The USA PATRIOT ACT in Fighting Foreign Public Corruption

I. INTRODUCTION: Corruption

Why Developed Countries Should Fight Foreign Public

During forty-two years Muammar Gaddafi was an authoritarian ruler of Lybia till mass appraisal occurred in February 2011 demanding democratic elections. In 2010 Lybia was rated 146th out of 178 possible by the corruption perception index launched by the Transparency International1. Wiki Leaks cable informed that Gadhafi's regime controls over $32 billion deposited around the world including hundreds of millions of dollars managed by several US banks2. When demonstrations in Lybia started, Switzerland ordered its banks to freeze any funds and assets belonging to Gadhafi3. Swiss government imposed the similar action against illicit deposits of Tunisian leader Zine Al Abidine Ben Ali and Egyptian dictator Hosni Mubarak4. These are the examples when assets forfeiture occurred after the corrupted officials were deprived of their power. Western governments, however, are reluctant to impose actions against illicit property of kleptocracs who are still remaining in office. This approach has to be changed, because revolutions obscuring dictators happen rarely.
1

Transparency International, Corruption Perception Index 2010, http://www.transparency.org/policy_research/surveys_indices/cpi/2010TI corruption index (accessed May 13, 2011) 2 Robert Windrem, Gadhafi controls $32 billion, turned down Madoff, diplomat wrote, http://openchannel.msnbc.msn.com/_news/2011/02/23/6115987-gadhafi-controls-32-billion-turned-downmadoff-diplomat-wrote (Feb. 23, 3011) 3 Samuel Rubenfeld, Swiss Order Freeze of Gadhafi Assets, http://blogs.wsj.com/corruption-currents/2011/02/24/swiss-order-freeze-of-gadhafi-assets/ (Feb. 24, 2011) 4 Ibid.

On the other hand, developing nations are the recipients of foreign financial aid, which comes from the developed countries. Only the US government spends annually $34 billion overseas5, including $900,000 financial aid for Lybia in 2010 6 and $514 million to Egypt. Developed countries contribute to the World Bank and International Monetary Fund, which are also important donors for developing countries. Money of American taxpayers often go to the nations, which are rich on natural resources and could be even wealthiest than the US if local kleptocrats would not consume everything. Nevertheless, the US and the EU financial institutions facilitate laundering billions of dollars by foreign corrupted officials. Public corruption is not only the problem of developing world it is the problem of developed countries and the problem of every taxpayer from the jurisdictions, which provide foreign financial aid. This paper alleges, that the US has the legal recipe for improving global efforts in prevention and fight against foreign public corruption. The USA Patriot Act, a law passed by Congress to prevent and fight terrorism and money laundering, has powerful provisions, which potentially can enhance the ability of developed countries to detect proceeds of illicit activities within their financial system an forfeiture assets of foreign kleptocrats. Additionally, the US anti-money laundering and anti-corruption efforts could be more efficient if (1) the US government statutory acknowledged the nexus between foreign public corruption and money laundering, and (2) Financial Action Task Force
5

FACTBOX: Facts about U.S. foreign assistance, http://www.reuters.com/article/2010/01/06/us-usa-aid-factbox-idUSTRE6054DT20100106 (Jan 6th, 2010)
6

Growing Criticism of U.S. Foreign Aid to Libya, http://video.foxbusiness.com/v/4606571/growing-criticism-of-us-foreign-aid-to-libya/ (Mar 24, 2011)

(FATF)7 would have enhanced the international cooperating for combating public corruption. The paper begins with explaining the nexus between money laundering and foreign public corruption. It then focuses on analyzing the Patriot Acts anti-corruption

provisions, that includes enhanced regulation of private banking accounts; criminal prosecution of foreign kleptocrats in the US; regime of primary money laundering concern; foreign assets forfeiture. The separate section of the paper is devoted to the explanation of the notion of correspondent banking, which is the core ground of Patriot Acts long-arm provisions. Finally, the paper outlines possible suggestions to improve the global anti-corruption regime on the base of the Patriot Acts long-arm provisions.

2. Symbiotic Relationship Between Corruption and Money Laundering:

A corrupted dictator needs a bank willing to hide the proceeds of illegal enrichment, it takes two to tango8.

A. Money Laundering Money laundering is the process of conversion or transferring proceeds of criminal activities to conceal the illicit origin of the property9. This process usually takes three phases: placement, layering and integration10. United States criminalized money laundering in 1986 by acknowledging the essential link between the drug trafficking and need to obscure illegal profits. War on drugs in the US caused creation of first antimoney laundering regime, which shortly became an international issue.
7 8

Intergovernmental body, which develops global anti-money laundering standards in financial sector Global Witness, Undue Diligence, 4, March 2009, (available at http://www.unduediligence.org/Pdf/GW_DueDilligence_FULL_lowres.pdf) 9 United Nations Convention Against Transnational Ogranized Crime, Art. 6 10 Peter Reuter & Edwin M. Truman, Chasing Dirty Money: The Fight Against Money Laundering, 3 (Institute For International Economics, 2004)

Due to rapid growth of a globalized economy, illicit financial flows can easily overcome country borders. As such, rigid international cooperation for fighting money laundering is essential. The leading intergovernmental body in developing international regulation standards against money laundering is FATF, which was established at G711 heads of state summit in 1989. Additionally, there are two intergovernmental treaties, which design the legal framework for international cooperation in preventing and fighting money laundering: (1) the UN Convention Against Illicit Trade in Narcotic Drugs and Psychotropic Substances (1988) and (2) the UN Convention Against Transnational Organized Crime (2000). There are internationally recognized five categories of predicate offences that trigger concealment of illegal funds: drug trafficking, other blue collar crimes, white-collar crimes, corruption, and terrorism.12 Since the 9/11s terrorist attacks the focus of world anti money laundering regime switched from the war on drugs to the war on terrorism. Alleging that money laundering provides financial fuel for terrorism, the Congress developed legal tools for blocking foreign dirty money flows through the US financial system. This example shows that by acknowledging a nexus between money laundering and underlying crime, jurisdictions can design more efficient policies in fighting the underlying crime itself. In October 2001, following the US proclamation of war on terrorism, FAFT adopted 8 special recommendations on terrorism financing. Stringent regulation of financial institutions became a weapon of global war on terrorism. Nevertheless, terrorism as a predicated crime composes the smallest scale of

11

Economic and political group of 7 developed countries (France, Germany, Italy, Japan United Kingdom, and United States) 12 Peter Reuter & Edwin M. Truman, Chasing Dirty Money: The Fight Against Money Laundering, supra, at 4

money laundering operations13 involving only tens or thousands of hundreds of dollars14. This is like a drop in the ocean comparatively to the $1.26 trillion of estimated illicit financial flows in 200815. The huge percentage of this dirty money derives from the developing countries with $725 - $810 billion of estimated average annual illicit outflows16. At the same time, corruption is the main underlying crime for money laundering in poor developing countries, which, conversely, are rich on natural resources. The developing nations wealth goes to the pockets of the kleptocrats and corrupted oligarchs, who are trying to hide the proceeds of their illegal enrichment in the reliable western financial centers. Predicate crime of bribery and corruption composes the large scale of illicit financial operations17 mainly affecting population of developing countries. Yet the corruption is a disease of developing nations, it also harms developed countries, which are transferring billions of taxpayers dollars of financial aid to the developing countries. Therefore, the official public acknowledgement of the close nexus between illicit financial flows and corruption is the important step of the global public policy in fighting money laundering. After the war on drugs and the war on terrorism, the world should begin the war on corruption.

B. Public Corruption Transparency International, a leading world think tank on the issues of corruption, defines corruption as the misuse of entrusted power for private gain 18. The UN
13

Peter Reuter & Edwin M. Truman, Chasing Dirty Money: The Fight Against Money Laundering, supra, at 41 14 Id. at 42 15 Dev Kar and Karly Curci, Illicit Financial Flows from Developing Countries: 2000-2009, http://www.gfip.org/storage/gfip/documents/reports/IFF2010/gfi_iff_update_report-web.pdf (Jan. 2011) 16 Id. 17 Peter Reuter & Edwin M. Truman, Chasing Dirty Money: The Fight Against Money Laundering, supra, at 41 18 Transparency International, FAQ About Corruption, http://www.transparency.org/news_room/faq/corruption_faq (accessed Apr. 11, 2011)

