Israel: Money Laundering: At the Crossroads
| Published date | 01 February 2000 |
| Date | 01 February 2000 |
| DOI | https://doi.org/10.1108/eb025958 |
| Pages | 351-367 |
| Author | Guy Harpaz,Sylviane Colombo |
| Subject Matter | Accounting & finance |
Israel:
Money Laundering: At the Crossroads
Guy Harpaz and Sylviane Colombo
Journal of Financial Crime — Vol. 7 No. 4 — International
The lucrative enterprise of money laundering, the
threat it poses to the integrity and stability of financial
sectors as well as to the democratic societies them-
selves, and the means to counteract it, all have long
been the object of academic debate across the globe.
However, interested parties in Israel, such as law
enforcement agencies, banks and legal scholars,
have not played a vociferous role in this debate, and
Parliament for its part has refrained so far from intro-
ducing anti-money-laundering legislation. Recently
a Bill entitled 'Prohibition of Money Laundering'
('the Bill') has been introduced to the Israeli Parlia-
ment. The Bill has passed first reading, and it is cur-
rently being debated in the committee stage before
being brought to second and third readings. It is
not unlikely that the Bill will crystallise into legisla-
tion in the near future. The proposed legislation
bears far-reaching legal, economic and policy implica-
tions.
It is thus surprising that it has not sparked off an
extensive debate in the legal literature. This paper
will, hopefully, aid in stimulating such a debate.
THE PHENOMENON OF MONEY
LAUNDERING AND THE CREATION OF
AN INTERNATIONAL REGIME TO
COMBAT IT
The term 'money laundering' denotes the process by
which the existence, source, or illegal application of
the proceeds of serious crimes (but not those of tax
evasion per se) is concealed by means of a series of
transactions. The purpose of the process is to blur
the illegal source of the monies and to render the
investigative authorities powerless in their efforts to
prove that those monies do emanate from serious
criminal activity.
Money-laundering activity around the globe is
constantly on the rise. Assessing its exact extent
might prove to be an impossible task, but some esti-
mates do exist. For example, the International Mone-
tary Fund states that the money-laundering activities
around the globe amount to $500bn—$1.5trn.3
Money-laundering operations are varied. For
example, money launderers transfer the proceeds of
crimes to tax havens and deposit them in bank
accounts registered in the names of straw companies.
They also buy real estate, works of art, gold and
diamonds. Despite these variations, three common
phases in the modus operandi of money-laundering
operations may be discerned, namely placing,
layering and integration.
During the placing phase the proceeds of crime are
introduced into the financial markets, frequently in
countries other than the one in which the illicit
activity took place. Shell companies or other front
activities are used in order to conceal the identity of
the actual owner of the money. Where large deposits
are discernible, they are broken into small amounts
and the deposits arc spread over several financial
institutions (a practice known as 'smurfing' or
'structuring'). Placing is the most transparent phase
in the laundering process and for this reason it is the
most vulnerable from the money launderer's point
of view. Law enforcement efforts are therefore
concentrated on it.
Placing is followed by layering, whereby the
money launderer creates an intricate network of
cash activities and transfers among a large number
of parties who in many instances are located in
dif-
ferent countries. In this way the connection between
the property and its illegal source (the 'audit trail') is
blurred.
Finally, during the integration phase, the laundered
capital is invested in legitimate investment channels,
situated in many cases in the country in which the
money-laundering operation was launched.
Money-laundering operations are often of a
sophisticated nature. The image of shady people
arriving at banks with suitcases full of dollar notes
does not reflect today's reality: 'The modern money
launderer will no doubt adopt rather more sophis-
ticated techniques than the gem carriers of India
or the Knights Templar.' Highly sophisticated
techniques are being utilised:
' . . . the development of electronic systems which
facilitate and greatly speed up transactions, the ever
increasing significance of the Internet, and the
meaninglessness of traditional notions of transac-
tion in the realm of cyberspace, all serve to exacer-
bate the profound problems confronted by those
seeking to establish the provenance of wealth.'
