Cleaning up dirty money

By Dr. D.C. Jayasuriya LLB. PhD., Attorney-at-Law

The 1988 United Nations Convention Against Illicit Trafficking in Narcotic Drugs and Psycho tropic Substances ('the 1988 Convention') has sharpened the focus on tracking down and seizing 'dirty money' generated by (drug-related criminal activities. It was the expectation of the architects of the 1988 Convention that by making it more difficult for criminals to have access to ill-gotten wealth they will be less motivated to engage in such activities. While it is difficult to quantify, it is estimated that the annual turnover of the illicit drug industry reaches a staggering US$500bn.

Control over laundering

Control over money laundering is one of a package of measures prescribed by the 1988 Convention to minimise the incidence of illicit drug production and trafficking. The principles and provisions relating to money-laundering control underlying the 1988 Convention have been further reinforced by the 1990 Council of Europe Convention on Laundering.

Search, Seizure and Confiscation of the Proceeds from Crime; the recommendations of the Financial Action Task Force on Money Laundering .set up by the G-7 Heads of State and Finance Ministers at their July 1989 Economic Summit; the 1994 Naples Political Declaration and Global Action Plan Against Organized Crime; and several conventions and resolutions of bodies of the United Nations and various geopolitical groupings.

Over 30 countries now have legislation to make money laundering a criminal offence; penalties range from imprisonment (up to 50 years in the case of Colombia, for instance) to the confiscation of property.

Many more countries, including India, where several eases under the Hawala system (alternative remittance scheme involving foreign currencies) are pending before the courts, are now formulating more comprehensive anti-money-laundering laws.

Bilateral agreements to facilitate mutual legal assistance, including the exchange of banking information and extradition, are also being negotiated in different parts of the world. The Criminal Justice (International Co-operation) Act 1990 of the UK and the Commonwealth Scheme3 including model legislation, have been particularly helpful in this process.

The Caribbean and Asian regional Financial Action Task Forces have sought to stimulate legislative developments within the respective regions, as well as to foster closer cooperation with countries outside the regions. The UN International Drug Control Programme recently launched a new global programme to assist countries in dealing with money laundering.

Difficult and frustrating

One of the most difficult and frustrating tasks faced by fraud investigators and criminal prosecutors is to track down the movement of funds and to identify the culprits. The complexity of the situation was once neatly described thus by an experienced prosecutor from the Serious Fraud Office in the UK.

'The modern criminal exploits territorial and jurisdictional boundaries; he may commit crimes and cause loss simultaneously in different jurisdictions and launder his profits through many more. He may then escape justice altogether by fleeing to another which permits no extradition, keeping his funds hidden from his victims. Even within the Commonwealth we are finding that arrangements made 20 years ago are becoming out of date. They were not designed for a world where money can pass untraceable through ten banks in as many minutes and where 200 limited companies are formed in a day, and sold the next, by one agent on one island4.

Any covert crime is difficult to investigate using traditional police methods and exercising traditional police powers. It is even more difficult when the proceeds of crime can change swiftly and often anonymously, hardly leaving behind a paper trail. The Chief of the Money Laundering Section of the US Department of Justice observed in 1993 that:

Probably the biggest challenge for law enforcement in combating money laundering is the fact that the money launderers are so adaptable and so quick at developing new methods. The sophistication of some of the major money laundering operations... is staggering. These operations are as well organized, equipped and efficient as major Fortune 500 companies. Moreover, they appear, to be tightly controlled by a few major players who are able to control their practices. This allows the money launderers to respond quickly to law enforcement activities5.

The three stages

Laundering basically involves three stages - placement, layering and integration. These stages can be described thus:

o Placement: the physical disposal of cash, being the proceeds of crime by depositing it with a financial institution;

o Layering: the process of transferring these funds among various accounts through often complex transactions so as to disguise the money trail;

o Integration: the actual shifting of funds to legitimate individuals or organisations with no apparent links to the criminals or to the activities from which the funds were obtained.

