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Part III
Anti-Money Laundering Regime: Examining the Challenge to
Sovereignty, Jurisdiction and Law Enforcement
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In this Part, the development of anti-money laundering regime (hereinafter: the
AML regime) and the legal effects of such development that challenge to the
principles of sovereignty, jurisdiction, and law enforcement will be analyzed.
The core problem that is presented in this part asks how these challenges have
originated and how it affects the existing rules of sovereignty, jurisdiction, and
law enforcement. Regarding the challenge to sovereignty, this study examines
the implementation of the AML regime from the standpoint of national
sovereignty. Regarding the challenge to jurisdiction, this study analyzes the
dynamics of jurisdictional theory in facing transnational money laundering
practices. Finally, in relation to the challenge to law enforcement, this study
exposes the changing character of law enforcement from a domestic level to an
international sphere.
Chapter 5
Anti-Money Laundering Regime and Its
Challenge to National Sovereignty
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5.1.
Introduction
This chapter will analyze the implementation of the AML regime and the legal
effects that challenge to national sovereignty. Whether the implementation of
the AML regime curtails the sovereignty of a state is the central question of this
chapter. First of all, a look into the relationship between globalization, global
governance, and international standards will be taken. International standards
have been emerging due to the process of globalization and the development of
global governance in all aspect of life, including the prevention and eradication
of money laundering practices. After discussing the relationship, this chapter
elaborates on the issue of the AML regime as an international standard. This
will be followed by an examination on how and why states comply with these
international standards despite being voluntary rules and despite the states in
question not being involved in the legislative-process of these standards. The
last section will analyze the implementation of the AML regime as
international standards from the standpoint of national sovereignty, focusing on
the principles of sovereign equality and of non-interference. In this section, the
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experience of Indonesia in implementing the AML regime during and after
blacklisting and the problems faced will be discussed.
5.2.
Mapping the Relationship between Globalization, Global
Governance, International Standards, and Anti-Money Laundering
Regime
5.2.1. Globalization, Global Governance, and the Emergence of
International Standards
Globalization can mean many different things in different contexts. 1 However,
scholars and policy makers tried to explain the evolving meaning of
globalization by emphasizing on the key concepts referring to certain
phenomena. Heba Shams, for example, defines globalization as a process of
social change, which underlines the change in terms of geographic and political
dimensions.2 Geographic dimensions refer to the direct effect of globalization
that expands beyond an individual state, while political dimensions refer to the
partial loss of state power in favor of the roles of other actors.3
As for the implications of globalization on society, it is widely
acknowledged that globalization has both positive and negative impacts. 4 One
1The
term ‘globalization’ is understood the integration and interaction of people, companies,
and government from different nations (http://www.globalization.org/What_is_Globalization.
html. It is a process driven by international trade and investment, and facilitated by information
technology (Ibid). Globalization is also understood as the development of internationally-oriented
social and economic relationships (See A. Gidden, Beyond Left and Right: The Future of Radical
Politics, Cambridge: Polity, 1994, p.4). Likewise, globalization may be seen as the erosion of
economic, political, social and cultural boundaries between countries. These include changes in
the identity of peoples, greater acceptance towards out of state, and transformations in strategies
that depend on the cooperation of international bodies in order to find solutions (See, i.e, HansHenrik Holm, “Globalization and What Governments Make of It”, European University Institute,
Firenze. Paper, Unpablished, p.4; Stephan Paul Haigh, “Globalization and the Sovereign State:
Authority and Territoriality Reconsidered”, University of Otago; Department of Political Studies;
Refereed paper presented to the First Oceanic International Studies Conference; Australian
National University, Canberra 14-16 July 2004, p.2.
2Heba
Shams, Legal Globalization: Money Laundering Law and Other Cases, International
Financial Law Series, 2004, p.66.
3Ibid.
4‘Globalization
has two features. The first is that it is a process that integrates the markets of
the world, making financial and other centers open and accessible to all on a global scale. This
means access to criminal as well. The second is that the emerging global economy is electronics,
integrated through information system and technology rather than organizational structures.
Again, access to the electronic economy is open to all including criminals’. See M. Sornarajah,
“Globalization and Crime: The Challenges to Jurisdictional Principles”, Singapore Journal of
Legal Studies, 1999, p.415.
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such positive impact is ease of access worldwide.5 On the other hand, one
negative effect would include the expansion and spread of crimes into
worldwide operations, such as the acts of money laundering. This type of crime
is committed across the boundaries of multiple jurisdictions in which criminals,
proceeds, and documentary evidence can easily move from one jurisdiction to
another. By using the development of technology6 which facilitates the method
of transferring illicit funds across-borders, criminals utilize them to make
money laundering easier to accomplish and harder to detect.7 Money
laundering in this context can be characterized as a transnational crime8 that
raises worldwide problems. The characteristics of such a crime cannot be
solved by an individual country, but requires multilateral efforts at an
international level.9 Here in this context, domestic measures are not enough in
5The
positive impacts of globalization involve people around the globe are connected to each
other, information and money flow more quickly, goods and services available increasingly,
international travel is more frequent, and international communication is commonplace. See V.
Sundaram, “Impact of Globalization in Indian Culture”. Available at http://www.boloji. com/
perspective/223.htm.
6‘Unsavory operators can today migrate around the globe as quickly as electronic signals.
Millions of dollars can be instantly re-shuffled accross countries thousands of miles away at the
click of a button. New technology, once more widely available, such as electronic money, will
facilitate the transfer of enormous amounts of funds across national boundaries with little
interference by domestic authorities’. Andreas Rueda, “International Money Laundering Law and
the USA PATRIOT Act 2001”. MSU-DCL Journal of International Law, Vol.10, 2001, p.142.
Andreas Rueda, “International Money Laundering Law and the USA PATRIOT Act 2001”. MSUDCL Journal of International Law, Vol.10, 2001, p.142.
7‘Like
the multinational corporation exploiting technology to advance legitimate business,
criminal groups are able to exploiting new technology in non-physical spaces beyond state
frontiers and thereby pose a threat to the existing system of territorial states. As much as a
business can make strategic alliances in the form of joint ventures, so can criminal syndicates in
different part of the world operate in association in the commission of crimes’. See M. Sornarajah
(1999), Supra note 4, p.410.
8A.
Bossard, Transnational Crime and Criminal Law, Chicago, 1990, p.5. See also Staven
David Brown, The Longer Arm of the Law, Routledge-Cavendish, London and New York, p.6.
‘The term ‘transnational’ means extending or going beyond national boundaries. Transnational
crime can be defined ‘an activity that is considered a criminal offence by at least two countries’, or
‘a serious crime business model involves setting up in one jurisdiction but operating in another’.
Another meaning of transnational crime is ‘criminal activities extending into a violating of laws of
several countries’. See also Gerhard O.W. Mueller, ‘Transnational Crime: An Experience in
Uncertainties’, in Einstein and Amir, Organized Crime: An Uncertainties and Dilemmas,
University of Illinois, Chicago, 1999, p.15. Passas used the term ‘cross-border crime’ which
means ‘conduct, which joepardizes the legally protected interests in more than one national
jurisdiction and which is criminalized in at least one of the states concerned’. See Nikko Passas,
“Cross-border Crime and the Interface between legal and Illegal Actors”, Security Journal,
Vol.16(1), 2003, p.20.
9In
the scope of the United States, for example, Martin argued that: ‘One lesson the United
States has learned is that international crime cannot be effectively fought from inside our borders.
We have learned, for example, that we cannot effectively combat narcotic trafficking without the
cooperation and assistance of all of those nations which are involved in the traffic of narcotics,
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countering money laundering, making international cooperation extremely
important in addressing the problem.10
It is at this point that collaboration and cooperation between or among
countries are of paramount importance for combating money laundering. Rules,
principles, and procedures above the level of a nation state need to be created.
This phenomenon leads to the establishment of global governance as a
response to the globalization in which it manages. Global governance11 in this
sense refers to how international affairs are governed in the current age of
globalization.12 In such a context, global governance refers to the collective
efforts to address worldwide problems that go beyond the capacity of
individual states to solve.13
In terms of its actions, global governance established international
standards14 which are then used in governing and guiding the conduct and
behavior of states and non-state actors in solving their problems.15 A standard
could be understood as a guide, setting rules for people to follow; they could
and the movement of cash proceeds derived from their sale... Thus, it has become commonplace to
observe that cooperation in law enforcement among nations is essential, particularly with those
types of crime which international by nature, such as narcotic trafficking, organized crime, money
laundering, and terrorism’ See Richard A. Martin, “Problems in International Law Enforcement”.
Fordham International Law Journal, Vol.14, 1990-1991, p.5.