Convention Against Corruption (UNCAC) specifies this broad definition and distinguishes public and private corruption. Private corruption is bribery and embezzlement of property in the private sector19, while public corruption is bribery of national and foreign public officials, bribery of officials of public international organizations; embezzlement, misappropriation or other diversion of property by a public official; trading in influence, abuse of functions, and illicit enrichment. The core stone of public corruption is the notion of public official, which UNCAC defines as: (i) any person holding a legislative, executive or judicial office of a State Party, whether appointed or elected, whether permanent or temporary, whether paid or unpaid, irrespective of that persons seniority; (ii) any other person who performs a public function, including for a public agency or public enterprise, or provides a public service(iii) any other person defined as a public official in the domestic law of a State Party20. UNCAC primarily focuses on public corruption, which poses serious threats on the democratic processes in the developing countries. The most dangerous type of public corruption is grand (political) corruption - a misuse of entrusted power by political leaders taking place at the policy formulation end of politics21. In 2008, Global Integrity established the grand corruption watchlist of countries with high risk of theft of public resources. Lack of transparency in political financing, government accountability, and weak oversight over state-owned enterprises were three main criteria in placing jurisdictions to the grand corruption watchlist22. Algeria, Jordan, Liberia,

19 20

UNCAN, Art. 20, 21 Id. art. 20 21 Corruption glossary, http://www.u4.no/document/glossary.cfm#politicalcorruption (April 13, 2011) 22 Global Integrity Report: 2009, http://report.globalintegrity.org/globalindex/findings.cfm#WatchList (April 13, 2011)

Mongolia, Ukraine, and Vietnam joined in 2009 the initial WatchList launched in 200823. Grand corruption by kleptocrats becomes a key priority of the UNCAC treaty parties24. The US concern regarding foreign public corruption raised in 1977 with adoption of the US Foreign Corrupt Practices Act (FCPA), which criminalized bribery of foreign public officials by the American corporations. FCPA defines foreign official as "any officer or employee of a foreign government or any department, agency, or instrumentality thereof, or of a public international organization, or any person acting in an official capacity for or on behalf of any such government or department"25. The global community supported the US initiative by signing the OECD Anti-Corruption Convention in 1997, which

established penalties for domestic corporations that bribe foreign public officials. Next phase of the US anti-corruption efforts started with the Patriot Act26, which passed by the U.S. Congress on October 26, 2001, less then two months after the 9/11 attacks27. This Act provides additional legal tools for fighting foreign public corruption, though its main goal is to prevent and obstruct terrorism. Anti-corruption provisions are floating around different titles and sections of the Patriot Act. There are three types of anti-corruption tools, which could be distinguished within the Patriot
23 24

Id. David Chaikin & J.C.Sharman, Corruption And Money Laundering: A Symbiotic Relationship, 9 (Macmillan, 2009)
25

26

Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism 27 See 107 P.L. 56; PUBLIC LAW 107-56 [H.R. 3162], OCT. 26, 2001

Act:

(1)

enhanced

due

diligence

of

private

banking

accounts

maintained for non-US persons; (2) criminalization of foreign public corruption; and (3) long-arm regulation of correspondent banking accounts. Two of these tools are extending the US jurisdiction over

foreign individuals residing abroad that potentially raise risk of international conflict of laws. In next sections this paper will examine all three types of the Patriot Acts anti-corruption provisions and will analyze the legitimacy and reasonableness of extraterritorial reach of two of them.

3. Patriot Acts Anti-Corruption Provisions: Private Bankers of Foreign Kleptocrats The Patriot Act requires the US financial institutions to implement special due diligence against any private banking account that is required or maintained by, or on behalf of, a senior foreign political figure, or any immediate family member or close associate of a senior foreign political figure28. A private banking account is defined as an account or combination of accounts if (1) a minimum aggregate of funds deposited is not less than $1,000,000; (2) account is established on behalf of 1 or more individuals who have a direct or beneficial interest in the account; and (3) an employee of the financial institution is assigned to act as an liaison between the institution and owner of the account.29 Enhanced due diligence means, that banks have to
28 29

107 P.L. 56, 312(a)(i)(3)(B) 107 P.L. 56, 312(a)(i)(4)(B)

identify the nominal and beneficial owners of the private banking accounts opened for non-US person and ascertain source of funds deposited. Additionally, if the account is opened on behalf or for the foreign political figure, the financial institution has to detect and report any transactions that may involve foreign corruption.30 In 2004 a Permanent Subcommittee on Investigations issued a report on enforcement and effectiveness of the Patriot Act.31 The hearing mainly revealed that for more than decade Riggs bank, which used to be the banker for the US Presidents, provided private banking services for foreign corrupt officials. Disregarding ant-money

laundering regulations, Riggs bank served as a private banker for Augusto Pinochet, a Chilean military dictator. Close relationships between Riggs and Pinochet started in 1994, when the bank officials flew to Chile and suggested private banking services to Pinochet. 32 Subsequently Riggs opened several accounts for Pinochet in DC; moreover, the bank officials helped Pinochet to establish two offshore shell corporations, which then became the clients of the bank. As a result, Pinochet deposited around $8 million at Riggs private banking accounts.
33

Pinochet was not the only one foreign corrupt client of Riggs bank.
30 31

Another example of Riggs cooperation with foreign senior

107 P.L. 56, 312(a)(i)(3)(B) United States. Cong. Senate. Committee on Governmental Affairs. Money laundering and Foreign Corruption: Enforcement and Effectiveness of The Patriot Act. Hearing. July 15, 2004. 108th Cong., 2nd sess. Washington: Government Printing Office, 2004. 32 Id. at 4 33 Id.

corrupted officials is Equatorial Guinea, a poor African country reach on oil resources. Riggs opened and maintained 60 accounts and

certificates of deposits for the Equatorial Guinean government, its officials and family members, including wife and son of the President of the African country.34 The total amount of Equatorial Guinean funds deposited at Riggs bank rose to $700 million.
35

By providing services

to foreign kleptocrats, Riggs bank violated the Patriot Acts provisions. Upon identifying nominal and beneficial owners of the private banking accounts and ascertaining source of funds, Riggs should have reported to the agencies any suspicious transactions that could involve the proceeds of foreign corruption. Riggs failed to comply with anti-money laundering requirement simply because it was ignoring laws by suggesting private banking services to foreign kleptocrats. Riggs

didnt report about the suspicious source of money deposited at its accounts, but, conversely, assisted foreign corrupt officials to hide the proceeds of illicit activities. When Congressional investigation revealed Riggss obscene practices, the high civil monetary penalty was imposed on the bank, which, finally, was soled for a discounted price. Riggs case shows the effectiveness of the Patriot Act anticorruption provisions, which require enhanced due diligence on private banking accounts opened and maintained for non-US person. The Riggs case, however, indicates that enhanced regulation of private banking accounts solves only the problem only if the client is an
34 35

Id. at 5 Id. at 6

individual.

The incentives for a foreign senior corrupt official to open

an individual private banking account in the US are low, because kleptocrat can access the US system in a less risky way. There are a lot of fancy tools for a kleptocrat to hide its personality behind the veil of the network of complicated corporate structures, which are usually created just to conceal the real owner of the funds. If such a foreign corporation becomes a client of the US bank, the chances to reveal the corrupted beneficial owner of the account dramatically go down. Next section of this paper shows how foreign corrupt leaders may use the corporate entities to laundry proceeds of corruption to the US.

4. Criminal Jurisdiction Over Foreign Kleptocrats In 2004 a jury of San Francisco federal court convicted the former Prime Minister of Ukraine for corrupted conduct, which occurred outside of the US territory. The Patriot Act amended the US anti-

money laundering statute by including to the list of predicate crimes the offense against a foreign nation involving bribery of a public official, or the misappropriation, theft, or embezzlement of public funds by or for the benefit of public official.36 This provided a green light for the US government to prosecute Pavlo Ivanovich Lazarenko, a political leader from Eastern Europe. Lazarenko, during his service as a Prime Minister of Ukraine, engaged in numerous business relationships 37

36
37

18 U.S.C 1956 United States v. Lazarenko, 564 F.3d 1026, 4 (9th Cir. 2009)

requiring businesses to pay fifty percent of their profits 38 in exchange for providing favorable conditions for the business. For example, Peter Kiritchenko, a founder of the Agrosnabsbyt company dealing with agriculture and metals, transferred a fifty percent interest of

Agrosnabsbyt to the relative of Lazarenko and 50 percent profits to the Lazarenkos accounts39. To do any kind of serious trade one needed Lazarenko agreement, - testified Kiritchenko40. As a result of such

business deals, Lazarenko consolidated millions of dollars, which he kept in foreign banks and laundered across the world through off-shore accounts and shell companies. A natural gas company United Energy Systems of Ukraine, which was entitled to receive money from customers for gas delivery, transferred $140 million to Somolli, a Cypriot company41. accounts Somolli in then transferred Poland $97 and million the to

Kiritchenkos

Switzerland,

USA.42

Subsequently, Kiritchenko transferred $120 millions to Lazarenkos accounts in Switzerland and Antigua.43 Afterwards, Lazarenko

transferred 38 millions from these accounts to his account in the USA.44 As a result of these manipulations, Lazarenko deposited big stake of the proceeds of his corrupted activities to his accounts at the US banks.
38

Lazarenko worked with everyone 50-50, meaning that he would control 50% of the business and take 50% of the profits. 39 Lazarenko, 564 F.3d 1026, at 4 40 Id. 41 Id. at 7 42 Id. 43 Id. 44 Id.

