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 REMARKS BY TREASURY DEPUTY SECRETARY STUART E. EIZENSTAT BEFORE THE ANTI-CORRUPTION SUMMIT 2000


9/21/2000

FROM THE OFFICE OF PUBLIC AFFAIRS

LS-895


I am very happy to be here this morning. I want to add my welcome to those of you who have come so far from so many countries to attend this Conference. In your own lands, you are in the forefront of the effort to protect the workings of your government and the honor of your nation from those who seek to corrupt them. You have my respect for the work you are doing and my best wishes for your success. I hope that what you take back from these three days will be of practical use to you.

Until recent decades, nations preferred to deal internally with corruption in government. The funds which were being stolen and skimmed came, for the most part, from their own citizens and did not affect their standing abroad. The global economy works very differently today. Enormous amounts of international capital roam the world searching for safe, attractive places to invest. Multinational firms seek partners and production facilities in many nations. Many countries seek financing from the IMF, the World Bank and other international institutions to support their currency, develop their infrastructure, and meet urgent social needs. Important contracts for major projects are open to bid by foreign firms. But the global economy also produces international cartels, with arms and sometimes armies of their own, who seek to corrupt government officials, including law enforcement officials, to facilitate distribution of their drugs, arms and other dangerous products. They then seek to launder their dirty money through legitimate financial channels to conceal it from detection and to "reinvest" it in their criminal enterprises.

In such a world, every government must recognize that corruption is a malignancy on their economies and financial institutions. It creates special difficulties for emerging and transitional nations. It can only be combated in any nation by the creation of transparent and accountable economic and political systems firmly grounded in the rule of law. As Vice President Gore said last year when he hosted the first-ever Global Forum on Fighting Corruption: "Corruption accelerates crime, hurts investment, stalls growth, bleeds the national budget, and-worst of all-undermines our faith in freedom. Corruption is an enemy of democracy-for democracy lives on trust, and corruption destroys our trust."

It is very important to have strong laws and better enforcement against corruption. In this connection, President Clinton officially announced last week that the U.S. had become the twentieth nation to ratify the Inter-American Convention Against Corruption. This Convention binds signatory nations to criminalize a wide range of corrupt acts, including bribery of public officials, and was the first multilateral agreement against bribery to be adopted anywhere in the world. As President Clinton said, "It is a victory for good government, fair competition, and open trade throughout our Hemisphere." The Convention covers bribery of foreign government officials, a provision my government pressed for as part of our effort to persuade other countries to adopt legislation similar to our own Foreign Corrupt Practices Act. In addition, 34 nations have signed and 23 countries, including the U.S., have ratified the Anti-Bribery Convention of the OECD, which also obligates parties to criminalize the bribery of foreign public officials in the conduct of international business. This Convention's strong process to monitor governments' implementation of their commitments has already caused several signatories to prepare new anti-bribery legislation.

To effectively combat corruption, nations must have clear laws and regulations that can be equitably and reliably enforced. This requires independent judges and adequately funded professional law enforcement. Nations must also end unnecessary controls on their economies and reduce state involvement, for the more the state is involved, without transparent rules, the more opportunities exist for demanding payoffs for licenses, contracts and tax concessions. The financial system must be a well-supervised, soundly regulated, competitive and not weakened by credit decisions based on personal or political connections. The transparency and accountability of the work of government should be increased. And nations must create a professional civil service, with strict conflict of interest rules, punishment for malfeasance, and adequate compensation for its workers. A key part of strengthening the civil service is to create strong, independent anticorruption investigation units, such as the U.S. Government has in its offices of Inspector General within our executive department, and in our General Accounting Office for overseeing the operation of federally-funded programs. In developing and transitional nations, these measures will help break the culture of corruption that now exists.

One of the most important ways by which the United States and the international community can combat corruption is by focusing on the financial infrastructure that facilitates the movement of dirty money around the globe. Money laundering - the act of making criminal proceeds appear to be the result of legitimate transactions - provides the vital financial lifeblood for international drug cartels, criminal organizations, terrorist groups, and corrupt government officials. It is not an exaggeration to say that all of our multilateral efforts to combat corruption in the end will be largely ineffective if we do not also work to shut down the financial mechanisms and systems that allow people to hide the profits of their corruption, and thereby grow wealthy from their crimes. In recent years, the citizens of such diverse places as Nigeria, Ukraine, and Indonesia have all seen the wealth of their nations stolen by corrupt government officials. They could only do so because various banks in the rest of the world accepted their funds as if it were money legitimately earned.

The threat we confront from international money laundering is unambiguous with respect to the facilitation of crime and corruption, but it has wider, more subtle effects as well. Abuses of the global financial system such as money laundering are what economists would call clear cases of a "global public bad" - indeed, it is the dark side to international capital mobility. Money laundering activities have the potential to cause serious macroeconomic distortions, misallocate capital and resources, increase the risks to a country's financial sector, and hurt the credibility and integrity of the international financial system.