10Matthew
Morgan, “Money Laundering: The United States Law and Its Global Influence”,
Essays in International Financial and Economic Law, No.5, November 1996, p.6
11‘Global
means pertaining to the whole world. Governance consists of rule systems, of
steering mechanism through which authority is exercised in order to enable systems to preserve
their coherence and move towards desired goals. ‘Global governance’ is not a normative term
denoting good or bad practice. It is a descriptive term, referring to concrete cooperative problemsolving arrangements. They may be formal, taking the shape of laws or formally constituted
institutions to manage collective affairs by a variety of actors (such as state authorities,
intergovernmental organizations, non-governmental organizations (NGOs), private sector entities,
other civil society actors, and individuals). But these may also be informal (as in the case of
practices or guidelines) or temporary units (as in the case of coalitions’. See Tom Obokata,
Transnational Organized Crime in International Law, (Oxford and Portland: Oregon, 2010), p.82.
See also Margaret P. Karns and Karen A. Mingst. International Organizations: The Politics and
Processes of Global Governance (Boulder, CO: Lynne Rienner Publishers, 2004).
12D
Held and A McGrew, ‘Interoduction” in D. Held and McGrew (eds), Governing
Globalization: Power, Authority and Global Governance, (Cambridge: Polity Press, 2003), p.2.
Marie Wilke argues that ‘global governance consist of various decision-making arenas, shifting
regulatory decisions from domestic to the global level’. See Marie Wilke, “Emerging Informal
Network Structures in Global Governance: Inside the Anti-Money Laundering Regime”, Nordic
Journal of International Law, Vol.77, 2008, p.509.
13Thomas
G. Weiss was director of the Ralph Bunche Institute for International Studies at the
Graduate Center (CUNY) and editor (2000-5) of the Journal Global Governance.
14Webster’s
Dictionary defines the concept of ‘standard’ as ‘something that is established by
authority, custom, or general consent as a model or example to be followed’.
15Herbert
V. Morais, “The Quest for International Standards: Global Governance vs.
Sovereignty”, Kansas Law Review, Vol.50, 2003, p.781.
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also be understood as universal rules, defined by a rule-maker, that address
public policy issues.16 In this setting, it could be argued that the concept of
‘international standard’ is intended to regulate the general acceptance of how
states, corporations, or individuals behave. Here in this context, international
standards address to voluntary guidelines or best practices for reducing the
global threat of money laundering practices.17 In the context of money
laundering, the Stockholm School Theories gave an example of international
standards from the FATF forty-recommendations.18 These standards are not
binding rules, meaning that no sanction can be imposed on states, corporations,
or individuals that fail to comply with them. However, the question of how
policies, procedures, and processes of ‘international standards’ impact on the
anti-money laundering regime remains. This issue will be addressed in the
following sub-section.
5.2.2. Anti-Money Laundering Regime as an International Standard
The term ‘standard’ can be described as ‘a guide for behavior and for judging
behavior’.19 The term standard can also be described as a set of universal rules
defined by a rule-maker that addresses public policy issues.20 Referring to the
concept of ‘international standard’, this term attempts to convey generally
accepted rules of behavior between governments, corporations, and individuals
from two or more countries in conducting business and financial affairs.21 In
this matter, ‘international standard’ can be manifested into recommendations,
16Rainer
Hülsse and Dieter Kerwer, “Global Standards in Action: Insights from Anti-Money
Laundering Regulation”, Organization, Vol. 14(5), 2007, p,627.
V. Morais (2003), Supra note 15, p.808. ‘The landscape of international standards
consists of a mix of "soft law" and "hard law." In terms of origin, international standards were
generally conceived of and developed by standard-setting bodies as voluntary guidelines or best
practices, that is, as "soft law." There were at least two good reasons for this practice. First, the
bodies that established these standards were often of very limited membership and, as such, lacked
the authority to require non-members to observe the standards. Examples of such bodies are the
OECD and the Basel Committee. By the same token, the non-members themselves often felt
threaten that their sovereignty was being encroached upon by these external pressures to adopt
standards. Second, the standard-setting bodies recognized that there are several material
differences among the legal frameworks and the business and financial systems of countries. A
‘one size fits all’ approach to the development and implementation of standards would not be
appropriate’.
17Herbert
18‘The
40+9 Recommendations are standards in the sense of the organization theory featured
here. They are designed to motivate states to develop their own national anti-money laundering
rules’. See Rainer Hülsse and Dieter Kerwer (2007), Supra note 16.
W. Abott & Duncan Snidal, “International Standards and International
Governance”, Journal European Public Policy, Vol.8, 2001, p.345.
19Kenneth
20Rainer
Hülsse and Dieter Kerwer (2007), Supra note 16.
21Herbert
V. Morais (2003), Supra note 15, p.781.
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best practices, principles, code of conducts, or guidelines. In the context of
anti-money laundering policy, ‘international standard’ is codified in the FATF
forty-recommendations. As an international standard, the fortyrecommendations function as ‘a blueprint’ for governments in creating money
laundering laws and regulations.22
The first international standards were issued in 1990 and aimed at
preventing the acts of money laundering particularly in the scope of financial
systems. These standards cover the general framework,23 the improvements of
national legal systems,24 the enhancement of the role of financial systems,25 and
the strengthening of international cooperation.26 Due to the changes in moneylaundering methods, techniques, and trends, these standards were revised for
the first time in 1996 and took into account two factors: the vulnerabilities of
technological advances and the profits derived from beyond drugs-related
crimes.27 The emerging trends of money laundering around the world
compelled the FATF to revise its recommendations for the second time in
2003.28
As an international standard, the forty-recommendations (2003)
comprise of four sections. These involve the legal system;29 measures to be
taken by financial institutions and non-financial businesses and professions to
22The
Recommendations recognized as the international standards for Anti-Money Laundering
(AML) and Combating the Financing of Terrorism (CFT). In July 2002, the IMF and the World
Bank conditionally endorse the FATF Recommendations as the AML and CFT standard for the
operational work of the two institutions. In March 2004, the IMF and the World Bank
unconditionally endorsed the FATF Recommendations (2003) as the new standard; and as a
consequence, the AML/CFT now permanent component of the two institutions’. See Daniel W.
Drezner, “Who Rules? State Power and the Structure of Global Regulation”, University of
Chicago, 2002, p.10. ‘See also Marie Wilke (2008), Supra note 12, p.512.
23The
Forty Recommendation on Money Laundering (1990), Recommendation 1-3
24Ibid,
Recommendations 4-7
25Ibid,
Recommendations 8-29
26Ibid,
Recommendations 30-40
27
Several changes that have been integrated in the 40 recommendations (1996) are: the
extension of predicate offences to all serious crimes; the expansion of customer identification to
legal entities; the mandatory reporting of suspicious transactions; the application of the
recommendations to the bureaux de change, non-bank financial institutions, and non-financial
businesses or professions; the need to pay special attention when dealing with shell corporations;
and the monitoring of cross-border cash movements.
28The
revision includes several substantial changes from the 1996 revision. Those changes are:
specifying a list of crimes that underpin the acts of money-laundering; enhanced measures for
correspondent banking and politically exposed persons; the extension measures to non-financial
business and professions; the improvement of transparency requirements on beneficial ownership
of legal persons; the reliance on third parties and introduced business; and the prohibition of shell
banks.