Journal of Financial Crime
Vol 7
No.
4,2000, pp. 351-367
© Henry Stewart Publications
ISSN 0969-6458
Page 351
Journal of Financial Crime — Vol. 7 No. 4 — International
Moreover, money-laundering operations are
inextricably tied to those countries in which strict
confidentiality rules are imposed upon banks and
other financial institutions. Confidentiality serves in
this regard as a smoke-screen which ensures the
secrecy of the money launderers' identity and their
operations. These rules of secrecy run counter to
international efforts to combat money laundering:
'Many of the current difficulties in international
cooperation in drug money cases . . . are linked
with a strict application of bank secrecy laws.'
Furthermore, money-laundering operations are
usually of an international character:
'The laundering of proceeds of crime is truly an
international phenomenon. No longer are opera-
tions limited to the country in which the illicit
money is generated. On the contrary, the trans-
border movements of money are now a prominent
feature of money-laundering operations.'
The world has not remained aloof to the increase in
money-laundering activities. Professor Barry Rider
notes in his most recent article, 'The Crusade Against
Money Laundering — Time to Think!', that
'over the last decade, governments, international
and regional organisations and law enforcement
agencies have increasingly recognized that by
interdicting the proceeds of crime, the very
motive behind many serious criminal enterprises
may be undermined . . . today around the world
governments are busy ensuring that appropriate
legislation is passed and systems erected to enable
the state to track, freeze and then eventually seize
the proceeds of crime.'10
This approach is pursued, in Professor Rider's opi-
nion, 'with the enthusiasm and single mindedness of
the most ardent zealot'.11
Money-laundering operations were first met with
unilateral measures. The USA was the pioneer in
this area, enacting in 1970 the first legal instrument
designed to counteract money-laundering opera-
tions.
In the 1980s and 1990s the rest of the Western
world (excluding Israel, assuming that Israel is a
part of it) followed suit, together with many
other countries. Even countries such as Luxembourg
and Switzerland, known for their deeply rooted
traditions of bank secrecy, 'joined the club'.
Unilateral measures in themselves proved,
however, to be insufficient. Given the fact that the
problem is international in character, it requires an
international remedy:
'The phenomenon cannot be tackled other than
by coordination between governments, law-
enforcement authorities and financial institutions.
Such cooperation also necessitates comprehensive
legislation which has to be co-ordinated between
states,
enabling all aspects of the phenomenon to
be combated.'
Consequently, an international regime against
money laundering emerged in the late 1980s and
the 1990s. This international regime not only
improves the effectiveness of the fight against crime
but it also brings about some macro-economic
benefits:
'An effective global campaign against money
laundering is a widely shared objective. Far from
being restrictive in nature or an obstacle to liberali-
sation, a successful effort against money laundering
is in fact an essential pre-condition for enhancing
international trade and commerce, financial
market liberalisation and the free movement of
capital under optimum conditions.'
The seeds of the international regime against
money laundering were planted in 1988, when the
Basel Committee on Banking Regulations and
Supervisory Practices adopted the Statement on
Prevention of Criminal Use of the Banking System
for the Purpose of Money Laundering. The
Statement encourages banks to adopt anti-money-
laundering procedures for the purpose of safeguard-
ing their credibility and integrity. To this end,
recommendations were issued with respect to matters
such as identification of customers, record keeping,
the development of internal control mechanisms
and cooperation with law enforcement authorities.
In the same year, the United Nations Convention
against Illicit Traffic in Narcotic Drugs and Psycho-
tropic Substances (known as the Vienna Convention)
was signed. The Vienna Convention calls for the
criminalisation of money-laundering operations and
for global coordination and legal assistance.
In 1989 an international task force to counteract
money laundering was established in Paris, under
the aegis of the seven industrialised nations; the G7
'Financial Action Task Force or FATF. The FATF
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