Each of the above stages involves complex covert activities well orchestrated by a number of institutions and individuals. Where necessary, recourse is had to violence, including blackmail and murder, the manipulation of banking records and even the destruction of office complexes where documents are stored.

Systems to combat money laundering are difficult to build up, operationalise and sustain. Based on the experience of one country (Canada) it has been rightly observed that: Legislation alone, good police work alone, adequate police powers, an intelligence analytical capability, international agreements, witness protection schemes, financial business cooperation, funding for forensic expertise, and asset management (and) sharing mechanisms will each prove insufficient unless these enabling tools are all in place and operating in unison8.

Given the complexity of dealing with money laundering - involving as it does an extensive network of financial institutions spread across several continents and subject to varying degrees of monetary controls and different arrangements for mutual legal assistance - a package of legislative and quasi-legislative measures will be required to provide the necessary basis for action at the national, regional and international level.

Some countries have taken concerted measures to develop a comprehensive set of regulatory instruments. Australia, for instance, adopted, within a short span of time, the following pieces of legislation:

- Proceeds of Crime Act 1987;
Mutual Assistance in Criminal Matters Act 1987;
Telecommunications (Interception) Amendment Act 1987;

- Cash Transaction Reports Act 1988; and

- Extradition Act 1988.

The implementation of these laws is facilitated by bilateral agreements negotiated with a large number of countries, the creation of informal working mechanisms, training of law enforcement officers and those working in banks and related financial institutions, and continuous monitoring of the system .

These laws provide for a comprehensive range of control measures. Besides investigations conducted by law enforcement agencies, Australia has appointed various Royal Commissions of Inquiry to report on corrupt practices. The adoption of all these measures does not necessarily mean, however, that Australia's experience in dealing with drug trafficking is an unqualified success story; indeed there have been calls9 for a fundamental reassessment of the overall strategy, particularly with regard to sentencing policies.

Voluntary codes of conduct

Apart from national legal controls voluntary codes of conduct are also in place in some countries to deal with the problem. The 1994 voluntary code of practice in British casinos, for instance, requires staff to alert the National Criminal Intelligence Service to any unusual or suspicious transactions. With chips being available for a six-figure sum in certain clubs, criminals are prepared to run the risk of gambling by exchanging the proceeds of criminal transactions for chips. Some laws providing for asset forfeiture extend even to profits obtained by speculating with funds obtained by fraud. A recommendation for law reform on these lines was made, for instance, by the Scottish Law Commission in its 1994 Report on Confiscation and Forfeiture.

The formulation and implementation of legislative measures dealing with money laundering and related problems have not been without problems. In some countries the drafting process has become far too tedious, cumbersome and time-consuming because of the absence of political will, conflicts of interest and lack of consensus. The development of bilateral agreements has been hampered by geopolitical differences, particularly with regard to the links between drug trafficking and arms smuggling. But despite differences, some countries have nevertheless made impressive progress. A good example is the regular Indo-Pakistan bilateral discussions which have now extended even to discussions on border trafficking in precursor chemicals. Constitutional law issues still tend to loom large in some jurisdictions. Problems created by new legislation dealing with human rights on existing laws are exemplified by the case of Hong Kong. With the coming into force of the Bill of Rights Act 1991, courts have the power to declare as repealed any statutory provisions inconsistent with it Among the provisions subject to attack is the one in the 1987 Act conferring the power on the Independent Commission Against Corruption to compel the production of documents and to answer questions (the failure to produce documents or to answer questions is a criminal offence punishable by a fine and/or imprisonment) and to make such answers admissible in a criminal trial against the defendant even if he or she has not had the benefit of a caution.

Studded with pitfalls

While the stage is set for a more concerted global effort to combat money laundering, it must nevertheless be recognised that the road ahead is studded with pitfalls. The emerging economies in the Central Asian Republics, Russia, Eastern Europe, Latin America and some Asian countries are posing problems. Another problem area pertains to the competing concessions being offered by countries that have created free trade zones and off-shore banking facilities.