After falling out of the president Kutchma favor, Lazarenko left Ukraine and was detained in New York JFK airport attempting to cross the US border with fake documents. The US Government alleged that Lazarenko misused his office to generate tens of millions for himself at the expense of the Ukrainian people and then sought to avail himself of the US banking system to safeguard his criminal

proceeds45. Though the misuse of office occurred in Ukraine and violated Ukrainian law, the jury charged Lazarenko with indictment of conspiracy, money laundering, wire fraud, and interstate

transportation of stolen property46. Lazarenko suggests a potentially powerful new tool to promote the rule of law abroad47, says Matthew J. Spence who alleges in his note that the US should prosecute corrupt foreign leaders in the US courts48. The efficiency of this legal tool in fighting foreign public corruption is doubtful though, because of the several reasons. Firstly, to prosecute corrupt foreign officials, the US government shall find grounds to establish jurisdictions over them. Generally, international law limits jurisdiction of the sovereign state to its territory and its citizens49. Principles of territoriality and nationality derive from the fundamental notion of sovereignty embedded into
45

US v. Lazarenko, SENTENCING MEMORANDUM; RESPONSE TO DEFENDANTS SENTENCING MEMORANDUM, August 18, 2006 (available at http://www.justice.gov/usao/can/press/press_documents/Lazarenko%20Sentencing%20Memo.pdf) 46 Lazarenko, 564 F.3d 1026, at 5 47 Mathew J. Spence, American Prosecutors as Democracy Promoters: Prosecuting Corrupt Foreign Officials in US courts, 114 Yale L.J. 1185, 1185 48 Ibid. 49 Restatement (Third) of Foreign Relations Law, 402 (1987)

the UN Charter, which states that UN is based on the principle of sovereign equity of all its members. Therefore, nations have to respect authority and interests of other nations. The international law, however, imposes different limits on the states exercise of its jurisdiction depending on whether it is jurisdiction to enforce or jurisdiction to prescribe50. Jurisdiction to prescribe indicates states power to regulate conduct, relations, status or interests of persons and things by enacting laws, regulations and rules.
51

Jurisdiction to

enforce (adjudicative jurisdiction) is ancillary to jurisdiction to prescribe52 and signifies states authority to compel compliance or impose sanctions for noncompliance with its administrative or judicial orders53. Restrictions also vary depending on whether adjudicative jurisdiction is conducted within civil or criminal procedure54. There must be satisfied two requirements for imposition adjudicative jurisdiction in criminal cases: (1) a person should violate the US law, and (2) a person should be in the court at the time the trial begins. 55 Before exercising adjudicative jurisdiction, the court has to prove that prescriptive jurisdiction exists.56 A state has jurisdiction to prescribe laws within its territory with respect to the (1) conduct, that wholly or in substantial part takes place within its territory; or (2) the status of

50 51

Restatement (Third) of the Law, 6 (2010) Id. 52 Restatement (Third) of Foreign Relations Law, 421 (1987) 53 Restatement (Third) of the Law, 6 (2010) 54 Restatement (Third) of Foreign Relations Law, 422 (1987) 55 Id. 56 Restatement (Third) of the Law, 6 (2010)

persons, or interests in things, present within its territory57; In Lazarenko case courts adjudicative jurisdiction derives from the states jurisdiction to prescribe that foreign corruption is a predicate crime of money laundering. The underlying crime occurred in Ukraine in violation of Ukrainian law, but this crime was an essential part of the money laundering offense, which involved transferring proceeds of corruption to the territory of US. Therefore, the conduct, in substantial part, takes place in the US. The US has criminal

jurisdiction to prescribe law with respect to foreign corrupt public officials, which transfer proceeds of their corrupted activities into, from or through the US. Criminal adjudicative jurisdiction, however, permits the court to try a person only if he or she is before the court at the time the trial begins. Lazarenko case is, in fact, a result of political circumstances, which caused the former Ukrainian Prime Minister to escape from Ukraine after derogating relationships with the president. Lazarankos run from Ukraine with fake Panamian passport and his attempt to illegally cross the US border provided ground for the US court to establish jurisdiction over the foreign public official. Lazarenko was before the court the trial began. The US government, however, has no authority to bring a foreign person to trial without his or her presence Therefore, Lazarenko case, when foreign corrupt leader becomes politically weak and escapes from his country, is rather an exception from general rule. Normally, the US courts have no criminal
57

Restatement (Third) of Foreign Relations Law, 402 (1987)

subject-matter (adjudicative) jurisdiction over foreign corrupt officials. Secondly, Foreign Sovereign Immunities Act of 1976 protects sovereigns and currently in power officials from judicial procedures in courts. To overcome the sovereign immunity protection, the US government has to prove that the foreign official violated international jus cogens law. Public corruption has not yet emerged to the level of peremptory norms of international law, which create universal

jurisdiction over foreign individuals committed such acts as genocide, slavery, piracy, crimes against humanity, etc. Thirdly, the prosecution of corrupted public foreign officials within the US jurisdiction is problematic because of lack of sources for evidence. Witnesses are usually residing abroad and could be also public leaders protected by the sovereign immunity. In Commodity Futures Trading Comn v. Nahas, the district court issued an order to the defendant, a Brazilian citizen residing in Brazil, to comply with the US subpoena, which Brazilian citizen ignored. Subsequently, the court froze the assets of Brazilian citizen, who appealed the decision for lack of subject matter jurisdiction. The court of appeal vacated the orders ruling that a service of process, within another sovereigns territory, violates international law58. The US court would violate international law by issuing subpoena on foreign citizens residing abroad to testify in the US. Foreigners are not obliged to comply with the US subpoena, unless the bilateral cooperation with foreign agencies and courts is established. Lazarenkos investigation in the US lasted for years, partly because Yuliya Tymoshenko, a leader of Ukrainian orange democratic revolution and the Ukrainian Prime Minister in 2007 2010, was one of the main witnesses in the case who was not willing to testify. The indictment of Lazarenko grounded mainly on
58

Commodity Futures Trading Comn v. Nahas, 738 F.2d 487, 494 (C.A.D.C. 1984)

banking records and testimony of Kiritchenko, a business partner of Lazarenko, who agreed to testify against the former Prime Minister of Ukraine. These considerations approve the Blake Pucketts statement that criminal prosecution of foreign corrupt leaders in the US courts is not an efficient tool in fighting foreign public corruption.59 5. Civil jurisdiction over foreign kleptocrats Civil penalties could be the alternative solution to the criminal prosecution of foreign corrupt leaders in the US. The major anti-money laundering and anti-corruption provisions of the USA Patriot Act are extending extraterritorially the US civil jurisdiction over foreign persons. International law imposes fewer restrictions on the civil adjudicative jurisdiction than on the criminal; therefore, long-arm civil provisions might be more efficient than long-arm criminal provisions. The Patriot Acts extraterritorial civil anti-corruption tools are embedded mainly in three legal constructions: (1) imposition on jurisdictions, financial institutions, or international transactions a regime of primary money laundering concern;60 (2)

extraterritorial subpoena;61 and (3) presumption that funds deposited into an account at a foreign bank, which has correspondent relationships with U.S. financial institution, shall be deemed to have been deposited into the interbank account in the United States.62 The first tool has features of the special economic sanctions against foreign
59

Blake Puckett, Clans And The Foreign Corrupt Practices Act: Individualized Corruption Prosecution in Situations of Systematic Corruption, 41 Geo. J. Intl L. 815, 825 60 107 P.L. 56, Title III, 311 61 107 P.L. 56, Title III, 319 62 107 P.L. 56, Title III, 319

institutions and jurisdictions, while other two provisions allow the US government to obtain information from foreign financial institutions and to forfeiture assets of foreign individuals deposited in foreign banks. All three tools are provided in Title III of the Patriot Act, which is mainly devoted to the international money laundering abatement and anti-terrorist financing. The Patriot Act alleges that money laundering provides the financial fuel that permits transnational criminal

enterprises to conduct and expand their operations63. Unlike FCPA, which focuses on the US corporations that bribe foreign politically exposed persons (PEP) institutions that
64

, the Patriot Act focuses on the US financial laundering proceeds of foreign illicit

facilitate

activities, including foreign public corruption. The Patriot Act alleges that foreign criminals are able to access the US financial system through correspondent accounts, which the US banks open and maintain for foreign banks65. Correspondent banking facilities create space for foreign banks manipulations and money laundering by hiding identities and real parties of interest to financial transactions66. Therefore, all three extraterritorial anti-money laundering legal

provision of the Patriot Act are based on the enhanced regulation of correspondent banking. This paper, firstly, examines each of the longarm civil anti-money laundering tools, and then provides the detailed explanation of the function of the correspondent banking, which is the
63 64