In many respects, even as we pass international conventions, the money laundering problem in recent years has grown worse. The reason: technology. Not too long ago, only a few countries in the world could be considered money laundering havens: places whose bank secrecy regimes, company incorporation laws, banking regulatory systems, and law enforcement practices combined to make them very attractive to anyone looking to hide money of dubious origin. But even as the international community successfully pressed these places to improve their anti-money laundering regimes, technological advances were undermining those accomplishments. The same advances in banking and communications technologies that have done so much for our prosperity have also resulted in a new proliferation of money laundering havens in just the last few years. Countries that were once too physically remote to be well integrated into the global financial system are now only a click of the mouse away. Some countries have found that offering no-questions-asked banking services can quickly create an extremely lucrative sector. Sadly, some countries have even made this part of their official development strategies.

Let me give you one of my favorite examples. Perhaps only five years ago, few bankers likely even heard of Nauru, a small island in the South Pacific. Then Nauru passed laws to create a strict bank secrecy regime. With today's technology, the result came quickly. According to the Russian Central Bank, out of the $74 billion in 1998 that was transferred from Russian banks to accounts in offshore jurisdictions, $70 billion went to accounts in banks chartered in Nauru. Now, we have no way of knowing exactly how much of that money found its way back into Russia or how much, if any, constituted money laundering - but the numbers are certainly surprising and suspicious. Newspaper reports also noted allegations that Nauru banks were part of the investigation into the $7.5 billion that moved from Russia through the Bank of New York.

We are addressing this new money laundering problem in two ways. First, by improving the U.S. anti-money laundering regime here at home. In the last year we have laid out the most comprehensive approach to the subject ever, in the National Money Laundering Strategy for 2000. We have, for the first time, designated areas within the U.S. for priority anti-money laundering law enforcement activities, and begun a grant program for state and local law enforcement. And we have expanded our regulatory regime to bring non-depository financial institutions such as money services businesses into our efforts to combat money laundering.

These efforts have set the stage for our second new focus, combating foreign money laundering havens. In the remainder of my time here today, I will describe briefly what we have done, the impressive results we have seen so far, and what we will do in the near future.

This year, the Financial Action Task Force, a group dedicated to the fight against money laundering that now has 29 member states from almost every corner of the globe, undertook lengthy, detailed examinations of 29 other jurisdictions' anti-money laundering regimes, evaluating them against well-established international standards. The jurisdictions that were examined were given ample opportunity to participate in these reviews, an opportunity of which almost all took advantage. In June the FATF - as it is called - publicly announced that 15 of the jurisdictions they had examined were considered "non-cooperative" with the international fight against money laundering. The places on the FATF list were diverse in size and region, from small islands like Dominica in the Caribbean to Nauru in the South Pacific, to sizable financial centers like the Cayman Islands and Liechtenstein, to trading centers like Panama and the Philippines, to countries of major geopolitical standing such as Russia and Israel.

Then in July, the G-7 Finance Ministers announced they were each issuing formal advisories to their domestic financial institutions, urging that enhanced scrutiny be given to transactions involving the 15 countries on the FATF list. The Finance Ministers also made an unusually strong statement: if the 15 countries in question did not move to bring their anti-money laundering regimes up to international standards, they would consider additional countermeasures including conditioning or restricting financial transactions with those jurisdictions and conditioning or restricting support from international financial institutions to them. President Clinton and the other G-7 Heads strongly endorsed this commitment.

It is just over two months since those advisories were issued, but the results from FATF's "name and shame" initiative have thus far been very encouraging. Indeed, it is not an exaggeration to say that, in many respects, we have witnessed more progress in the last few months than we have in the prior several years.

First, there was a market reaction. For instance, on the day the FATF list was released, Standard & Poor's announced it was downgrading its rating for a top Liechtenstein bank. In the financial world, these actions tend to get people's attention. Then there was the diplomatic reaction. Since the advisories the leaders of Panama, the Bahamas, Russia and the Philippines, among others, have made public pledges to bring their anti-money laundering regimes up to international standards. For many countries these were not easy statements to make; the Prime Minister of the Bahamas, for instance, has stressed that he plans to upend decades of tradition by proposing changes to his country's banking regulations and tax benefit structures. And now we are beginning to see a real legislative reaction. Again only since the advisories, the Cayman Islands, Israel and just this week Liechtenstein have passed new anti-money laundering laws. These are real accomplishments: for the first time customer identification will be mandatory in the Caymans as it is in other comparable financial centers; for the first time money laundering is a crime in Israel as it is in other comparable developed countries.

These actions are extremely promising and validate the international community's tough new approach to crack down on money laundering havens. But they are just the first step. Before FATF can consider removing any country from its list, it must confirm that any new laws that have been passed fully comply with international standards and do not leave open loopholes for criminals and corrupt officials to abuse. It must also review the implementing regulations that bring that law into effect and define how that law will be interpreted. And it must be assured that the new regulatory and law enforcement provisions are being effectively implemented. The U.S. will work to ensure that if jurisdictions on the FATF list take the necessary steps to combat money laundering effectively, the FATF will appropriately act to remove them from its list.