For the group of countries that is moving away from a centrally planned economy to a potentially more vibrant free market economy with banks and similar establishments being able to deal with a range of foreign currencies, the requirements of anti money-laundering schemes can pose a major difficulty, not only in terms of the attitudinal changes that are necessary but also in relation to the skills required to verify the legitimacy of transactions. Constraints on the inflow of cash to deal with liquidity problems are seen as potential barriers to fiscal and banking reforms. With the gradual removal of travel restrictions accompanied by new and often informal contacts with the outside commercial world, there is a greater degree of flexibility for the nationals of these countries to operate outside standard norms and accepted practice with impunity. Privatization programmes permitting the creation of new banking and financial institutions or their adaptation by injecting new capital with new management have also created problems in some countries. In Russia, for instance, it is estimated that criminals control 81 per cent of the voting shares in privatised enterprises12 and that one third of new private entrepreneurs are linked to the drug trade. Political instability, corrupt administrators and politicians, inflation and unemployment are among the factors that facilitate the emergence of 'parallel' for unregulated lending and investment markets, providing a safe haven for money laundering. There are many countries on the world map that fit this profile.

Attractive concessions

In the wake of the new WTO trade regimes, general recession and adverse balance of payment conditions, some developing countries are now offering more attractive concessions to foreign investors. These concessions tend to go beyond the traditional limits of requirements for business and extend to the purchase of property, vehicles, helicopters, yachts etc. for the personal use of the expatriate business community. There is an increasing tendency to simplify controls and paper work and also to exclude customs surveillance of imports for and by Foreign investors.

As more and more countries now tighten their legislative controls to deal with money laundering, there are unrelated parallel developments that tend to offer newer opportunities of defeating these controls ostensibly through legitimate means, offered sometimes by the very governments that are committed to the international obligations to combat money laundering.

Given the need for competing demands of foreign investors and the need to accelerate the pace of market economy reforms, solutions must be found to minimise the opportunities for money laundering.

Financial institutions' help

Financial institutions with a good track record of dealing with money laundering controls need to assist the countries that are reforming their economies so that the necessary controls and safeguards can be built into the new systems as these evolve and the staff can be provided with the necessary training and skills required to operate anti-money laundering systems.

Bilateral and multilateral financial assistance schemes can also provide for matters relating to mutual legal assistance so that the recipient countries will be required to create and enforce such systems and co-operate with the international community of nations.

A code of conduct on foreign investments, with ethical standards and accepted bench market limits on incentives, privileges and concessions is another possible solution. The development of such a code must involve ministers of finance and trade as well as leading actors in multinational investments. A code that is adopted at the international level must become part and parcel of national foreign investment packages and should be binding on all current and prospective investors.

Controlling money laundering has never been easy, nor will it become easier14. Legislation is only a part of the package of measures required to combat money laundering; it is a myth to assume that through legislation alone money laundering can be curbed.

However, given the political will; greater determination to introduce and maintain systems of good governance; an environment that facilitates the integrity of financial institutions and their staff; and effective international cooperation on law enforcement matters, more progress can surely be made.

Postal bill to parliament

The long awaited Postal Bill is expected to be presented in parliament next week.

Public Enterprise Reform Commission (PERC) Director General, Mano Tittawella told The Sunday Times Business that the Postal Bill would be presented on June 22.

A comprehensive postal reform programme has been developed with assistance from the Universal Postal Union and the World Bank.

Under the programme, the Postal Department will be restructured into a dynamic, independent entity operating on commercial principles. In addition, other activities relating to network rehabilitation, institutional development and operational improvement will also be undertaken. The project is estimated to cost around US$ 46 mn of which US$ 37 mn is funded by the World Bank.

Despite recording a Rs. 1.9 bn revenue in 1999, the postal department posted an operating loss of Rs. 212 mn. The department made an average loss of over Rs. 4 bn over the last ten years.

The department's inefficiencies over the years saw its lucrative business mail (75%) moving towards private courier operators. Businesses even courier their ordinary letter mail due to postal delays.

