Replacing Safe Havens with a Safe System
| DOI | https://doi.org/10.1108/eb027201 |
| Published date | 01 February 1999 |
| Date | 01 February 1999 |
| Pages | 353-360 |
| Author | Jonathan M. Winer |
| Subject Matter | Accounting & finance |
Journal of Money Laundering Control — Vol. 2 No. 4
Replacing Safe Havens with a Safe System
Jonathan M. Winer
In recent weeks, there has been a major crash in the
middle of the financial services electronic highway,
and hundreds of millions of people are already feeling
the shock from the impact, even if they were
nowhere near the site of the impact in Moscow.
The current Russian crisis simultaneously poses
threats to the world's capital markets, Eurasian poli-
tical stability and democracy in the Newly Indepen-
dent States, in addition to the viability of the market
reforms the International Monetary Fund has been
seeking to put in place all over the earth. It provides
a perfect case history of the relevance of the theme of
the recent 16th International Symposium on Eco-
nomic Crime, The Prevention and Control of Economic
Crime Against Governments, to both national and
international security.
CAUSES OF THE RUSSIAN CRISIS
There have been many analyses of the causes of the
recent Russia crisis. Its relationship to the problem
of economic crime provides a window into vulner-
abilities in our system of financial supervision, regu-
lation, and enforcement that are literally global.
For years, analysts have suggested that the viability
of Russian reform was threatened by Russia's lack of
transparency, inadequate regulation, inadequate law
enforcement, corruption and organised crime. They
noted that financial crime threatened the integrity of
Russia's financial systems and simultaneously fuelled
many other types of criminal activity, discouraged
foreign investment, facilitated capital flight, and
robbed Russia of the resources it needed to move
forward with privatisation and modernisation.
But despite the profound flaws of its political,
juridical and financial systems, Russia is not itself
the problem. Russia is not unique; it is not even
that unusual. The recent global raging bear market
is merely the freshest reminder that global capital
flows and global technologies have outpaced the
ability of governments to regulate or to enforce the
rules necessary for efficient markets. Instead, in coun-
try after country, we see financial discontinuities,
anomalies, inadequate regulation, and fraud, leaving
the world subject instead to sudden, wild gyrations
in financial markets.
Mexico has had many of the same problems in its
political and financial systems as Russia has had,
with as much corruption in evidence as transparency
and regulatory integrity has been missing. Mexico,
like Russia, was a miracle of the marketplace, until
in early 1995, the miracle proved mirage and the
bailouts began. Japan's financial system similarly has
little transparency, poor auditing, weak regulatory
controls, and the shared participation of its banks
and its local form of organised crime, the Yakuza,
in real estate speculation. For much of the 1990s,
Japan has been in a slow free-fall, which continues
to this day. Last year, what was then called the
Asian Financial Flu spread through Malaysia, Indone-
sia, South Korea and Thailand. Each of these financial
sector collapses, like the most recent Russian pro-
blem, took place in environments that featured
poor regulation, weak law enforcement, little finan-
cial transparency, a fair degree of official corruption,
and no laws against laundering money.
Lesser known financial collapses have had similar
features. For example, the collapse in 1995 of Latvia's
largest commercial bank occurred because the bank
had been controlled by a criminal group that used
the bank to make bad loads to its front companies
and defrauded the bank's accounts of as much as
$40m. That collapse provoked a major financial
crisis in Latvia, contributed to a change in the
government, and forced Latvia to seek short-term
assistance from the International Monetary Fund.1
Similarly, a series of pyramid or 'Ponzi' schemes in
Albania last year stripped the country of more than
$250m in capital, causing the government to collapse
as hundreds of thousands of impoverished refugees
fled to Italy.
The flaws in our current system of governance in
the area of international financial service activities
should not surprise us. As technology globalised
financial markets beyond national borders, govern-
ments, regulators and law enforcement agencies
stayed at home, their responsibilities most often
limited to overseeing domestic activities of entities
and markets. While anyone with a computer,
modem and bank account had the ability to move
funds throughout every jurisdiction in the world,
no government regulator or law enforcement
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