29Ibid,
Recommendation 1-3
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prevent money laundering and terrorist financing;30 institutional measures
necessary for combating money laundering and terrorist financing; 31 and
international cooperation which involves mutual legal assistance and
extradition.32
The first section relates to the legal system that provides the scope of
money laundering, provisional measures, and confiscation. In this section, the
FATF recommends its members to criminalize money laundering and apply
this crime to the widest range of predicate offences.33 The FATF also
recommends adopting measures to confiscate the proceeds of money
laundering.34 In implementing its recommendations, the members should
ensure that they are not inhibited by bank secrecy laws.35
The second section relates to the role of financial institutions, nonfinancial businesses and professions, and the role of countries in the prevention
of money laundering and terrorist financing. The role of financial institutions is
conducted through customer due diligence, record keeping, and the reporting of
suspicious transactions.36 In contrast, the functions of countries are to provide
sanctions who fail to comply with its requirements, to refuse the establishment
with shell banks, to implement feasible measures to detect and monitor crossborder transportation of currency, and to apply its recommendations to
businesses and professions.37
The third section concerns the institutional measures necessary in a
system for combating money laundering and terrorist financing.38 Firstly,
countries should ensure that their financial institutions are effectively
implementing the forty-recommendations.39 Secondly, countries should ensure
that effective, proportionate and dissuasive sanctions - whether criminal, civil
or administrative - are available for natural and legal persons who fail to
comply with anti-money laundering or terrorist financing requirements.40
Thirdly, countries should establish a Financial Intelligence Unit (FIU) in their
territories.41 Fourthly, countries have to develop special investigation
30Ibid,
Recommendation 4-25
31Ibid,
Recommendation 26-34
32Ibid,
Recommendation 35-40
33Ibid,
Recommendation 1
34Ibid,
Recommendation 3
35Ibid,
Recommendation 4
36Ibid,
Recommendation 5-15
37Ibid,
Recommendation 17-20
38Ibid,
Recommendation 26-34
39Ibid,
Recommendation
40Ibid,
Recommendation 17
41Ibid,
Recommendation 26
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techniques suitable for the investigation and should provide their own
competent authorities.42 Finally, countries should ensure that their policy
makers, FIU, law enforcement, and supervisors have effective mechanisms that
enable them to co-operate and co-ordinate domestically with each other to
combat money laundering and terrorist financing.43
In the fourth section, the FATF encourages countries to conduct
international cooperation by fully implementing all relevant international
conventions.44 In this case, countries should provide the widest range of mutual
legal assistance notwithstanding the absence of dual criminality. 45 Also,
countries should be able to take expeditious action in response to requests by
foreign countries to identify, freeze, seize, and confiscate the property
laundered, the proceeds, and the instrumentalities used in the commission of
these offences.46 In relation to extradition, countries should recognize money
laundering as an extraditable offence through either extraditing its own national
or submitting the case to its competent authorities for the purpose of
prosecution. Finally, countries should co-operate with each other, in particular,
on procedural and evidentiary aspects to ensure the efficiency of such
prosecutions.47
5.3.
Analyzing the Implementation of the Anti-Money Laundering
Regime and the Compliance of States
The emergence of various laundering methods as described in the previous
chapter48 has been responded by the anti-money laundering regime (AML
regime) in preventing and controlling money laundering practices. Establishing
international standards is one effort to internationalize the anti-money
42Ibid,
Recommendation 27 and 30
43Ibid,
Recommendation 31
44Ibid,
Recommendation 35
45Ibid,
Recommendation 37
46
Ibid, Recommendation 38
47Ibid,
Recommendation 39.
48Trends
in money-laundering activities have been moving from conventional to more
sophisticated and professional methods. The development of these trends might be split into four
categories based on its type, scope, perpetrator, and modus operandi. The first category is marked
by the extension of predicate offences from drug-related crimes to all serious crimes. The
development of the second category concerns the movement of the launderers from individuals
that are operationally restricted in one jurisdiction to the internationally organized criminals that
operate on a global scale. The third category is developed by the movement of perpetrators from
‘blue-collar criminals’ such as drugs-traffickers, arms smugglers, human traffickers to ‘whitecollar criminals’ which involves lawyers, accountants, notaries and other legal professions. The
final category concerns the development of modus operandi, which is shifting from real crimes to
cyberspace crimes.
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laundering policy. Its internationalization aims to raise the issue of money
laundering into an international level. This then leads to the question of how far
have countries complied with their obligations under the AML regime? Three
subject matters that will be elaborated in this section are the meaning and
theories of compliance, constructing state compliance with the AML regime,
and assessing the compliance of states with the regime.
5.3.1. The Meaning and Theories of State Compliance
Theories of compliance are useful for understanding the compliance-related
behavior and the reasons behind the behavior. There are various theoretical
definitions and multiple meanings of ‘compliance’. In a broader context, the
term ‘compliance’ which can be described through synonyms such as
obedience and willingness, requires a wish, a request, a demand, or
command.49 Compliance can also be defined by observing the conformity of a
behavior to a specific set of rules50; or by observing the implementation of
regulation by a country that adhere to the agreed upon set of provisions.51
Taking state behavior into consideration, compliance may refer to the
application of international standards or agreements. This means that
compliance points to a state fulfilling its obligations under international
standards or agreements.
Whichever definitions are formulated, compliance comprises three basic
elements: ‘actor’, ‘behavior’, and ‘norm’. ‘Actor’ refers to the states or nonstate entities that conclude international agreements and then implement and
enforce them in their actual behavior. ‘Behavior’ refers to the action of the
actor undertaken to conform to the international obligation on the domestic
level. ‘Norm’ refers to the standard or specification to which the actor has to
comply. Norms in this context point to the international and domestic
compliance. The international compliance is about the behavior of state; about
how and why they comply with the norms. The domestic compliance, in the
mean time, focuses on the behavioral of corporations and individuals under the
supervision of any state. The question is when the compliance takes place and
the reasons why states comply or not with their obligations.
Oran Young in his book ‘Compliance and Public Authority’ points out
that ‘compliance occurs when the actual behavior of a given subject conforms
to prescribed behavior; and non-compliance or violation occurs when actual
49See
the Oxford Encyclopedic English Dictionary, Oxford University Press, 1991, p.299; and
Collins Cobuild English Language Dictionary, London & Glasgow, 1987, p.284.
50Benedick
Kingsbury, “The Concept of Compliance as a Function of Competing of
International law”, Michigan Journal International Law, Vol.19, 1998, p.345.
51Jacobson,
HK and Brown Weiss, E, “Compliance with International Environmental Accord”,
1 Global Governance, 1995, p.119.
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behavior significantly differs from prescribed behavior’.52 In the meantime,
Shihata distinguished two categories of compliance, namely, formal
compliance and substantive compliance.53 According to him, formal
compliance occurs when states enter into an international agreement, while
substantive compliance takes place when any state adopts the international
agreements and implements them in its domestic legal system.54
From the essential question as to why states comply or not with
international obligations in some cases and not in others, some basic models of
state compliance arise. Waltz55, for example, proposes three kinds of theories,
namely, the realist theory, institutionalist theory, and normative theory. In the
realist theory, it is claimed that any state obeys international law only when it
serves its own self-interest. It is the interest of a state that is the main aspect
and the principal reason for considering the compliance of international
obligations.56 As apposite, any state will violate the law if the law is contrary to
its interests. In this case, a state acting based on what Hulsse and Kerwer call
the logic of consequences in which they expect costs and benefits of
compliance with any rules.57 This theory argues that power rather than law is
the primary determinant in interstate relations.58 The institutionalist theory
asserts that compliance can be reached effectively by establishing an
international institution whereby legitimate standards of state behavior are
created.59 The normative theory, finally, argues that moral and ethical
obligations deriving from natural law form behavioral guidance for states to
obey or not with international obligations.60 The approach of this theory
focuses on the force of ideas, beliefs and standards of appropriate behaviors as
a major influence on government willingness to comply with international
agreements.61 This theory argues that states behave according to the logic of
52Oran
Young, Compliance and Public Authority: A Theory with international Application,
John Hopkins: University Press, 1979, p.2-3.
53Ibrahim
F.I. Shihata, “Implementation, Enforcement, and Compliance with International
Environmental Agreements – Practical Suggestions in Light of the World Bank’s Experience”, the
Georgetown International Environmental Law Review, Vol.9, 1996, p.37.
54Ibid.
55Kenneth
N. Waltz, “Theories of Compliance with International Law: A Typology”, in
Markus Burgstaller, Theories of Compliance with International Law, Leiden/Boston: Martinus
Nijhoff Publishers, 2005, p.p.96-102.
56Ibid.
See also Louis Henkin, How Nations Behave: Law and Foreign Policy, Second Edition,
New York: Columbia University Press, 1979, p.p.19, 23, and 30.
57Rainer
Hulsse and Dieter Kerwer (2007), Supra note 16, p.629.
58Beth
A. Simmons, “Compliance with International Agreements”, Annual Reviews Political
Science, 1998, p.79.
59
Kenneth N. Waltz (2005), Supra note 55, p..96-102.
60Ibid.
61Beth
A. Simmons (1998), Supra note 58, p.88.
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appropriateness in which they have a tendency to follow the rules.62 This
theory tends to use a cooperative approach and moral force in obtaining
compliance.63
Other opinions regarding the causes and reasons as to why states comply
or not with international law have been proposed by Abram Chayes and
Antonio Handler Chayes64, Thomas M. Frank65, and Harold Honju Koh66.