Though an ordinary letter cost Rs. 3.50, the business mail used to subsidise the additional cost incurred to despatch mail and maintain post offices islandwide.

De-regulating the postal service would legalise private courier services and enable private companies to provide postal services.

However, the monopoly on ordinary letter services will be maintained by the state. Parcels and other mail will be allowed for private participation.

The project would also upgrade 54 post offices by establishing modern services like fax, photocopy, email and internet services. Presently, a few post offices have installed a Reuter terminal as a means of promoting the stock market.

An independent board will be set up under the new Act. The management would be required to draw up its own business plan and source vital financing from the banks, based on their projected cash flow. With more than 17,000 employees, a voluntary retrenchment scheme is also on the cards.

The corporation would not be listed, as the government believes in providing universal services.

However, in developed markets like Holland the postal department is listed on the Exchange.

Corporate round up

Two of Sri Lanka's blue chips recorded their best ever performance in the financial year 2000 in a gloomy economic environment.

John Keells Holdings and Aitken Spence and Company Ltd recorded their highest growth figures during this period.

However, other blue chips such as Richard Pieris and Co. Ltd and Hayleys Ltd recorded a dip in profit after tax. Sri Lanka had a moderate growth of 4.3 per cent in 1999 compared to 4.7 per cent in 1998.

JKH

John Keells Holdings turnover increased 10.7 per cent to Rs. 10.46 bn for the financial year 2000. Profit after tax increased 31.5 per cent to Rs.

1.18 bn. "To maximise productivity, we have not only to do things better but also to do better thing," JKH Chairman, Ken Balendra told shareholders. The company's involvement in the privatisation of the Colombo port and rapid expansion of software exports by the information technology sector of the group are examples of this.

"We have successfully ventured overseas with the purchase of two island resorts in the Maldives. The time is opportune for us to pursue further business opportunities in South Asia," Balendra said. "In the domestic arena we are looking at possible mergers and acquisitions to achieve economies of scale and increase market share," he said.

Aitken Spence

Meanwhile, Aitken Spence and Company Ltd recorded profits of Rs. 494 mn in the financial year 2000 — a growth of 27.6 per cent. The company's dollar linked revenue was around 75 per cent of the total revenue earned. Earnings per share was Rs. 13.28 and Return on Capital Employed was 10.1 per cent.

"The upward trend in tourist arrivals made the year under review the best for the tourism sector of your company," Chairman, Aitken Spence and Company Ltd, R Sivaratnam told shareholders.

The major contributor to revenue was the tourism sector which achieved 63 per cent of total revenue. The cargo logistics sector contributed 17 per cent and the manufacturing sector 15 per cent. However, profits in the cargo logistics sector remained flat.

Aitken Spence and Company have formed two companies to undertake power projects in Anuradhapura and Matara. The company's third resort in the Maldives will also be operational in June 2000.

Hayleys

Hayleys Ltd's turnover increased 6 per cent to Rs. 9 bn in the financial year 2000, while profit after tax fell 7 per cent YOY to Rs. 644 mn. "A strong Sri lankan rupee relative to the East Asian Currencies continued to exert pressure over our exports as much of our competition comes from that region," Chairman, Hayleys Ltd, Sunil Mendis told shareholderds.

Rubber gloves and activated carbon were the areas most seriously affected. Meanwhile, exports of coir products too were adversely affected by the appreciation of the Rupee against the Euro. Increases in freight rates to Europe and USA made conditions even more difficult for these businesses.

Despite these difficulties, the Haycarb Group (the groups coir business) and Dipped Products Group added significantly to the groups results. "The focus this year will remain on consolidation of activity, improvement of productivity and cost reduction," Mendis said.

Richard Peiris

Richard Peiris and Company Ltd's (RPC) turnover increased 5.1 per cent YOY to Rs. 2.6 bn in the financial year 2000. Profit after tax fell 25.5 per cent to Rs. 233 mn. "The significant loss in the new resin rubber shoe soling sheet project in the first year of commercial operation and eroding profitability in most rubber good exporting companies resulted in a decline in overall profitability," RPC Chairman, Henry Pieris told shareholders. "Conversely most of the other sectors registered improved performance to counter the imbalance to some extent," Pieris said.

