarment rulings. The decision itself to publish the rulings is significant and provides powerful evidence that the World Bank and the other development banks take financial crime very seriously. In the recently published decisions it is evident that the World Bank condemns financial crimes such as forgery, bribery and fraud.

Transnational money laundering is utilized to avoid exposure and is used to “launder” the assets into legitimate businesses or investments to enable the wealth to be used. Financial institutions are vital in the deployment of money laundering strategies. Sophisticated usage of offshore banking, wiring into shell companies, the ability to transfer assets with a mouse click and the wide array of investment possibilities make the transfer of ill gotten gains achievable. Governments all over the world have concentrated efforts at combating money laundering. States have recognized the global nature of the fight and it is well understood that unilateral efforts are not meaningful.

The FATF was founded by the G-7 in 1989 in specific acknowledgment of the international problem of money laundering. (FTAF, About Us).  While narcotics related activity was a factor, drug trafficking per se was not the sole motivating reason behind the G-7 action. The proximate cause was the apprehension that large movements of cash could endanger the stability of global financial institutions.

The FATF embraces a broad definition of money laundering:[...] any other crimes for which there is a link to narcotics, or, alternatively, to criminalise money laundering based on all serious offences, and/or on all serious offences that generate proceeds of or on certain serious offences.

The FATF extends the offense of money laundering from strictly narcotics related to non drug related activity. Money laundering is not merely bank enabled but applies to any financial institution. In addition, dubious activity warrants reporting and criminalized serious offences are determined by each country.

Across the globe, many nations have enacted specific regulations and laws criminalizing financial crime. The United States (US Dept of Justice, Foreign Corrupt Practices Act), the UK (Ministry of Justice, The Bribery Act 2010: Guidance)  and many other nations have established corruption laws. The OECD provides a comprehensive list of nations with laws implementing the anti-bribery convention. (OECD Anti-Bribery Convention: National Implementing Legislation).

China has laws criminalizing both money laundering (Anti-Money Laundering Law of the PRC, Feb. 11, 2011)  and corruption.  Chinese money laundering laws are similar to other nations’ and their bribery prohibition relates to both governmental and commercial bribery. Russian laws criminalize money laundering and comports with international standards of identifying customers, reporting suspicious activity and prosecution of offenders. (Money Laundering, Russia).

Israel has enacted anti-money laundering laws similar to international standards.  The law requires banks to “know their customer”, report suspicious activities and various civil and criminal penalties are available. Israel also criminalizes bribery. (PENAL LAW 5737-1977).

The Saudi Arabian Combating Bribery Law was issued in 1992 by the Council of Ministries.  The anti-bribery law outlaws to both public officials and private persons or companies in the capacity of bribe giver. The law prevents paying money or using intimidation or force to obtain a benefit. Violators risk both monetary penalties and imprisonment while government officials are to be fired. The ill gotten gains are to be impounded.

New Zealand is another example of a state with anti money laundering and bribery laws. Under New Zealand law, money laundering laws are also similar to the “international standard” with “know your customer” requirements, mandatory reporting of suspicious activity and civil and criminal penalties.

Financial fraud, money laundering and bribery impact the mutual interests of nations. For example, the United States SEC has enforcement and regulatory cooperation with numerous countries including: Canada, Chile, Germany, Israel, Italy, Norway, Portugal and the UK. (Securities and Exchange Commission, Cooperative Arrangements with Foreign Regulators, Nov. 29, 2011)  The SECs Office of International Affairs (“OIA”) cooperates with a “global network of securities regulators and law enforcement authorities to facilitate cross-border regulatory compliance and ensure that international borders are not used to escape detection and prosecution of fraudulent securities activities.” (Securities and Exchange Commission, Office of International Affairs, Nov. 13, 2012).

Significantly, in contrast to past examples of rogue leaders ransacking the national treasuries, there is now a concerted global effort at recovery of stolen wealth.
When other past dictators, such as Jean-Claude “Baby Doc” Duvalier of Haiti, fled their countries, they often retired in comfort, living off their plundered assets in French villas and estates. This time, the international community is working to ensure that such outrages are stories of the past. (Mark V. Vlasik  Op Ed: Getting Back the Bad Guy’s Loot, New York Time, Jan. 19, 2012).


Global financial crimes also have real world-wide implications: national impoverishment, empowerment of rogue leaders and drug cartel enrichment among others. The ability to launder money, transfer assets abroad and commit fraud is essential to the perpetration of these violations of international law. The vast majority of the nations of the world have concluded that it is in their self-interest to criminalize and sanction such conduct. Historically financial crime was not treated as a violation of international law. However, globalization, the ability to instantaneously transfer wealth, the enormous incentives to do business with nefarious elements and the devastating effects of financial crime militate in favor of re-evaluating this approach. Certain fraudulent acts have developed into violations of norms of international law and therefore, the ATS should provide for jurisdiction of such conduct.

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