Chayes & Chayes point to the ‘managerial approach’ in promoting compliance
with treaty norms. The ultimate impetus of compliance, according to this model
does not stem from the fear of sanctions, but rather the lost of reputation and
avoidance of isolation from the international community.67 In addition, they
suggest that non-governmental and inter-governmental institutions play
significant roles in using the above tools for managing and leading to a
satisfactory level of compliance.68 As opposed to the ‘managerial model’,
Chayes & Chayes refuse elements of the ‘enforcement model’ such as military,
economic, membership or unilateral sanctions. The reason to refuse it,
according to them, is due to high-costs and the legitimacy problems.69
Still another case was argued by Thomas Frank. He proposes the
‘fairness approach’ in which legitimacy and distributive justice function as the
central causes and reasons of state compliance. In this matter, Frank argues that
countries will obey international rules if they consider that the rules are fair and
in accordance with the right process.70 Finally, Koh proposes ‘transnational
legal processes’ in analyzing state compliance with international law. Koh
argues that as transnational actors – including both state and non-state actors –
interact, patterns of behavior and norms emerge which are internalized. This
model internalized them into the domestic institutions, politics, and legal
systems, which in turn leads to compliance.71
62
Kenneth N. Waltz, Supra note 55.
63Durwood
Zaelke, Donald Kaniaru, Eva Kruzikova (Eds), Making Law Work: Environmental
Compliance & Sustainable Development, Cameron May, London, 2005, p.57.
64Abram
Chayes and Antonio Handler Chayes, The New Sovereignty: Compliance with
International Regulatory Agreements, Cambridge: Harvard University Press, 1995.
65Thomas
M. Frank, Fairness in International Law and Institutions, Oxford: Clarendon Press,
1995.
66Harold
Hongju Koh, Why Do Nations Obey International Law, Yale Law Journal, Vol.106,
1996-1997, p.2639.
67Chayes
& Chayes (1995), Supra note 64, p.p.250-271
68Ibid.
69Ibid,
p.30. See also Harold Hongju Koh, Supra note 66, p.2637.
70Thomas
71Ibid.
1998.
M. Frank, Supra note 65. See also Harold H. Koh, Supra note 66, p.2614.
See also Horald H. Koh, “Bringing International Law Home”, Hous.L.Rev, Vol.35,
Chapter 5: Anti-Money Laundering Regime and Its Challenge to National Sovereignty
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5.3.2. Constructing State Compliance with the AML Regime
5.3.2.1. Compliance Mechanisms
The compliance mechanisms in the work of the FATF to member and nonmember countries involve three models, namely, self-assessment, mutual
evaluation, and Non Cooperative Countries and Territories (NCCT). The first
two mechanisms are for the FATF’s members and the third one is for nonmembers.
(i)
Self-Assessment
The first mechanism is self-assessment exercise. It monitors annually the
progress of the FATF members in implementing the forty-recommendations.72
In this exercise, each member provides information on the status of its
implementation dealing with legal and financial aspects. Herein, each member
is required to complete a standardized questionnaire, showing to what extent
the recommendations have been implemented.73 The information is compiled
and analyzed with the result presenting a view of the progress of the members
in implementing the forty-recommendations.74 Based on the assessment, the
FATF may offer suggestions for further enhancement of countries’ anti-money
laundering systems.
(ii)
Mutual Evaluation
The second mechanism is the mutual evaluation process. It is a monitoring
method that evaluates the performance of the AML systems of member
countries based on the implementation of the forty-recommendations.75 Herein,
it provides more detailed examinations of the measures to combat money
laundering. This method is carried out by a Team, which consists of selected
experts in the field of legal, financial, and law enforcement from different
countries, performing an on-site examination.76 The Team analyzes data
submitted by the governments and then verifies the data through on-site visits
and interviews.77 Subsequently, the secretariat of the FATF issues a draft
72Self-assessment
was begun in 1991 utilized a compliance grim which produced
comprehensive evaluation of progress on legal and financial matters. See FATF, Annuat Report
1990-1991, May 13 1991, p.3.
73See,
i.e, FATF, Annual Report 1995-1996, 28 June 1996, pr.39. FATF, Annual Report 19992000, 22 June 2000, pr.84-85.
74See
FATF, Annual Report 1997-1998, 25 June 1998, pr.27.
75See
FATF, Annual Report 1991/1992, 25 June 1992, pr.30-31.
76Ibid.
77Ibid.
Chapter 5: Anti-Money Laundering Regime and Its Challenge to National Sovereignty
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confidential report that the Team and the evaluated countries will discuss.78
The final report is a confidential opinion that will issue after discussing in the
FATF plenary meeting.79 The report describes how well the member countries
adhere to the recommendations and identifies areas for further enhancement.80
The mutual evaluation has had three rounds since 1992; every member
was evaluated once in each round. The focus of each round differs depending
on the targets that will be obtained. The first round was conducted between
1992 and 1995. It focused on monitoring the progress of the FATF members in
implementing the forty-recommendations.81 The second round occurred
between 1996 and 1999; its focus was on the effectiveness of each country’s
anti-money laundering laws and systems.82 The third round of mutual
evaluation was conducted between 2005 and 2008 and focused exclusively on
the compliance of the revised recommendations, the areas of serious
deficiencies identified in the second round, and the effectiveness of countermeasures.83 Here in the third round, the FATF evaluated its members based on
the forty-recommendation 2003, the 9 Special Recommendations 2001, and the
Anti-Money Laundering/Combating Terrorist Financing (AML/CFT)
Methodology 2004.
(iii)
The Non Cooperative Countries or Territories
The third mechanism is a policy for assessing the implementation of antimoney laundering by non-member countries in order to achieve maximum
compliance with the forty-recommendations.84 The FATF reviewed nonmember countries by using twenty-five criteria for defining non-cooperative
countries or territories. The objective of the initiative is to counter money
laundering through having international standards implemented by all global
financial centres.85 Non-member countries that do not comply with the fortyrecommendations will be categorized as Non Cooperative Countries or
Territories (NCCTs).86 Here in this context, the FATF adopted twenty-five
78Ibid.
79Ibid.
80Ibid.
81See
FATF, Annual Report 1991-1992, 25 June 1992, pr.32-57.
82See
FATF, Annual Report 1996-1997, June 1997, pr.38.
83See
FATF, Annual Report 2004-2005, 10 June 2005, pr.17.
84FATF,
Annual Report. The Annual Report Issue on Non-Cooperative Countries and
Territories has existed since 2001.
85FATF,
Annual Review of Non-Cooperative Countries and Territories 2006-2007: Eight
NCCT Review, 12 October 2007, pr.5.
86The
concept of Non Cooperative Countries and Territories (NCCTs) has existed during the
FATF meetings in 1999/2000. During this period, the FATF established 25 criteria and identified
jurisdictions which meet the criteria. They cover prevention, detection and penal provisions, and
Chapter 5: Anti-Money Laundering Regime and Its Challenge to National Sovereignty
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criteria in defining the NCCTs. These criteria cover prevention, detection and
penal provisions. 87 The rationale for this policy is to encourage countries and
territories not only to implement anti-money laundering legislations, but also to
improve existing countermeasures. This approach uses ‘peer pressure’ being
based on ‘naming and shaming’ by blacklisting certain non-member countries
that do not comply with the FATF standards. The countries which are
categorized as an NCCT appear in the FATF’s blacklist. According to the
FATF, the aim of this initiative is for all financial centres to adopt effective
measures to prevent, detect, and repress money laundering in the world’s
financial system.88 For non-member states, the forty-recommendations are put
into effect when it is conceived that the launderers and traffickers are taking
advantage of the weak or non-existent regulations regarding these matters.89
This is the reason why the FATF has obliged non-member states to
implement the forty-recommendations. It has become evidence that even
though the members have strengthened their systems, the criminals try to seek
other jurisdictions that have weaknesses in their money laundering
countermeasures. As a consequence, money laundering may affect not only
non-members with weaknesses in their legislations but also the member states
that have complete money laundering countermeasures. In the 2000 NCCT
report, fifteen countries were identified as non-cooperative in the fight against
money laundering. In 2001, the FATF added eight countries to the list
including Egypt, Hungary, Indonesia, and Nigeria. The list changes each year
based on countries compliance. Some countries are removed from the list,
some remain, and new ones were added. The following figure displays the list
of NCCTs process from 2000 to 2006.
Bahamas
Cayman Islands
Cook Islands
Dominica
2000
+
+
+
+
2001
+
+
2002
+
+
2003
+
-
2004
+
-
2005
-
2006
-
they include such items as financial regulations (e.g. supervision of financial institutions,
excessive secrecy, customer identification requirements, and other regulatory requirements),
judicial and administrative international cooperation, and the issue of resources.
87The
criteria address the following issues: loopholes in the financial regulations that allow no
or inadequate supervision of the financial sector, weak licensing or customer identification
reequirements, excessive financial secrecy provisions, or lack of suspicious transaction reporting
system; weaknesses in commercial requirements icluding the identification of beneifical
ownership and the registration procedures of business entities; obstacles to international cooperation regarding both administrative and judicial levels, and inadequate resources for
preventing, detecting and repressing money laundering activities. See FATF, Annual Report
1999/2000, 22 June 2000, pr.79.