See 107 P.L. 56, Title III, 302(b)(1) Politically exposed person 65 See 107 P.L. 56, Title III, 302(a)(2) 66 107 P.L. 56, Title III, 302(a)(6)

core stone of anti-money laundering extraterritoriality in the Patriot Act A. Primary Money Laundering Concern: a Unilateral Economic Sanctions Regime The UN Charter permits its member-states to impose unmilitary measures when Security Council determines the existence of threat to the peace, breach of the peace, or act of aggression.67 The objective of these measures is to maintain or restore international peace and security.68 These measures may include complete or partial interruption of economic relations, in other words, - economic sanctions. While the UN Charter and other international treaties provide the legal framework for multilateral economic sanctions regime, the international customary law leaves space for jurisdictions to impose unilateral economic sanctions.69 Unilateral economic sanctions could be divided into (1) retortive measures, (2) counter measures and (3) punitive sanctions.70 The international principles of proportionality, discrimination and necessity are governing the unilateral economic sanctions.71 Firstly, before imposition of economic sanctions, a state has to assess whether desired effect of the economic measure proportionally corresponds to the required cost expenditure or potential cost losses.72 Secondly, the states has to be reluctant in applying broad economic sanctions against totalitarian society, where discriminating sanctions, like blocking assets of individuals and firms, could be more efficient.73 Thirdly, economic measure should reasonably relate to its main objective.74 Economic sanctions are measures against the threats to certain internationally
67 68

United Nations Charter, Art. 39, 41 Id. art. 39 69 Kern Alexander, Economic Sanctions: Law and Public Policy, 57 (Macmillan, 2009) 70 Id. at 60 71 Id. at 64 72 Id. 73 Id. 74 Id. at 65

recognized values or interests. It is a common practice for countries to impose economic sanctions against jurisdictions or persons, which conduct acts of aggression, crimes against humanity and human rights violations. The experience in taking economic measures against jurisdictions or persons practicing corruption or conducting money laundering is very low though and began in 2001 with FATFs blacklisting of noncooperative countries and territories. In section below there will be analyzed the role of FATF in developing the global anti-corruption regime. While FATF shows an example of multilateral sanctions against regimes involving money laundering and corruption, the Patriot Act permits the US government to take unilateral special measures against jurisdiction or institution of primary money laundering concern. In both situations, the main objective of the sanctions is to prevent and fight money laundering, but this indirectly effects corruption, which is one of the predicate crimes of money laundering. Section 311 of the Patriot Act (Section 311) grants authority to the U.S. Secretary of the Treasury (Secretary) to conclude, upon finding reasonable grounds, that a foreign jurisdiction, institution, class of transactions, or type of account is of primary money laundering concern.75 Such designation imposes on US financial institutions an obligation to take certain special measures against the primary money laundering concern.76 Factors, which should be considered by the government for defining a primary money laundering concern, are different with respect to institutions and jurisdictions. In finding reasonable grounds for a foreign jurisdiction, the Secretary must consider potentially relevant jurisdictional factors, such as: (a) evidence that organized criminal groups, international terrorists, or both, have transacted business in that jurisdiction; (b) the extent to which that jurisdiction or financial institution operating in that jurisdiction
75 76

107 P.L. 56, Title III, 311(a)(a)(1) Id.

offer bank secrecy or special regulatory advantages to nonresidents or non-domiciliaries of that jurisdiction; (c) the substance and quality of administration of the bank supervisory and counter-money laundering laws of that jurisdiction; (d) the relationship between the volume of financial transactions occurring in that jurisdiction and the size of the economy of the jurisdictions; (e) the extent to which that jurisdiction is characterized as an offshore banking or secrecy haven by credible international organizations or multilateral expert groups; (f) whether the United States has mutual legal assistance treaty with that jurisdiction, and experience of United States law enforcement officials and regulatory officials in obtaining information about transactions originating in or routed through or to such jurisdiction; and (g) the extent to which that jurisdiction is characterized by high levels of official or institutional corruption.77 In finding reasonable grounds to conclude that foreign institutions, transaction or account is of primary money laundering concern, Secretary has to consider institutional factors: (a) the extent to which such financial institution is used to facilitate or promote money laundering in or through the jurisdiction (b) the extent to which it is used for legitimate business purposes in the jurisdiction, and (c) extent to which such finding is sufficient to ensure that the purposes of the Banking Secrecy Act continue to be fulfilled, and to guard against international money laundering and other financial crimes.78 When the Secretary deems a jurisdiction or institution to be of primary money laundering concern, the Secretary imposes appropriate special measures, which will adequately address the money laundering risks. Among five special measures provided by Section 311, four require additional recordkeeping and information collection relating
77 78

107 P.L. 56, Title III, 311(c)(2)(A) 107 P.L. 56, Title III, 311(c)(2)(B)

to beneficial ownership, payable-through and correspondent accounts79.

The most

stringent fifth measure prohibits all U.S. financial institutions from opening or maintaining any correspondent or payable-through account for an institution defined to be of primary money laundering concern80. When selecting the appropriate measure, the Secretary has to balance the following specific factors: (1) whether similar action has been or is being taken by other nations or multilateral groups; (2) whether the imposition of a particular measure would create a significant competitive disadvantage for U.S. financial institutions or would have a significant adverse systematic impact on the international payment, clearance, and settlement system, or on legitimate business activities involving the particular institution, and (3) the effect of the action on U.S. national security and foreign policy. 81

A.1. Foreign Jurisdictions of Primary Money Laundering Concern Since the Patriot Acts enactment the U.S. government designated three jurisdictions to be of primary money laundering concern: Ukraine, Nauru, and Burma82. The US sanctioned the island of Nauru for providing licenses for offshore shell banks, which have no physical presence anywhere in the world83. Burma appeared to be a jurisdiction of primary money-laundering concern because it failed to establish effective and enforceable anti-money laundering regulations, which could help the country to overcome its status as a haven for international drug trafficking 84. Financial Crimes

79 80

107 P.L. 56, Title III, 311(a)(b) 107 P.L. 56, Title III, 311(a)(b)(5) 81 107 P.L. 56, Title III, 311(a)(a)(4)(B) 82 SECTION 311 - SPECIAL MEASURES, http://www.fincen.gov/statutes_regs/patriot/section311.html (Mar 30th, 2011) 83 Notice of designation, 67 Fed.Reg 78859,78861 (Dec.26, 2002) 84 Notice of proposed rulemaking, 68 Fed.Reg.66299,66300 (Nov.25, 2003)

Enforcement Network (FinCEN)85 imposed the most stringent fifth special measure on both Burma86 and Nauru87 prohibiting U.S. financial institutions from establishing, maintaining, administering, or managing correspondent accounts for or on behalf of financial institutions from these jurisdictions. The law enforcement requirement included restrictions on indirect correspondent accounts, meaning that foreign banks have to avoid establishing any interbank accounts for Burmese and Nauru banks under the threat to lose correspondent relationships with U.S. financial institutions. The treatment, however, of Ukraine was different. Ukraine suffers from widespread corruption, - begins the reasoning of FinCEN in finding 88 Ukraine to be a jurisdiction of primary money laundering concern. Additionally to the high level of corruption, the lack of access to information regarding account holders, use of anonymous accounts, and no legal requirement for domestic banks to identify beneficial owners caused Ukraine to be a target of Patriot Act. Unlike Nauru and Burma, Ukraine has softer record keeping and information reporting special measures. U.S. financial institutions were obligated to identify and record the nominal or beneficial owners of accounts (1) being held by anyone who has an address in Ukraine, or if (2) more than $ 50,000 was transferred from the U.S. account into an account in the Ukraine, or vice-versa89. The US imposition of the Patriot Act special measures against any foreign jurisdiction was positioned as part of an international cooperation. It was in response to the FATFs call to its members to take additional countermeasures with respect to the blacklisted jurisdictions90. The factor of taking similar measures by other nations or multinational groups seems to be crucial for
85

The authority of the Secretary of the Treasury under Section 311 of Patriot Act were delegated to the Director of FinCEN 86 Final rule, 69 Fed.Reg. 19093 ,19097 (Apr. 12, 2004) 87 Notice of proposed rulemaking, 68 Fed.Reg. 18917, 18921 (Apr.17, 2003) 88 Notice of proposed rulemaking, 67 Fed.Reg. 78859, 78862 (Dec.26, 2002) 89 Id. 90 FATF maintained the list of non-cooperative countries and territories

the US in designating jurisdictions to be of primary money laundering concern. The withdrawal of Ukraine and Nauru from the FAFT blacklist of non-cooperative countries, in 2003 and 2005, respectfully, was the core reason for the U.S. authorities to rescind 91 designation of these jurisdictions to be of primary money laundering concern. FATF excluded Ukraine and Nauru from the list of non-cooperative countries after they developed and adopted required anti-money laundering legislation. Burma remains the only foreign country subject to Section 311 provisions.