The company's rubber sector registered mixed results in the back drop of severe price competition from other rubber goods producing countries. The rubber matting and flooring business continued to register volume growth while the tyre sector dominated the tyre rebuilding industry recording growth in sales volume and market share. However, the financial sector under performed due to depressed market conditions.

"The group will actively pursue its policy to consolidate rationalize and develop existing business while investing in selective high growth areas which have synergy with core activities," Pieris said.

Retailing centres will be developed in Battaramulla and Dehiwala. The tyre retreading sector will be reinforced by the commissioning of a pre-cured tyre rebuilding factory in Pallakelle.

Designer labels dress the boutique

Odel added another popular international brand to its collection of designer clothing and accessories with the launch of designer Kenzo's range of men's shoes.

This is a collection of men's footwear from the world famous international design house in Paris- Kenzo, a release said.

The range depicts the Japanese designer's exotic and fun designs that made him a star from his Paris debut in 1964 to his last collection.

Kenzo is the second prestigious label to join the fast expanding designer collection of footwear at Odel. The Calvin Klein Selection was launched in May this year. Both these world-renowned collections are from the very latest Summer 2000 range. Odel is the first retail store which has been given the franchise to sell these designer labels in Sri Lanka.

Odel which has taken the initiative in making designer fashion labels available to the Sri Lankan market has plans of getting more designer selections in the near future

Takada Kenzo was well on his way to becoming world famous by the 1970s after selling some of his earliest work to Feraud and then working as a freelance designer in France to where he migrated from his country of birth, Japan. During this time Kenzo opened his first boutique, called "Jungle Jap".

He explored the world's richly diverse cultures and like a tourist recording his travels, he presented collections that were snapshots of the colourful journeys he had taken. His clothes were exotic and fun, but maintained its "ethnic but utterly modern" look he created. This was his trademark which helped him become a globally accepted designer which saw world famous personalities from Japan to Hollywood adorn his creations.

Elpitiya IPO soon

Twenty percent of the long over due Elpitiya Plantations Limited (EPL) will be up for grabs at Rs. 10 in the course of next month. PERC officials did not disclose the underwriters to the issue.

Recent plantation IPOs have not performed well due to the lull in the Colombo bourse and hence industry officials feel that EPL might be priced below its potential.

In addition, given the present market condition industry officials expect a similar situation with the present IPO, as in the previous IPO this year.

However, EPL overall is a healthy plantation, comprising of 14 viable tea, rubber and oil palm estates cultivated in a total area of 6,000 hectares.

The EPL IPO, was initially scheduled to be sold last year, was put off due to human constraints and dull market conditions, along with other plantation IPOs.

However, as the IPOs are already long overdue, PERC will put out the remaining two plantations - Maturata and Pussellawa for sale once their pending court cases are resolved.

Previously, 51 per cent of EPL was sold at Rs. 30.25 to its present management company, Aitken Spence Plantation Management Limited (ASPML) in July 1997. ASPML is a consortium, comprising of Aitken Spence & Company Limited, MJF Holdings Limited, Tea Plantation Investment Trust Plc. and Mr. D A de S Wickremanayake.

Malwatte, with its mixture of estates incurred a loss of over Rs. 4 million for the first six months of the last financial year.

However, it recorded a over Rs. 31 million profit in the financial year 1999.

Fact File

Share ownership

Entity %

Aitken Spence & Co. Ltd 38.97

MJF Holdings Limited 32.86

Tea Plantation Investment Trust Plc. 11.74

Mr. D.A de S Wickremanayake 16.43

Land Under cultivation

Tea 3009

Rubber 2515

Oil palms 269

Other 156

Uncultivated 1995

Balance Sheet Rs (000)

Fixed assets 1,261

Total assets 1,464

Total liabilities 1,115

Share capital 200

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