88Annual
and Overall Reviews of Non-Cooperative Countries and Territories, 10 June 2005,
p.15.
89FATF,
Annual Report 1989/1990, p.16.
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Egypt
Granada
Guatemala
Hungary
Indonesia
Israel
Lebanon
Liechtenstein
Marshall Islands
Myanmar
Nauru
Nigeria
Niue
Panama
Philippines
Russia
St.Kits and Nevis
St.Vincent & Grenadines
Ukraine
+
+
+
+
+
+
+
+
+
+
+
-
Total 23
15
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
-
+
+
+
+
+
+
+
+
+
+
+
+
+
17
15
+
+
+
+
+
+
+
+
9
+
+
+
+
+
-
+
+
-
6 2
1
+
-
Figure 4: List of NCCTs from 2000 to 2006
The NCCT initiative was conducted until on October 2006. After that, the
FATF declared there was no the NCCT’s evaluation anymore. 90 However, it
does not mean there is no exercising on non-member countries regarding the
implementation of the FATF standards. In this sense, the FATF just changed
the name of its evaluation from ‘NCCT initiative’ to ‘FATF Public Statement’.
Therefore, in essence, there is no significant different between these two
mechanisms since both of them announce to public the countries that have
serious deficiencies in implementing the AML/CFT systems. On 16 February
2012, the FATF announced Public Statement on 17 countries91 that have
strategic deficiencies in complying with the AML/CFT standards.92
90See
http://www.fatf-gafi.org/document/June 2007.
91Those
countries involve Bolivia, Cuba, Democratic People's Republic of Korea, Ethiopia,
Ghana, Indonesia, Iran, Kenya, Myanmar, Nigeria, Pakistan, Sao Tome and Principe, Sri Lanka,
Syria, Tanzania, Thailand, and Turkey. See http://www.fatf-gafi.org/document/18/0,3746,en_
32250379_32236992_49694738_1_1_1_1,00.html.
92‘Indonesia,
for example, has taken significant steps towards improving its AML/CFT regime,
including by enacting AML legislation in 2010 and developing draft comprehensive CFT
legislation. Despite Indonesia’s high-level political commitment to work with the FATF and APG
to address its strategic AML/CFT deficiencies, Indonesia has not made sufficient progress in
implementing its action plan, and certain strategic AML/CFT deficiencies remain. Indonesia
should work on implementing its action plan to address these deficiencies, including by: (1)
adequately criminalising terrorist financing (Special Recommendation II); (2) establishing and
implementing adequate procedures to identify and freeze terrorist assets (Special
Recommendation III); and (3) amending and implementing laws or other instruments to fully
implement the 1999 International Convention for the Suppression of Financing of Terrorism
Chapter 5: Anti-Money Laundering Regime and Its Challenge to National Sovereignty
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Countries listed in the list might have economic consequences due to the
application of recommendation 21.93 Herein, the FATF recommends its
members ‘to give special attention to business relation and transactions with
persons including financial institutions from non-cooperative countries or
territories’. The blacklist functions as ‘shaming character’ which is used to
enforce non-member countries implement the FATF’s standards. To decide
whether any jurisdiction should be removed from the list, the countries in
question have to meet a minimum standard required by the FATF. Two special
measures can be taken in dealing with the countries that do not sufficiently
apply the forty-recommendations. The first measure is special due diligence to
be exercised by financial institutions to individuals and entities from such
countries. The second one is special record keeping and reporting requirements
regarding suspicious transactions emanating from these countries.
Subsequently, the FATF will remove countries from the list if the countries in
question have met those requirements.
A research regarding the effectiveness of this sanction in forcing nonmember states to meet the minimum standards of the FATF recommendations
has been conducted by Sharman.94 His research on the Seychelles, Antigua &
Barbados, and the Cook Islands has proven that these governments improved
their anti-money laundering laws in a relatively short time. Based on this
research, a country’s association to crime and corruption has a detrimental
effect on the reputation of the NCCT.95 The NCCTs list has ‘a shaming
character’ and ‘economic consequences’ to the countries affected this policy. In
this case, the blacklisting method used in the FATF policy causes diffidence,
disinvestment, and threatening electronic banking links in the financial systems
of the targeted countries. This could then lead to economic and financial
problems for those countries in question.
(Special Recommendation I). The FATF encourages Indonesia to address its remaining
deficiencies and continue the process of implementing its action plan’. See http://www.fatfgafi.org/document/18/0,3746,en_32250379_32236992_49694738_1_1_1_ 1,00.html.
93See
sub-section 4.3.2 below.
94J.C.
Sharman, “The Global Anti-Money Laundering Regime and Developing Countries:
Damned if They Do, Damned if They Don’t?”, p.p.9-13. Available at http://www.allacademic.
com//meta/p_mla_apa_research_citation/1/0/0/7/5/pages100752/p100752-28.php. See also J.C.
Sharman, The Money Laundry: Regulating Criminal Finance in the Global Economy, (Ithaca and
London: Cornell University Press, 2011).
In his research on the Cook Islands, Sharman noted that: ‘In 1999 the offshore industry
made a net contribution of $NZ 1,4 million to government revenues, but by 2004 this contribution
had fallen to $NZ 400,000’.This reflects a drop in the number of offshore banks, a halving in the
number of IBCs, and decline in the number of asset protection trusts, which local industry and
government sources attributed directly to the blacklisting.
95Ibid.
Chapter 5: Anti-Money Laundering Regime and Its Challenge to National Sovereignty
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5.3.2.2. Accountability for Non-Compliance
What are the appropriate sanctions to deal with states that do not comply with
the anti-money laundering regime? Regarding this matter, the FATF provides
various measures, namely, termination from the FATF membership, the
application of recommendation 21, peer pressure through the NCCT process,
imprisonment, and fines. The first three sanctions are provided for states, the
remainders for non-state entities and their employers. ‘States’ in this context
refers to both members and non-members of the FATF. Non-state entities
include financial intermediaries such as banks, non-bank financial institutions,
and non-financial business and professions.
Terminating from the FATF’s Membership
(i)
Termination from the FATF’s membership can be imposed on a member that
does not comply with the FATF recommendations. This sanction has
threatened on the Austrian government in 2000. At that time, the membership
of Austria would be suspended if it did not get an effort to meet these
standards.96 On May 2000, the FATF asked the Austrian government to
eliminate and then to prohibit the system of anonymous passbook.97 The full
range of measures, which were taken by the Austrian government satisfied the
FATF and met its conditions. Therefore, the sanction was not applied and the
Austrian membership of the FATF was not suspended.
(ii)
Applying Recommendation 21
The application of recommendation 21 is another sanction for non-compliant
states. Through this sanction, the FATF calls for its members to apply special
attention to transactions with specified jurisdictions.98 This sanction might be a
96See
FATF, Annual Report 1999/2000, 22 June 2000, pr.90.
‘A public statement was issued on 3 February 2000 which stated that Austrian would be
suspended as a member of the FATF with effect from 15 June 2000 unless by 20 May 2000 the
Austrian government: (a) issues a clear political statement that it will take all necessary steps to
eliminate the system of anonymous passbooks in accordance with the 40 FATF recommendations
by he end of June 2002; and (b) introduced and supported a Bill into Parliament to prohibit the
opening of new anonymous passbook and to eliminate existing anonymous passbooks’.
97Ibid.
98Recommendation
21 states that: Financial institutions should give special attention to
business relationships and transactions with persons, including companies and financial
institutions, from countries which do not or insufficiently apply the FATF Recommendations.
Whenever these transactions have no apparent economic or visible lawful purpose, their
background and purpose should, as far as possible, be examined, the findings established in
writing, and be available to help competent authorities. Where such a country continues not to
apply or insufficiently applies the FATF Recommendations, countries should be able to apply
appropriate countermeasures.
Chapter 5: Anti-Money Laundering Regime and Its Challenge to National Sovereignty
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_______________________________________________________________________________________________________
signal for the greater scrutiny of transactions by financial intermediaries. 99 This
sanction also enables the application of other countermeasures if the noncompliant countries failed to make adequate progress.100 The final option is that
the FATF can recommend its members to close off business relations with the
non-compliant states or deny access to their financial systems. 101 The strict
application of this recommendation will result in placing pressure on countries
to comply in order to maintain their access in the global financial market.102
Sanctions for the application of recommendation 21 to the FATF’s members
were imposed on Turkey in 1996. Turkey had not passed the anti-money
laundering legislation and its compliance with the forty-recommendations was
seriously deficient.103 For these reasons, the FATF issued a public statement in
accordance with recommendation 21.104 However, the FATF did not apply this
recommendation because Turkey adopted a new law which was welcomed by
the FATF.105 Recommendation 21 was also used against a non-member state,
such as the Antiguan government. In this case, the Banks of New York and
America, the Chase Manhattan and the HSBC Banks all terminated their
banking relations with Antiguan institutions.106
(iii)
Peer Pressure through the NCCT Initiative
Peer pressure sanction through the NCCT initiative has been used for nonmembers who have insufficiently complies with the forty-recommendations.