A.2. Foreign Institutions of Primary Money Laundering Concern FinCEN is more eager to impose special measures on foreign financial institutions, rather than on jurisdictions. Since late 2001, thirteen banks from around the world experienced the Patriot Acts long arm jurisdiction. Unlike with respect to jurisdictions, FinCEN designates institutions to be of primary money laundering concern without the prior similar actions taken by other nations or multilateral groups. The story of Banco Delta Asia, which is licensed in Macau - a special administrative region to China, shows a good example of Section 311 potential effect on worlds affairs. In September 2005, FinCEN publicly stated that for more than 20 years, Banco Delta Asia was providing financial services for North Korean clients engaged in illicit activities 92. Immediately upon the US agencys notice, approximately $40 million was withdrawn from deposit accounts in Banko Delta Asia.93 In response to the U.S. allegations, Macau authorities appointed an administrative committee, which temporally replaced the management of the bank94. Macau government retained independent accounting firms to investigate bank
91

Revocation of designation, 68 Fed.Reg 19071, 19071 (Apr. 17, 2003); 73 Fed.Reg 21178 21180 (Apr.18, 2008) 92 Notice of finding, 70 Fed.Reg 55214, 55215 (Sep. 20, 2005) 93 Id. 94 Final rule, 72 Fed.Reg 12730, 12733 (Mar. 19, 2007)

internal weaknesses regarding money-laundering accusations from U.S. authorities 95. As a result, over fifty North Korean accounts at the bank, including twenty accounts held by the state-owned North Korean banks, were frozen. The big stake of frozen accounts belonged to individuals and companies accused by the U.S. government for counterfeiting U.S. currency and financing the production of weapons of mass destruction. To protect its financial institutions from the U.S. sanctions, some foreign jurisdictions responded similarly. China government froze the North Korean accounts at the Bank of Chinas Macau branch; Vietnam and Mongolia blocked banks in its jurisdictions from doing business with North Korean entities96. At the same time, following the US allegations, Macau government enacted a series of new regulations on money laundering, broadening the scope of predicate crimes, and introduced more stringent punishment for money laundering, enhancing requirements of recordkeeping and suspicious transactions reporting97. Notwithstanding these developments, the US Department of Treasury found that complete change of banks management and control didnt occur, leaving the risk for Banco Delta Asia to continue egregious historical practices98. In 2007, the U.S. government issued the final rule99 imposing on Banco Delta Asia the fifth special measure, which prohibits all U.S. financial institutions from establishing or maintaining correspondent accounts for the targeted institution This had an effect of ordering all banks in the world to block any US dollar accounts they held with Banco Delta Asia.100. The North Korean economy faced a tremendous challenge as its institutions, either for licit or illicit transactions, couldnt obtain US dollar accounts
95 96

Id. Kern Alexander, Economic Sanctions, Law and Public Policy, supra, at 295 296 97 Final rule, 72 Fed.Reg 12730, 12732 (Mar. 19, 2007) 98 See Id. at 12734 99 Id. 100 Kern Alexander, Economic Sanctions, Law and Public Policy, supra, at 295 299

from any bank in the world, because of the burden of reputational risk, which foreign banks were not ready to face. Imposition of Section 311 special measure on Macau bank was part of international economic pressure, which caused North Korea to stop its nuclear weapon development and allow foreign inspections101. Recent example of imposing Patriot Acts special measures on foreign institution is designation of the Lebanese Canadian Bank (LCB) as institution of primary money laundering concern. On February 17, 2011, the US Department of the Treasury issued a notice with intent to designate LCB as a financial institution of primary money laundering concern102 and impose on it a fifth special measure103, which prohibits US banks to establish or maintain, directly or indirectly, correspondent accounts for LCB. FinCEN broadened its definition of LCB to all its branches, offices and subsidiaries operating in Lebanon or any other jurisdiction. 104 This includes, but is not limited to, LCB Investments (Holding) SAL, LCB Finance SAL, LSB Estates SAL, LCB Insurance Brokerage House SAL, Dubai-based Tabadul for Shares and Bonds LLC, and Prime Bank Limited in Gambia105. FinCEN requires all US financial institutions to review their account records and to ensure that no accounts are maintained for the LCB. Moreover, the US financial institutions have to imply special due-diligence action by notifying its correspondent account holders that they may not provide services to LCB, which are conducted through correspondent relationships with the US financial institution. Few days after the notice of intent appeared at FinCEN webpage, mass media announced that LCB, which is the eighth biggest bank in Lebanon, would be sold106. This is likely to
101 102

Id. Notice of finding, 76 Fed.Reg. 9403 , (Feb.17, 2011) 103 Notice of proposed rulemaking, 76 Fed.Reg. 9268, (proposed Feb. 17, 2011) 104 Id. at 9270 105 Id. 106 Mariam Karouny, Lebanese bank for sale after U.S. laundering claim, http://www.reuters.com/article/2011/03/03/lebanon-bank-idUSLDE7221KS20110303 (March 3, 2011)

happen, because the fifth special measure imposed by US has the same effect as ordering to all banks in the world to rescind their correspondent relationships with LCB. As the Banko Delta Asia case shows, to overcome the burden of primary money laundering concern designation, the change of control over target financial institution has to occur. The US Government accused LCB for facilitating money laundering of proceeds from international drug trafficking, and for connection of bank managers to Hizbollah officials outside the Lebanon107.

5.B. Extraterritorial Subpoena

Section 319 of the Patriot Act (Section 319) provides legal tools for the US government to obtain confidential information about the funds deposited offshore. The Secretary of the Treasury or the Attorney General may issue a summons or subpoena to any foreign bank that maintains a correspondent account in the United States, including records maintained outside of the United States relating to the deposit of funds into the foreign bank108. This means that the US government empowered US law enforcement agencies to get information regarding records about customers of the largest banks of any jurisdiction in the world. Within seven days of receiving a written request, the US bank must obtain the requested information from the foreign bank109. If the foreign bank fails to comply with the subpoena, the Government obliges the US bank to terminate correspondent relationships. Failure to do so results in a civil penalty of up to $10 000 per day.110 Such provisions of the Patriot Act hide potential conflict of laws, when a foreign
107 108

Notice of finding, 76 Fed.Reg. 9405, (Feb.17, 2011) 107 P.L. 56, Title III, 319(b)(k)(3)(A)(i) 109 107 P.L. 56, Title III, 319(b)(k)(3)(B) 110 107 P.L. 56, Title III, 319(b)(k)(3)(C)

bank in order to comply with the US regulation will have to violate domestic bank secrecy laws. A fear of loosing a correspondent account with an US financial institution caused banks in some countries to protect themselves through adding special disclosure clauses into the contracts with customers. David Chaikin conducted a survey of standard contract terms changed by Australian banks in light of the Patriot Acts long-arm provisions111. He concluded that there is a trend among banks in Australia to embed clauses that expressly permit disclosure of confidential information to foreign authorities for anti-money laundering purposes112. For example, an Australian Macquarie Bank states in bank-customer contract that it may in absolute discretion, with or without notice to you, disclose or otherwise report the details of any transaction or activity, or proposed transaction or activity in relation to [your account] (including any personal information) to any reporting body authorized to accept reports under any laws relating to the AML/CTF Act applicable in Australia or elsewhere113. Long-arm provisions of the Patriot Act regarding obtaining information about foreign banks records bear the high potential for causing international conflict of laws that had actually happened in the SWIFT case. In June 2006, a series of press 114 reports uncovered the US access to the records maintained by the SWIFT115, which facilitates the majority of worlds international banking transactions. Office of Foreign Assets Control of the US Department of Treasury (OFAC) for the purpose of terrorism investigation issued subpoena on wire transfers data held on the SWIFTs US server. SWIFT compliance with the subpoena triggered the
111

David Chaikin, A Critical Examination of How Contract Law Is Used by Financial Institutions Operating In Multiple Jurisdictions, 34 Melbourne U.L.R. 34, 47 (2010) 112 Id. at 50 113 Id. 114 Glenn R. Simpson, Treasury Tracks Financial Data In Secret Program, The WallStreet Journal,June 23, 2006 Friday 115 Society for Worldwide Interbank Financial Telecommunication

negative reaction of the European Union community, which claimed that SWIFT data had to be protected according to the EU Data Protection Directive 95/46/E ("the Directive")116. The Directive restricts transfer of personal data to the third parties, unless the adequate level of protection is granted.117 The EU started negotiating the EU-US

SWIFT data protections agreement, which would limit the scope of the US access to the wire transfers information and would protect privacy rights of the EU citizens transferring funds through SWIFT system. After the process of lengthy negotiations, the European Parliament approved in summer of 2010 the final Agreement on the Terrorist Financing Tracking Program (TFTP) between the European Union and the United States118. This agreement respects the right balance between the need to guarantee the security of citizens against the threat of terrorism and the need to guarantee their fundamental rights and civil liberties, commented Jos Manuel Barroso, the European Commission President.119 The EU signed the treaty with intention to develop its own data procession system120 similar to the US terrorist financing trafficking program121, which provides legal tools to identify proceeds of illicit activities. SWIFT case shows the unilateral attempts by the US to access foreign financial records violate the principle of territoriality in international jurisdiction. The US didnt
116

