Cleaning up dirty money

Cleaning up dirty money

Indonesia, which has so far been ranked among the most corrupt
countries in the world, has now gained notoriety as a suspected
conduit for money laundering. This is defined as the processing,
through the banking system, of the proceeds of crime, in order to
disguise their illicit origin.

The Paris-based Financial Action Task Force (FATF), an agency
set up in 1989 by 29 developed countries to wage an international
crusade against money laundering, added Indonesia last week to
its blacklist of jurisdictions considered uncooperative in the
crusade against money laundering.

There is no hard figure for the amount of illicit cash pumped
through bank accounts by the underworld, but FATF has estimated
it to be as much as US$1.5 trillion per year.

Intensive monitoring and investigation by international
agencies has revealed that money laundering is much more
widespread than previously thought: hitherto, it was seen as
something that involved only drug dealers and unknown banks in
banana republics located in tiny island states, such as those in
the Caribbean and in Latin America.

In fact, as a recent report by the Democrats in the U.S.
Senate disclosed, even a bank as well known as Citibank
(Citigroup) had, in its aggressive efforts to attract wealthy
customers in far-flung corners of the world, failed to crack down
adequately on money laundering. Citigroup subsequently admitted
its embarrassment over the failure, the report said, as quoted by
the Economist weekly news magazine in its mid-April issue.

Likewise, the object of laundering is no longer limited to
drug money, but also other ill-gotten gains obtained through
corruption and tax evasion.

Insofar as domestic transactions are concerned, Indonesia has
long been a haven for money laundering by residents, due to the
absence of any surveillance of bank transactions. One can deposit
or transfer any sum of money to or from one bank to another in
Indonesia without any questions being asked about the source of
the money. Even someone who brings in an unusually large sum of
bank notes for deposit to a local bank rarely raises any
suspicion. Bank staff seem afraid that by asking too many
questions, customers might take their money elsewhere.

Only transfers of foreign exchange or rupiah into or out of
Indonesia worth over $10,000 have to be reported each month by
commercial banks to Bank Indonesia. Even this compulsory
reporting requirement was enforced only last March, and was
designed purely for monitoring purposes, to help the central bank
design its monetary policies, and not to detect suspicious
transactions.

But Indonesia has now entered the spotlight, especially as the
international fight against money laundering has accelerated
since the establishment of FATF in 1989.

To be effective, the drive against money laundering should be
made world-wide because it has grown in parallel with the
globalization of the financial market. The blacklist issued by
FATF annually is a way of forcing countries to cooperate.

Blacklisted countries, especially flagrant offenders, could be
subject to vetoes on licenses for overseas outlets of their
banks, or entirely ostracized by the international financial
market.

Globalization has indeed allowed money to be shifted in
seconds between banks in different parts of the world, but it
also has created huge opportunities for crooks to hide or "clean
up" their money by shifting it around the globe.

Even though Indonesia has not yet been classified as a
flagrant offender, it is nonetheless encouraging to note the
quick and positive response from the government to the FATF
warning.

A money-laundering bill was submitted recently to the House
of Representatives, but it will take some time before entering
the statute book. But Bank Indonesia has just issued regulations
and guidelines on banking practices to curb laundering through
what is now internationally known as the "know your customers"
principle. The guidelines will help banks to detect any
suspicious transactions.

The focus on bank transactions is indeed the right approach,
because banks have widely been used as the main channel through
which crooks try to "clean up" their hot money. Private banking
has especially been targeted as a major laundering channel, as
some of the clients can be extremely wealthy people who want
their affairs to be handled very discreetly.

Banks should be forced to play a proactive role in rooting out
money laundering by drawing up guidelines or protocols in order
to establish a "know your customers" practice. This means that
the bank should find out who it is that wants an account before
he opens it, and where the money has come from and what will
happen to it, but all without violating banking secrecy and
breaching privacy.