As discussed earlier, the FATF applied this sanction for the first time in 2000,
when fifteen countries were identified as non-cooperative in the fight against
money laundering. The list change annually based on countries compliance.
The FATF demands of its members that they apply recommendation 21 to the
countries on the list.107 As a result of the NCCT initiative, many countries have
99
FATF, Annual Report 2004/2005, 10 June 2005, pr.40.
100FATF,
NCCT Report 2005, p.5.
101FATF,
NCCT Report 2005, p.1. See also FATF Report on New Payment Methods, 13
October 2006, p.19.
Shams, “The Fight Against Extraterritorial Corruption and the Use of Money
Laundering Control”, Law and Business Review of the Americas, 2002, p.129.
102Heba
103In
September 1996, Turkey was the only FATF member which had not passed anti-money
laundering legislation. See FATF Report 1996/1997, June 1997, pr.33-35.
104Ibid.
105On
19 November 1996, Turkey enacted Law No.4208 on the Prevention of Money
Laundering which came into force that same day. The law makes it a crime to launder the
proceeds of a range of serious offences and contains provisions dealing with seizure, confiscation
and the the controlled delivery of illegal funds. See Ibid.
106J.C.
Sharman (2006), Supra note 94.
107Financial
institutions should pay special attention to business relations and transactions with
persons, including companies and financial institutions, from countries which do not or
Chapter 5: Anti-Money Laundering Regime and Its Challenge to National Sovereignty
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_______________________________________________________________________________________________________
improved their AML regulations to overcome the serious deficiencies of their
anti-money laundering systems.
(iv)
Imprisonment and Fine
Finally, imprisonment and fine as sanctions can be imposed on non-state
entities that perform poor performance or failure to meet their obligations with
the AML systems. This sanction also imposes on them if they do not apply
obligations to comply with the forty-recommendations. There are some
financial institutions that have been fined because of various reasons. To date,
among others, the BCCI case108, Bank of New York109, Bank of Boston110,
Banco de Occidente111, Amsouth Bank112, and Banque Leu113. Most of these
cases concern the failure of meeting their obligations with regard to customer
identification, record keeping, and the reporting of suspicious transactions.
Those cases are mainly related to the terrorists, dictators, and politicians.114 The
insufficiently apply these recommendations. See Guy Stessens, “The FATF ‘Black List’ of NonCooperative Countries or Territories”, 14 Leiden Journal of International Law, 2001, p.205.
108For further analysis of BCCI case, see N. Passas, “The Genesis of the BCCI Scandal”,
Journal of Law and Society, 23:1, 1996, p.52-72.
109Joseph
B. Mays, Jr, “The Mens Rea Requirements in the Money Laundering Statutes”,
Alabama Law Review, Vol.44:3:725, p. 734. See also Bonnie Buchanan, “Money Laundering - A
Global Obstacle”, Research in International Business and Finance, p.122.
110The
Bank of Boston was indicted for failing to report around $1,2 billion of currency
transaction in 1985. Following a guilty plea, the bank was fined $500,000. See Frederick J.
Knecht, “Extraterritorial Jurisdiction and the Federal Money Laundering Offence”, Stanford
Journal of International Law, Vol.22, 1986, p.391.
111Kirk
W. Munroe, “Surviving the Solution: The Extraterritorial Reach of the United States”,
14 Dickinson Journal International Law 505, Volume 14:3, 1995-6, p.p.517-520.
112U.S.
Department of Justice, available at http://www.usdoj.gov/usao/mss/documents/
pressreleases/October2004/amprsrels.htm-- 5 February 2007.
113Ibid,
at 520-523.
114‘From
2000 onwards, more and more cases in which terrorists, dictators and politicians
mainly from southern countries had used Western financial institutions, predominantly set in
Switzerland or the U.S., for money laundering were exposed in public. Especially interesting were
the Abacha case (concerning the defalcation of public funds by the former president of Nigeria,
Sani Abacha) and the case of the Bank of New York (concerning the money laundering of
Russian corporate enterprises by using their U.S. branches). The cases revealed new methods and
aspects of money laundering and thus put the AML policy of that time into question, which
resulted in a general reform of existing standards and the development of new approaches.
Surprisingly, even though the scandals had a huge impact on the Western financial sector and are
commonly known, specialist literature always just generally refers to ‘the scandals that shook up
the financial sector at the beginning of the new century’ instead of naming the cases. It is thus
accordingly hard to gain information about the cases. Nevertheless the reports of the enquiry
boards investigating in the cases allow a good insight’.See Marie Wilke (2008), Supra note 12,
p.516.
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_______________________________________________________________________________________________________
question remains, to what extent countries comply with the FATF standards?
This issue will be analyzed in the following section.
5.3.3. Assessing the Compliance of States with the AML Regime
5.3.3.1. The Compliance of the FATF’s Members States
Compliance concerns both state and non-state entities. With regard to the state,
compliance refers to a state’s adherence to international obligations. If any state
ratifies an international agreement, as a consequence, it should comply with the
obligations accorded in the agreement. Whether a state complies with its
obligations, it can be checked by observing it after ratification. Two actions
that the state should take after ratifying an agreement are, firstly, harmonizing
its domestic laws by drawing up new ones or amending the existing ones in
order to make them consistent with the international agreements; and secondly,
implementing and enforcing those instruments in its domestic legal system.
However, it is not always the case; some states comply with their obligations,
but others do not.
State compliance exists on an international as well as a domestic level.
On the international level, state compliance might be measured by identifying
to what extent any state participates in concluding international agreements and
to which level it complies by internalizing these agreements into its domestic
legal system. On the domestic level, state compliance might be measured by
asking the question, to which level does a state take the implementation and
enforcement of its international obligations? Three functions of any state in its
domestic legal system are prescriptive, enforcement, and adjudicative
functions. Concerning the prescriptive function, a state has the power to create
legislations or regulations that are in accordance with international agreements.
As far as the enforcement function is concerned, a state has the power to
implement and enforce those instruments on the domestic legal system.
Regarding the adjudicative function, any state has the power through its
criminal justice system to uphold the law.
With regard to the AML regime, state compliance might be measured by
assessing the legal instruments that govern the regime. From a general point of
view, there are two kinds of legal instruments regulating the regime of antimoney laundering, namely, binding and non-binding rules, otherwise called as
‘hard law’ and ‘soft law’. The former refers to the international treaty
obligations concluded by countries, while the latter is related to the various
recommendations, codes of conducts, guidance, and regulatory principles
issued by international or intergovernmental organizations. Binding rules in the
framework of the AML regime were drawn up during the Vienna Convention
of 1988, the Strasbourg Convention of 1990, the Convention against Terrorism
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Financing of 1999, the Palermo Convention of 2000, and the Convention
against Corruption of 2003. Non-binding rules were set up by the Basle
Committee on Banking Regulation and the FATF Recommendations.
The binding rules of the AML regime consist of preventive and
repressive measures. The preventive measures aim to prohibit the occurrence of
specified crime underlying the crime of money laundering such as drugsrelated crime, organized crime, and corruption, or to prohibit the laundering of
the criminal proceeds itself. The underlying crime of money laundering
generates illicit funds that are necessary to be concealed or disguised. The
implementation and enforcement issues of the binding rules are crucial
elements in controlling and fighting money laundering criminality. However,
the binding rules are not easy to enforce because the lack of coercive
enforcement mechanisms in this regard. This means that in implementing and
enforcing the binding rules, much depends on the consciousness of the member
states. Sometimes sanctions can be imposed on the states that do not comply
with the convention, such as military, economic, membership or unilateral
sanctions. However, as mentioned earlier, the application of those sanctions is
costly and, in the end, it will raise the question of legitimacy. In this sense,
Scott Barret argues that imposing sanctions on non-compliant countries also
harms the imposing countries.115
The implementation of the Vienna Convention of 1988 in controlling
and fighting drug trafficking and money laundering is one example which
shows how difficult it is to implement and enforce the binding rules. More than
167 countries have ratified the convention. However, the compliance of states
concerning its implementation is still highly questionable. Some states are
reluctant or simply unwilling to comply with the convention’s obligations even
though they have criminalized drug trafficking and money laundering in their
domestic legal systems.116 Several countries were also found to be failing to
comply with the duties imposed by the convention. The consequence of noncompliance by several countries will affect the efficacy of the convention. As a
matter of fact, there is a significant positive correlation between the compliance
of states and the level of success of the prosecution and conviction of money
laundering. These facts indicate that the binding rules of the anti-money
laundering regime are still on the level of what Shihata117 called ‘formal
compliance’, and has not reached the level of ‘substantive compliance’.