EUROPE'S PRIVACY COMMISSIONERS RULE AGAINST SWIFT, https://www.privacyinternational.org/article/europes-privacy-commissioners-rule-against-swift (November 24, 2006) 117 EU Data Protection Directive 95/46/E, Chapter IV 118 European Union Delegation to the US, EUROPEAN COMMISSION WELCOMES EUROPEAN PARLIAMENT'S APPROVAL OF THE AGREEMENT ON THE TERRORIST FINANCING PROGRAM (TFTP), http://www.eurunion.org/eu/2010-News-Releases/EUROPEAN-COMMISSIONWELCOMES-EUROPEAN-PARLIAMENT-S-APPROVAL-OF-THE-AGREEMENT-ON-THETERRORIST-FINANCING-PROGRAM-TFTP.html (July 8, 2010) 119 European Union Delegation to the US, supra 120 EU-US SWIFT Data Transfer Agreement Passes European Parliament Vote, http://news.softpedia.com/news/SWIFT-Data-Transfer-Agreement-with-US-Passes-European-Parliament146985.shtml (accessed April 22, 2011) 121 US Department of Treasury, Terrorist Finance Tracking Program (TFTP) http://www.treasury.gov/resource-center/terrorist-illicit-finance/Terrorist-FinanceTracking/Pages/tftp.aspx (accessed April 22, 2011)

have adjudicative jurisdiction to subpoena foreign entities, which reside abroad and have very limited connections to the US territory. Therefore, the US unilateral actions to track foreign banking records should be replaced by the multilateral cooperation with other strong jurisdictions. This is particularly important, because the EU has well-developed experience in adopting preventive measures against extraterritorial reach of the US law.122 The European Commissions regulation imposes countermeasures against extraterritorial foreign acts and requires residents of the EU to inform the Commission about any cases when their economic and/or financial interests are affected, directly or indirectly, by the extraterritorial implementation of foreign jurisdiction123. Implementation of the USA Patriot Acts long-arm provisions, especially its deeming language of interbank accounts assets forfeiture and regime of primary money laundering concern, poses the high risk of triggering countermeasures from the EU. This diminishes the Patriot Acts efficiency in detecting and fighting money laundering at financial institutions and jurisdictions from the European Union. Example of the EU-US SWIFT agreement confirms that in any extraterritorial legal act there has to be the right balance between protection of basic human rights and public interest, like between the privacy rights and need to fight terrorism, or between the ownership rights and need to fight terrorism. The US has very poor standing to convince the EU to implement similar to the Patriot Acts long-arm legal tools for fighting money laundering though this could develop an effective global anti-money laundering regime. The reason is that the official Patriot Acts goal is to prevent and detect terrorism. Terrorism, however, involves very small percentage of the illicit financial flows,

122

In response to the unilateral economic US sanctions against Cuba, Iran and Lybia, the EU adopted regulation protecting its members against the effects of extraterritorial application of legislation adopted by a third country; See: Council Regulation (EC) No 2271/96 of 22 November 1996 123 Council Regulation (EC) No 2271/96, art. 2

conversely to the public corruption, which causes laundering of billions of dollars to the world financial centres. Illicitly gained funds flow from the developing world that enhances poverty and deprives billions of people worldwide from basic human needs and human rights.

5.C.Deeming Language of Assets Forfeiture Forfeiture the proceeds of illicit activities deprives criminals from illegally gained profits and reduces incentives to commit money laundering. The UN Convention against Transnational Organized Crime (1999) and the UN Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances (Vienna Convention, 1988) provided a legal framework for international assistance in seizure and forfeiture of illegally obtained assets. With enactment of the UN Convention Against Corruption (2005), there was recognized the need of international cooperation in freezing, seizure and forfeiture the proceeds of corruption.124 The US, however, established the long-arm jurisdiction for forfeiture proceeds of illicit activities without the requirement of international assistance. The most drastic long-arm provisions of the Patriot Act permit the US authorities to seize, arrest and forfeit funds at the correspondent accounts even if these funds are not the direct proceeds of illegal activities. Section 319 states that if funds deposited into an account at a foreign bank, and that foreign bank has an interbank account in the United States with covered financial institution, the funds shall be deemed to have been deposited into the interbank account in the United States. In real life, this means that if a foreign citizen abroad deposited funds at the account of a foreign bank, which has a correspondent relationship with US financial institutions, US authorities may forfeit these funds. To grant extraterritorial jurisdiction to the US government, Congress emphasized
124

UN Convention Against Corruption, Art. 31

that it shall not be necessary for the Government to establish that the funds are directly traceable to the funds that were deposited into the foreign bank125. The Patriot Acts Long-arm forfeiture provisions were first challenged in the United States v. Union Bank.126 In that case, the US government seized over $2.8 million from a correspondent account held by Union Bank (Jordan) at the Bank of New York. The seized funds corresponded to the value of 124 cashiers checks deposited at Union Bank in Jordan. US authorities claimed that the checks were the proceeds of Canadian telemarketing fraud conspiracy, which victimized eighty Americans, and therefore were forfeitable. The United States appealed the decision of the district court, which found that Union Bank was the owner of some portion of the seized funds and, therefore, was eligible to contest the assets seizure. Union Bank contested the seizure claiming to be an innocent owner of the seized funds. Analyzing the intent of the Congress in Section 319 to treat foreign deposit as domestic one, a court stated: once the cashiers checks were deposited into accounts at Union Bank (Jordan), those checks were deemed to have been deposited into the interbank account of Union Bank in the United States127. This deeming language leaves no legal standing for foreign banks to contest the forfeiture of the funds at their correspondent accounts on the ground of an innocent owner defense, that forbids civil forfeiture of assets if the owner did not know of the conduct giving rise to forfeiture128. Moreover, the Union Bank case excludes the possibility for foreign banks to use Constitutional protection of excessive fine under the Eighth Amendment, which prohibits government from imposing cruel and unusual punishment. The court found that civil forfeiture of funds at interbank account is not a punitive action against the
125 126

107 P.L. 56, Title III, 319(a)(k)(1)(B)(2) United States v. Union Bank, 487 F.3d 8, (1st Cir. 2007) 127 Id. at 23 128 18 U.S.C. 983(d)

Union Bank129. Lack of recourse is not an issue for the US government, which urges foreign banks to protect themselves by contract or other means, giving the foreign depositor incentive to appear in a US court and assert the innocent owner defense of the forfeiture130. Therefore, banks are likely to find the contractual way of shifting responsibility for possible assets loss onto its customers. In the US legal system, the forfeiture of proceeds of criminal activity can be civil, criminal or administrative. In criminal forfeiture, in personam action is taken against a convicted person as part of the sentence in a criminal case. In a civil case in rem forfeiture government attacks property and the prior indictment is not required. Both actions, unlike in administrative forfeiture, require judicial order. Ownership shift in interbank accounts is a legal fiction131 embedded into the US civil forfeiture statute. It means that the government has to prove that funds deposited in a foreign bank, which has correspondent relationships with US financial institutions are derived or were used to commit a crime. The burden of proof in civil forfeiture is comparatively light meaning that government initially has to show probable cause, The probable cause can be shown by proving reasonable belief that funds were involved in a transaction or attempted transaction in violation of money laundering statutes132. When probable cause exists, which is less then prima facie showing, but more than mere suspicion, the burden of proof shifts to the owner of the funds.133. The process of civil forfeiture starts with funds seizure pursuant to a court warrant. To convert property from seizure to forfeiture, the government has 60 days to send notice of
129 130

Union Bank, 487 F.3d 8 at 2 Id. at 28 131 Todd Barnet, Legal Fiction And Forfeiture: A Historical Analysis of The Civil Asset Forfeiture Reform Act, 40 Duq. L. Rev. 77, (2001) 132 George Chamberlin, What Is Considered Property Involved In Money Laundering Offense, 135 A.L.R. Fed. 367, (2010) 133 Id. at 2b

seizure to all interested parties, and if no one challenges the forfeiture within 30 days, title of funds will be transferred to the government automatically by default. This is imperative as every individual or entity from any country in the world can be subject to the US jurisdiction because of the Patriot Act deeming language. Ownership shift, described above, occurs strictly for the purposes of the governmental forfeiture of the proceeds of illicit activities. Tamam v. Fransabank134 shows that deeming language granting long-arm jurisdiction over foreign persons, doesnt apply in the tort cases. In Tamam, Israeli citizens sued five Lebanese banks for providing financial services for Hizbullah-related organizations. The Israeli plaintiffs were injured in attacks conducted by Hizbullah, a Lebanese terrorist organization, in 2006. Though all factual circumstances occurred outside of the US and all victims were non-US citizens, Israeli filed a claim in US under the Alien Torts Claim Act. Plaintiffs alleged that court has to establish personal jurisdiction over the Lebanese banks, which maintained the bank accounts for Hizbullah front groups. The only connection of the Lebanese bank to the US was its correspondent banking with US financial institutions. New York court dismissed the claim because plaintiffs didnt prove that use of

correspondent account was at very root of the action which caused the injuries135. The court dismissed the Israeli claim because maintaining or establishing a correspondent banking account is not enough to subject a foreign bank to personal jurisdiction. On the other hand, for the purposes of forfeiture, which is an action of government and has government interests, personal jurisdiction over foreign financial institutions and individuals derives merely from maintaining the correspondent relationships between banks. It means that only the governmental enforcement action can trigger ownership
134 135