Not every jurisdiction on the FATF list has responded as quickly or constructively as we might like. For instance, some time ago we received a letter from the President of Nauru. He noted that because Nauru "has been the victim of unfair adverse media publicity based on unsubstantiated allegations of money laundering," business had taken a turn for the worse and they had lost revenue accordingly. The President went on to say that before Nauru could "go ahead with the implementation of its resolve to reform its offshore financial regime" it would need money to compensate it for its losses. Specifically, the President asked the United States for financial assistance "at least in the sum of $10 million to make up for Nauru's loss for a period of two years." Needless to say, Nauru should not expect to receive a big check anytime soon.

Yet, a few countries aside, this effort has been a great success thus far. But we need to do more. Indeed, there are three concrete steps we intend to take next.

First, we will expand the work of FATF. In two weeks, the FATF member countries will meet in Madrid. Among the items on their agenda are two initiatives that are of great interest to the U.S. In Madrid, the FATF members will decide which jurisdictions will be included in a second group to be reviewed in the coming months for possible inclusion on the FATF list. FATF will also likely begin the process of reviewing and strengthening the international standards it sets for its own members. This is important, because as FATF holds other countries up to international scrutiny, it must ensure that the standards the FATF countries apply to themselves take into account the latest money laundering trends and techniques.

Second, we will push for a stronger role for the IMF, the World Bank and regional development banks in fighting financial abuse. Tomorrow, Secretary Summers will be leaving for Prague where he will urge the IMF, the World Bank, and the regional development banks to intensify their work in combating financial abuses of the global financial system. This new effort would not represent an expansion of the mandate of these Bretton Woods institutions; on the contrary we believe that the fight against international money laundering is consistent with and integral to the responsibilities of the IMF and the MDBs to protect the credibility and integrity of the international financial system. The IMF and the World Bank already engage in helping countries develop and reform their financial systems, to adopt good governance and to fight corruption. We are not asking the Fund or Bank to be policeman. But we believe both can play a greater role in fighting abuse and preserving the integrity of the international financial system in areas that are within the scope of their mandates.

We will be asking the Fund and Bank to institutionalize the fight against financial abuse through various avenues, including technical assistance, surveillance, financial sector assessments, and lending conditionality, where relevant and appropriate. The Bank and the Fund are uniquely well placed to perform analytic and diagnostic work on financial abuse issues. We also believe country programs and loan operations should incorporate appropriate conditions designed to help countries make real and measurable progress in combating money laundering. In Prague, Secretary Summers will also call on both the Fund and Bank to prepare a joint paper on their respective roles in combating financial abuse, for final consideration next Spring.

And third, after expanding the FATF process and improving the work of the IMF and World Bank, we must stay committed to make good on the pronouncement by the G-7 Finance Ministers to consider restrictions on international lending or banking transactions to countries on the FATF list that do not make efforts to improve their anti-money laundering regimes. The U.S. has already signaled its own commitment: we have argued strongly that the Philippines should take measures to strengthen its money laundering regime in the context of an IMF program. That point was not lost on Manila, where the government has told us that they intend to address the shortcomings that the FATF has identified.

I suspect that by next year's G-7 Summit we will be in a position to know which countries on the FATF list will have decided to ignore the will of the international community. At that point, we will have to follow through with strong countermeasures. Unfortunately, the U.S. at present is somewhat hamstrung in this regard. As we have already stated to our Congress, we do not now have adequate legal authority to condition or narrowly restrict U.S. financial transactions with money laundering havens, even ones that present plain threats to the integrity of the U.S. financial system and that facilitate the movement of dirty money from terrorists, drug cartels, crime groups and corrupt foreign officials.

Earlier this year we worked successfully with the U.S. Congress and the banking community to draft bipartisan, common-sense legislation that would give us the authority we need to combat this problem in a graduated, targeted manner, without unduly impacting industry competitiveness or placing unreasonable new burdens on U.S. banks - and, most importantly, while continuing to ensure Americans' critical rights to financial privacy. We managed to accomplish all this and were pleased that the ideologically diverse House Banking Committee passed the bill overwhelmingly, sending it forward by a vote of 31 to 1.

But a handful of Members of Congress have opposed even this bipartisan bill, and therefore there has been no action to bring the bill to the floor of the House or even hold a hearing in the Senate. Let me be clear: without the passage of this bill the U.S. will have a much weaker hand when dealing with recalcitrant money laundering havens. Again, this is not and should not be a partisan issue. There are many Republicans and Democrats on Capitol Hill who are working alongside the Administration in the fight against money laundering, drugs, terrorism and foreign corruption. We urge the leadership to bring this bill up for a vote in the House and to hold hearings in the Senate so that the next President has the tools he needs to continue this bipartisan effort we have begun this year.

These are the main outlines of the Treasury Department's efforts in this area. Each nation has its own special challenges in the fight against corruption. You are here because you are committed to this effort. You want to learn and you want to share your experiences with delegates from other nations. My Government wants to cooperate in this mutual education, and I hope that the forthcoming sessions of this Summit will make that clear.

Good luck to all of you in the accomplishment of your very important mission.


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