115Scott
Barret, “International Cooperation and International Commons”, Duke Environmental
law and Policy Forum, Vol.10, 1999-2000, p.140.
116Jimmy
Gurule, The 1988 United Nations Convention against Illicit Traffic in Narcotic
Drugs and Psychotropic Substances – A Ten Year Perspective: Is International Cooperation
Merely Illusory?, Fordham International Law Journal, 1998, p.78.
117Formal
compliance occurs when states enter into an international agreement. See Ibrahim
F.I. Shihata (1996), Supra note 53, p.37.
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The non-binding rules of the Basel Committee and the FATF
recommendations, on the other hand, play a significant role in preventing the
acts of money laundering. This leads to the question of why, in the case of
money laundering, non-binding or voluntary rules are more effective than the
binding rules. The answers to this question are, firstly, that the powerful nationstates are concerned about the phenomenon of money laundering and use an
extraterritorial regulatory authority to sanction non-compliant countries.
Secondly, the monitoring and controlling system of the FATF are very
effective for both its member and non-member countries. The third reason is
that countries that are unwilling or reluctant to cooperate in implementing the
FATF standards are coerced into doing so. Fourthly, the non-binding rules are
supported by some conventions as the binding instruments. Such conventions
involve the Vienna Convention, the Palermo Convention, and the Convention
against terrorist financing. Finally, the FATF collaborates with international
organizations such as the International Monetary Fund (IMF) and the World
Bank (WB) in implementing the FATF standards on non-member countries.
Regarding the first reason, it is the strong and concentrated interest of
most industrialized countries to detect and discourage money laundering
practices. In this case, developed countries have an important role in
negotiating international agreements and promoting compliance.118 The
establishment of the FATF in 1989 came from efforts of the developed
countries. In relation to the second reason, the monitoring and controlling
system implemented by the FATF supports countries in obeying the elements
of the FATF standards. International mechanisms for monitoring, supervising,
and evaluating are manifested in three types of mechanisms, namely, selfassessment, mutual evaluation, and the NCCT initiative.119 The third reason is
concerned with sanctions for non-compliant states. As reviewed earlier, the
FATF provides various sanctions, such as the termination of the FATF
membership, the application of recommendation 21, being included in a
blacklist for non-member states published by the FATF, imprisonment for
natural persons, and a fine for non-state entities. For the forth reason, nonbinding rules are very effective in upholding the AML regime because they are
supported by treaties and other sources of international law. Here in this
118Edith
Brown Weiss, “Conclusion: Understanding Compliance with Soft Law” in Dinah
Shelton, ed, Commitment and Compliance: The Role of Non-Binding Norms in International Legal
System. New York: Oxford University Press, 2000, p.549. Drezner noted, the members of the G7
have great powers in financial regulation. See Daniel W. Drezner, “Clubs, Neighborhoods and
Universe: The Governance of Global Finance”, University of Chicago, 2003, p.5.
119Self-assessment
happens by means of the report of every member state regarding the
implementation of the Forty Recommendations in its territory. Mutual evaluation concerns the
evaluation of a team to the member countries regarding the implementation of these
Recommendations in their domestic legal system. Finally, the NCCT initiative aims to assess the
level of compliance of non-members in implementing the FATF Forty Recommendations. See
section 4.3.2. of this chapter.
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context, there is a cohabitation of hard law and soft law provisions of the AML
regime. Finally, before providing technical assistance, the IMF and the World
Bank asks that non-members of the FATF which mainly consists of developing
countries to implement the FATF standards in their territories.120
5.3.3.2. The Compliance of Non-Member States of the FATF
It is at this point that reasons why states comply with the AML regime are
explored. Questions will arise as to the compliance of non-member states of the
FATF even though the standards are non-binding rules and the states in
question are not involved in the legislative-process of the standards. In other
words, the question is how to encourage non-members of the FATF in
improving their anti-money laundering laws and to comply with them?
From a view point of theoretical framework, two crucial factors
motivating non-members to follow non-binding rules are legitimacy through
expertise and third party power (coercion).121 In other words, these two features
are regarded as the main explanations for how these standards work, especially
with non-member states. The first feature is legitimacy through expertise.
Hulsse and Kerwer point out that ‘standards’ are defined as expert knowledge.
Borrowing from Jacobsson (2000), they note that ‘standards are expert
knowledge stored in the form of rules’.122 They also note that legitimacy
through expertise is the major explanation for how standard-setting works.123
120The
IMF and the World Bank generally recognized the FATF 40 Recommendations as the
appropriate international standards for combating money laundering and agree that work should
go forward to determine how the recommendations can be adopted and made oeprational in their
work. See FATF, Annual Report 2000/2001, pr.36.
121Rainer
122Ibid,
Hulsse and Dieter Kerwer (2007), Supra note 16, p.629.
p.629.
Within this context, they further explain that ‘Two features of expertise are particularly
important to understand how expertise creates legitimacy: First, expertise is a kind of knowledge
that claims to be highly relevant for practical purposes. This is due to the nature of the type of
knowledge that qualifies as ‘expertise’. Expertise is stored in professions and organizations, rather
than in academic disciplines. Like scientific knowledge, expertise is general and abstract and thus
has a wide field of application. Unlike scientific knowledge, expertise embodies sound practical
advice (Hallström 2004), and not just knowledge about the world, which often appears
contradictory and hypothetical. This makes expertise useful to the user, reducing her search costs.
Rather than searching for a custom-made solution to a problem, users will rely on the standards as
guides in problem solving. Second, expertise is a kind of knowledge that claims to be correct. This
claim is difficult to challenge for the user. Expertise is knowledge produced and administered by
specialists and can only be challenged by specialists. “Their competence is considered so
advanced (...) that it cannot be evaluated or controlled by persons without the same education and
the same access to research” (Jacobsson 2000, p. 42). Expertise introduces an asymmetry between
the expert that knows and the layperson that does not. Most of the time the layperson will has to
trust the expert. This, too, makes expertise useful to the user, as she can rely on standards to justify
123Ibid.
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To put it differently, Hallstroom (2004) explained that standard-setters are
experts with various backgrounds who use their knowledge asymmetry to avoid
any arguments and to legitimize their expertise.124
When implementing the standards in the framework of the FATF
recommendations, there are four empirical exercises that prove the FATF
policies are legitimized by expertise. These policies involve the FATF plenary
meeting, the FATF typology meeting, the mutual evaluation for members, and
the NCCT initiative for non-members. The FATF plenary meetings, held three
times a year, are a forum for taking decisions and for processing the creation of
rules, which are presented as being expert-grounded.125 Based on the first
FATF annual report, cooperation spanned to more than 130 experts, ranging
from ministries to law enforcement to regulatory agencies, etc. Similarly, the
FATF typology meetings, which are emphasized in academic literatures, are
also considered as being expert-grounded.126 Mutual evaluation, an assessment
of the implementation of the forty-recommendations by the FATF members, is
also claimed to be expert-grounded.127 Finally, the expertise base is also a
signal to exercise non-members that have not met the FATF standards,
categorizing them as non-cooperative countries or territories.
The second feature is third party power or coercion. In this regard, a
third party may refer to an international organization, ad hoc coalition of states,
or to private entities.128 Even though the nature of the international standards is
voluntary, members of the organization could coerce non-members to comply.
Here in this context, non-members are forced to comply voluntarily. 129 In the
her conduct. Following an accepted and widespread standard, for example, a standardized
environmental management system, will put the user in a strong position when held accountable’.
124Ibid,
p.631.
125FATF,
Annual Report 1989-1990, p.3. See also Rainer Hulsse and Dieter Kerwer (2007),
Ibid, p.631.
126FATF,
Annul Report 1998-1999, p.6.
Annul Report 1998-1999, p.9. ‘The evaluation Team as consisting of ‘three or four
selected experts, drawn from legal, financial and law enforcement fields of other members’. This
annual report explains: ‘the purpose of this exercise is to provide a comprehensive and objective
assessment of the extent to which the country in question has moved forward in implementing
effective measures to counter money laundering’. Cited in Rainer Hulsse and Dieter Kerwer
(2007), Supra note 16, p.631.
127FATF,
128J.C.
129‘In
Sharman (2006), Supra note 94, p.9.