Tamam v. Fransabank, 677 F. Supp. 2d 720 (N.Y.S.D. 2010) Id. at 20

shift of funds deposited in interbank accounts. For purposes of fighting terrorism and money laundering the US Congress made an exception from the basic principles of the property law. Attempt to challenge the deeming language of assets forfeiture failed, when Trans Union, a foreign institution, tried to contest in the US court the seizure of funds in its correspondent account in the US. There is, however, likelihood, that strong foreign jurisdiction, like the EU, could impose countermeasures against the US for illegal seizure of foreign nationals property. Therefore, it is essential for the US government to initiate cooperation with other developed countries regarding forfeiture of proceeds of illicit activities at correspondent accounts. This paper discusses below the possible outcomes of such kind of cooperation, but, firstly, the detailed explanation of correspondent banking relationships is required. Patriot Acts anti-money laundering provisions are mainly grounded on the issue of the correspondent account, which is a legal basis for the US to extend prescriptive and adjudicative jurisdiction on the foreign persons. 6. Correspondent Banking: Invisible International Journey of Money In previous sections this paper analyzed the forfeiture of Union Banks assets from its correspondent account maintained by the US bank. To understand precisely the legal nature of this case, it is necessary to track to journey of money. The US government claimed that forfeited funds were the proceeds of fraud scheme, which victimized American citizens. Perpetrators convinced American individuals to send the cashiers checks to Montreal in exchange of promise to obtain profits from the lottery. 136 The perpetrators then sold the checks to the restaurant owner in Montreal, who, in turn, sold them to the Israeli citizen. Finally, the checks were sold to the money changer in Jerusalem, who subsequently, sold them to Mohammed Ghaleb Esseileh. Esseileh was
136

Id. at 7

operating a money exchange business and deposited all checks into his and his business accounts at the Union Bank in Jerusalem. Upon receiving the checks deposits the Union Bank transmitted them to its correspondent banking account in New York, which then presented the checks to the issuing bank. So, finally checks arrived back to the US, providing a link to the US territory and allowing the US government to forfeiture funds. Basically, the similar link to the US territory can be found regarding almost every international transfer in the US currency. Lets assume, that the Union Bank was exercising a wire transfer in US currency from the account of Mr. Smith, a Jordanian citizen, to the banking account of his wife, Mrs. Smith, in Ukraine (Ukrainian bank). The process of transferring money ends up in changing records in credit and debit accounts at the ledgers of Union Bank and Ukrainian bank. In order to execute these changes banks have to (a) find a secure way for

interbank communication; and (b) to establish reciprocal accounts with each other. Additionally, when the international transfer is in US dollars, banks must obtain US currency reserve in order to clear the transaction. To do that, banks use the correspondent banking, when one bank (correspondent) provides banking services for another bank (beneficiary)137. A big part of international business is conducted in the US dollars and some countries have a dollarized economy, thus foreign banks need a constant access to the US currency. To satisfy its commercial needs in the US currency, foreign banks may open a branch in the US, or establish its subsidiary, a separate legal entity within US jurisdiction.138 Through correspondent relationships with American banks, foreign banks can access the US dollars without costly physical presence in the US. By opening a correspondent account within an existing US financial institution, a foreign bank can
137

United States. Cong. Senate. Permanent Subcommittee on Investigations, Report on Correspondent Banking: A Gateway for Money Laundering, 107th Cong., 1st sess. Comm. Print, 2001 138 Id.

provide its clients with a wide range of services available at the US correspondent bank, including quick clearing of international transactions in US dollars.139 World financial centers like New York, London, Dubai, and Hong-Kong have dozens of banks, which provide mainly correspondent services for foreign banks. Usually, every bank willing to engage in international business maintains correspondent accounts with several banks worldwide.140 An alternative way for smaller banks to get access to the US currency is to establish correspondent relationships with a domestic bank, which maintains an account in the US. For the purposes of interbank communication and facilitation movements of funds across countries, bankers developed electronic international funds transfer systems.. SWIFT (Society of Worldwide Interbank Financial Telecommunication) is the most popular international funds transfer system, which in 2010 was providing services for more than 9,000 financial institutions from 209 countries and territories.141 SWIFT, a privately owned corporation headquartered in Belgium142, sends daily millions of standardized financial messages. In the US, banks can also use CHIPS (Clearing House Interbank Payment System) and Fedwire (Federal Reserve Wire Network) for international transactions.143 Unlike SWIFT and CHIPS, Fedwire, is a governmental entity. 144 Mechanically, the journey of Smiths money can have four possible routes. Under the first scenario, the Union Bank receives payment order #1 from Mr. Smith and
139 140

Id. Id. at 12 141 SWIFT, Company Information, http://www.swift.com/about_swift/company_information/index.page (accessed March 30, 2011) 142 Supra. 143 Principles of payment systems / by James J. White, Robert S. Summers; St. Paul, Minn.: Thomson/West, c2008; 7-1 at pg. 379 144 Id.

transmits via SWIFT payment order #2 to its bank-correspondent in the US (US 1), which immediately issues and sends payment order #3 via CHIPS to the New York Clearing House145, or via Fedwire to the Federal Reserve Bank of New York146. From the US clearing system, payment order #4 is transferred to the Ukrainian bank correspondent in the US (US 2). Finally, the US correspondent of Ukrainian bank issues and sends payment order #5 via SWIFT to Mrs. Smiths account in Ukraine. The process of transferring money from Jordan to Ukraine engages four banks from three different jurisdictions. It looks like:
Mr. Smith Union Bank US 1 Clearing House or Federal Reserve US 2 Ukrainian bank

Under the second scenario, assume that both Union Bank and Ukrainian bank have the same US correspondent. The journey of funds will follow a different route:
Mr.Smith Union Bank US correspondent Ukrainian bank

International transactions in the US dollars can also be cleared outside of the US financial system. Under the third and fourth possible scenario, both Union Bank and Ukrainian bank obtain access to the US dollars through Eurodollar deposit at a non-US bank, which has a US bank-correspondent. Eurodollar is a term coined during the Cold War,147 when demand for US dollars raised in Europe, and big European banks started to provide deposits in US dollars for other banks148. Assume, that Union Bank and Ukrainian bank have deposits in Eurodollars through correspondent relationships with banks in London. In this case, dollar transfers wont reach the US jurisdiction and will
145 146

Id. at 381 Id. 147 Corinne R. Rutzke, The Libyan Asset Freeze and Its Application to Foreign Government Deposits in Overseas Branches of United States Banks, AM. U.J. INTL L. & POLY 242, 252 (1988) 148 Ibid. 254

not be reflected in the ledger books of any US financial institutions. The London bank, however, will have to cover dollar claims from foreign banks through maintaining a correspondent account with the US bank. The journey of your inheritance will look like:
Mr. Smith Union Bank London correspondent1 the UK clearing institution-> London correspondent 2 Ukrainian bank

Under the forth scenario, the Union Bank and Ukrainian bank both have the US dollar deposit accounts at the same bank in London. No national clearing system is involved in the transaction, which entirely occurs within London bank internal system:
Mr. Smith Union Bank London correspondent Ukrainian bank

The journey of Mr. Smiths money from Union Bank to Ukraine is, in fact, a series of book record changes in ledgers of banks from different jurisdictions, which communicate with each other through secure international funds transfer systems. This change of records creates a link of funds deposited in foreign banks to the US territory, where bank-correspondent resides.

7. The Patriot Act in The Global Fight Against Public Corruption

The Patriot Acts long-arm provisions emerge as an alternative to criminally punishing foreign kleptocrats by simply freezing their illicit funds and blocking ways for concealment the proceeds of corruption. The US practice in fighting terrorism through enhanced regulation of correspondent interbank accounts could become a successful international legal tool in fighting public corruption. Yet, there are two obstacles to make it happen: (1) the US government should statutory acknowledge the nexus between public corruption and money laundering as it did with the link between terrorism and money laundering, and (2) cooperation between the EU and US in fighting public corruption

should be negotiated with FATF assistance. There is a good moment for the US to overcome these obstacles. Under pressure from international experts and outstanding critique of its efficiency by think tanks,149 FATF officially acknowledged the link between corruption and money laundering. FAFT Recommendations, last updated in 2003, provided international standards causing adoption of anti-money laundering legislature in all jurisdictions. Countries with lack of anti-money laundering regulation were blacklisted in FATF list of non-cooperative countries and territories. Though FATF doesnt have legal enforcement powers, this action had a powerful effect on blacklisted governments, which under threat of losing international business relations had to develop AML regulations. In 2010, FATF issued a reference guide150 on the use of its Recommendations in the fight against corruption where it emphasized the important role of anti-money laundering and counter-terrorist financing measures in combating corruption. In February 2011 the experts meeting, hosted by FATF, outlined the organizations further priorities, which will be focused on intersections between anti-money laundering and anti-corruption regimes151. FATF started to review its recommendations; moreover, it is maintaining the list of high-risk jurisdictions, which have problems of complying with FATF standards152. FATF is seeking the tools to improve the preventive measures, assets recovery and mutual legal assistance practices regarding laundering the proceeds of corrupt activities. Patriot Acts long-arm jurisdiction provisions introduce possible solutions for all three
149 150

Global Witness, Undue Diligence, supra, at 106 - 111 FATF, A Reference Guide and Information Note on the Use of the FATF Recommendations to Support the Fight Against Corruption, http://www.fatf-gafi.org/dataoecd/59/44/46252454.pdf (April 15th, 2011) 151 FATF, President's Summary of Outcomes from the FATF Experts' Meeting on Corruption, http://www.fatf-gafi.org/document/46/0,3746,en_32250379_32235720_47219438_1_1_1_1,00.html (April 15th, 2011) 152 FATF, Improving Global AML/CFT Compliance: update on-going process, http://www.fatf-gafi.org/document/49/0,3746,en_32250379_32236992_47221809_1_1_1_1,00.html (accessed April 16th, 2011)

challenges FAFT is facing. The paper below mainly alleges that US Government could be more efficient in fighting foreign public corruption by enhancing cooperation with foreign jurisdictions. Then it outlines suggestions for FATF to improve global anticorruption regime by using the practice of Patriot Acts long-arm provisions. The detailed discussion of these suggestions will be the subject of the dissertation, which the author of the paper is going to write during the next 5 years.

7.1. Preventive Measures and Extraterritorial Subpoena Access to wire transfers information is an essential condition for detecting proceeds of grand corruption. The US has good practice in accessing to the bank records for the purpose of tracking the proceeds of illicit activities. The US Bank Secrecy Act requires the US financial institutions to file suspicious transaction reports, which include reports about any transfer of deposit of more that $10,000. 153 Transaction is deemed suspicious if it involves the funds of senior foreign public officials. FATF is currently working to improve its Recommendation 6, which requires countries to conduct enhanced due diligence concerning PEPs. To strengthen this standard FATF could maintain the lists of PEPs from every jurisdiction similarly to the list of terrorists and terrorist associated organizations. Banks usually exercise due diligence to ascertain whether their clients are not terrorists, but banks are not eager conduct the same due diligence with respect to the PEPs. The example of failure to identify its client and the source of funds deposited is the story about the son of President of Congo. Record of terrorists checked,- eloquently states the Bank of East Asia stamp at Denis Christel Sassou Nguessos credit card bill 154.
153

31 U.S.C. 1051 Global Witness, Undue Diligence, supra, at 57

154

Nguesso, the son of the corrupted president of the Republic of Congo, who also happened to be the head of the public government agency selling Congos oil, withdrew $35,313.36 from the account of his offshore company to satisfy his luxurious personal shopping needs155. Hong Kong bank allowed the transaction after verifying that Nguesso was not a terrorist, but it didnt check him with PEPs records. This information became public mere accidently156, but the case illustrates the need to establish PEPs filters in the banks similarly to terrorist filters. Such internal controls might be difficult to implement at financial institutions from developing countries, where corrupted public officials oppose to the transparency of their financial activities, but the long-arm jurisdiction example of the Patriot Acts Section 319 could be helpful. Strong jurisdictions like the EU could subpoena almost any bank in the world to provide records of PEPs through strengthening the due diligence regulations of its domestic banks. For example, the EU and the US could instruct domestic financial institutions to request their correspondent foreign banks to provide payment records involving name of Mr. Nguesso and his offshore corporations. Extraterritorial subpoenaing will encourage the EU countries to revise PEP filters within banks of their jurisdiction. This could reveal the defects of the EU financial system following the example of the US, when Congressional investigation on enforcement and effectiveness of the Patriot Act revealed the practices of tie relationships between big US banks and foreign corrupted officials157.

7.2. Assets Forfeiture

155 156

Supra, at 55 Supra, at 59 157 Committee on Governmental Affairs. Money laundering and Foreign Corruption: Enforcement and Effectiveness of The Patriot Act. Hearing. July 15, 2004. 108th Cong., supra at 1-6

FATF emphasizes the importance of effective laws and procedures to freeze, seize and confiscate the proceeds of corruption and laundered assets158. By depriving corrupt officials from stolen property, regulators diminish incentives for kleptocrats to conduct crimes for illicit personal enrichment. The warning example of failure to forfeiture the proceeds of grand corruption is the story of Riggs bank, which was holding $700 million for Equatorial Guineas president, his family and high governmental officials. While Equatorial Guinea is Africas third largest oil exporter, its population lives in poverty, because the countries natural wealth is captured and controlled by the corrupted government. After congressional investigation revealed to the public that Riggs facilitated laundering funds for kleptocrats, the bank transferred Equatorial Guinea money from its accounts159. The tie with foreign corrupted PEPs caused big problems for Riggs, which finally had to pay huge fines and was sold for a discount. On the other hand, Riggs meltdown didnt deprive president Obiangs family from illicitly gained assets. There is evidence160 that $700 million was placed around the world settling in HSBC Luxemburg, HSBC Spanish, branch Barklays in Paris and other banks. All these banks have connection to the US financial system through correspondent relationships. Therefore, US could use power under the Patriot Act Section 319 and order American correspondent banks to get from its foreign beneficiaries the records associated with the Equatorial Guineas PEPs. When the US would get the records revealing information about deposits at Obiangs accounts, Department of Treasury could have used the power to seizure these funds, which shall be deemed to have been deposited at the interbank account with the US financial institution. This would force the foreign bank to seek for
158

FATF, A Reference Guide and Information Note on the Use of the FATF Recommendations to Support the Fight Against Corruption, supra at 8 159 Global Witness, Undue Diligence, supra, at 49-66 160 Supra

recourse from its corrupted client by freezing his accounts and encouraging him to challenge the civil forfeiture in the US court, as court advised in the United States v. Bank Union. The US government, however, should consider that if the Patriot Acts long-arm reaches financial institutions of strong jurisdiction like the EU, there is a risk of imposing countermeasures by the EU against US extraterritorial jurisdiction. This threat reduces the likelihood of imposition of the Patriot Acts deeming language of assets forfeiture on the financial institutions from developed countries. Additionally, the Patriot Acts obesity with terrorism financing leaves too small a room to impose longarm jurisdiction over proceeds of foreign public corruption. It is even difficult to obtain the PEPs account records from the foreign affiliates of the US banks. There was an attempt to subpoena HSBC USA to reveal information about accounts opened for Obiangs family in HSBC affiliates in Spain, Luxemburg and Cyprus, but bank secrecy laws of the EU jurisdictions barred disclosure of information161. Section 319 of the Patriot Act requires an US bank to terminate correspondent relationships if a foreign bank doesnt comply with the subpoena, but this didnt happen in the HSBC case. This indicates the need to develop bilateral EU-US agreement regarding detection and forfeiture of the proceeds of grand corruption, which could enhance the EU regulation of interbank accounts and adapt for anti-corruption purposes the Patriot Acts long-arm legal tools against terrorism finance.

7.3. Regime of Primary Money Laundering Concern The high efficacy of imposing special measures on jurisdiction and institutions designated by the US government to be of primary money laundering concern provides examples for FATF to improve its blacklisting strategy. Countries with lack of AML
161

Global Witness, Undue Diligence, supra, at 35

regulation were blacklisted between 2000 and 2007 in FATF list of non-cooperative countries and territories. Though FATF doesnt have legal enforcement powers, this action had a powerful effect on blacklisted governments, which under threat of losing international business relations had to develop anti-money laundering regulations. In light of its efforts to adapt anti-money laundering standards for fight against corruption, FATF could develop the list of jurisdictions of primary ground corruption. Transparency International index rating of corruption perception will be helpful for designating jurisdictions of primary ground corruption. By blacklisting jurisdiction of grand corruption, FATF would bring a green light for its members to impose restrictive measures against blacklisted countries. For example, the US could impose the fifth special measure forbidding its financial institutions to provide correspondent banking services for banks from jurisdictions of primary ground corruption. The similar

reaction from the EU could deprive blacklisted countries from access to the Euro and the US dollar and cause its isolation from the international business. Kleptocracts would loose the means to launder kickback and bribes, but will get incentive to raise the transparency in governance declining the level of corruption.