1999, FATF decided to evaluate non-members’ anti-money laundering performance and,
if necessary, take countermeasures against countries unwilling to cooperate. This more aggressive
stance resulted in the publication of a black-list of Non-Cooperative Countries and Territories
(NCCT) in 2000s. Should these countries fail to change their anti-money laundering policies,
FATF threatened that it would encourage its members to apply sanctions against the NCCT
countries (Winer 2002:45; Kern 2001:243). The sanction feared most by financial havens was that
the U.S. denies access to its financial system. An coercion worked: when the black-list was first
published, 15 countries were named and shamed, and 8 more were added later, but only 2 of them
(Myanmar and Nigeria) remain on the list in June 2006. Apparently, the NCCT-practice has been
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same vein, the reason that non-members comply is because of force.130
Therefore, it can be argued that the FATF standards are voluntary on paper, but
its implementation come down to coercion.131
In the case of money laundering, borrowing from Ayling and Grabosky,
coercion can be differentiated between mandatory reporting and mandatory
action.132 Mandatory reporting requires a third party to monitor and report any
anomalous activities to a law enforcement agency or other regulatory body. By
contrast, mandatory action requires a third party to enforce concrete measures
in furtherance of law enforcement.133 In the context of money laundering,
mandatory reporting refers to the obligation of financial institutions to report
financial transactions over a certain threshold of value that is seemingly
suspicious or unusual. Mandatory action refers to the obligation of nonmember states to set up and implement the FATF standards.
Non-member countries that do not comply with the FATF standards risk
being put on a ‘blacklist’ and having recommendation 21 applied onto them by
the FATF members. These sanctions have an impact on the reputation of the
country, and thus require steps to address the identified deficiencies. 134 If
implemented, these states will face disinvestment pressures and limited access
to international financial networks.135 As a consequence, they have to pay
significant costs for their economic activities, such as the cost of transactions to
compensate for the competitive advantage of the financial institutions located
in the non-cooperative countries or territories;136 or the avoidance of penalties
imposed by the regulators of non-compliance.137 To legitimize its policy, the
FATF collaborates with the IMF and WB to implement global anti-money
successful in securing non-members’ compliance with the-40 Recommendations (Drezner
2003:17-18). FATF itself finds that ‘overall, the NCCTs exercise has proved to be a very useful
and very efficient tool to improve worldwide implementation of the FATF 40 Recommendations
(FATF 2005). Non members, to put it in a paradox, are forced to comply voluntary. Anti-money
laundering is considered a compulsory power story’ (e.g., Drezner 2003:17-18, Winer 2002:45,
Kern 2001:243). See Rainer Hulsse and Dieter Kerwer (2007), Supra note 14, p.633.
130See
Rainer Hulsse and Dieter Kerwer (2007), Supra note 16. p.633. See also Rainer Hulsse
and Dieter Kerwer, “How Standards Rule the World: The Case of Money Laundering”, Paper,
August, 2006, p.14.
131Ibid,
p.14.
132J.
Ayling and P. Grabosky, “Policing by Command: Enhancing Law Enforcement through
Coercion”, Law & Policy, Vol.28, No.4, 2006, p.423.
133Ibid.
134FATF,
Annual Review of Non-Cooperative Countries and Territories 2006-2007: Eight
NCCT Review, 12 October 2007, pr.7.
135Rainer
Hulsse and Dieter Kerwer (2007), Supra note 16, p.628.
136Financial
137Jackie
Action Task Force on Money Laundering, Annual Report 1990-1991, p.45.
Harvey, “Compliance and Reporting Issues Arising for Financial Institutions from
Money Laundering Regulations: A Preliminary Cost and Benefit Study”, Journal of Money
Laundering Control, Vol.7, No.4, 2004, p.336.
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laundering to non-members.138 For organizations with a universal membership,
the IMF and the WB have a privileged position to pressure developing
countries to create, develop, and implement a domestic AML policy. As a
result, it is noted that the World Bank and the IMF have significant persuasive
impacts throughout the world. It is apparent that political pressure leads nonmembers of the FATF, which mainly consist of developing countries, to adopt
the FATF standards.
On the contrary, if non-member states comply with those standards, they
also have to face significant costs in having to implement those standards in
their legal systems. There are at least three types of costs, namely, direct cost,
indirect cost, and opportunity cost.139 It is estimated that enforcing the
AML/CFT regulations in the United States and European financial firms costs
around $5 billion. It has also made more difficult for customers to open bank
accounts, transfer money across borders, and set up charities. It is a dilemma
for non-member states, which are mainly developing countries, putting them in
a difficult position to comply or not with the FATF standards: costs of
compliance and risks of non-compliance. In this context, Sharman described
the position of non-members of the FATF as, ‘dammed if they do, and dammed
if they do not’.140 Therefore, it is obvious that coercion encourages the rapid
growth of the AML regime in the world even though its implementation is
expensive and the effectiveness is doubtful.141 In this sense, Sharman noted that
these costs are particularly burdensome and very little knowledge exists on
whether the AML standards work.142 In other word, the question lies in whether
these standards indeed are effective in fighting money laundering or predicate
offences.
Another dilemma involves the evaluation process treatment of the FATF
for member and non-member countries. Herein, there is a double standard in
138The
Executive Summary of the Core principles methodology ’17 mentioned that “Both the
IMF and World Bank will play an active role in the implementation process. In the context of its
surveilance mandate, the IMF will encourages its member countries to comply with the Core
Principles, and will work with them in assessing compliance on case-by-case and priority basis. In
the course of its regular operations, the World Bank will encourage its client countries to adopt the
Core Principles and will also work with them to assess their supervisory framework against the
Principles. Both the IMF and the World Bank will seek to have countries remedy identified
weaknesses in their regulatory and supervisory regime, and will provide technical assistance and
training to asdress such weaknessess on a priority basis. To meet the increasing demands in the
financial sector area, both institutions are increasing the number of staff with financial sector
expertise”.
139J.C.
Sharman (2006), Supra note 94, p.p.5-8.
140Ibid.
p.p. 5, 9. See also Eric Helleiner, “The Politics of Global Financial Reregulation:
Lessons from the Fight against Money Laundering”, Working Paper No. 15, Center for Economic
Policy Analysis, New School for Social Research, 2000, p.8.
141Ibid,
142J.C.
Sharman (2006), Supra note 94, p.8.
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which member and non-member countries receive different treatment from the
FATF. Based on his research, Sharman noted that the United States, Canada,
and Australia all have received some criticism in complying with the FATF
standards. In fact, those countries have never been included in the blacklist.143
Likewise, the United States has failed to consistently meet the FATF standards,
performing below the standards of certain countries classified in the NCCTs.144
It is at this point that the coercion strategy to non-member countries
tends to be a political character. An example of this point is the first NCCTs
process that was imposed on Russia being put on the blacklist on June 2000. In
this case, Russia had a lack of banking supervision institutions, a missing FIU
system, a reluctance to cooperate with other countries, and the free market
economy including the financial sector not being satisfactorily established.145
However, after a short time frame – within three years – Russia became a full
member of the FATF. Russia’s inclusion in the FATF governance system was a
strategic decision.146 It is now even said that the evaluation process of member
states, such as mutual evaluation, is a highly political character.147 In addition,
it is noted that developed countries have used the AML system as a political
instrument.148 Here in this context, the AML system has been misused as a
political weapon against ‘unwanted individuals’.149 Furthermore, the global
AML regime concerns are much more important to developed countries than
developing states. The FATF strategies to non-member countries remain a
highly political character, discriminatory, and consisting of a democratic
deficit.150 In light of the success of coercion on non-members of the FATF, the
question remains as to whether there is any violation to international norms.
The following will examine the implementation of the AML regime from the
standpoint of national sovereignty.
143Ibid.
144P.
Alldridge, “Money Laundering and Globalization”, Journal of Law and Society, Vol.35,
No.4, 2008, p.445.
145FATF,
Review to Identify Non-Cooperative Countries or Territories: Increasing the World
Wide Effectiveness of Anti Money Laundering Measures, 22 June 2000, p.9. See also Marie
Wilke (2008), Supra note 12, p.514.
146Marie
Wilke (2008), Supra note 12, p.513.
147‘States
have also complained that the procedure for de-listing is, even though transparent, of
a rather unofficial and biased character and that discrimination control the process’, Ibid, p.513.
148Peter
Lewish, “Money Laundering Laws as a Political Instrument: The Social Cost of
Arbitrary Money Laundering Enforcement”, European Journal Law and Economic, Vol.26, 2008,
p.407.
149Ibid.
150Marie
Wilke (2008), Supra note 12, p.513-519.
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5.4.
Examining the Implementation of Anti-Money Laundering Regime
from the Standpoint of National Sovereignty
As indicated earlier, the FATF has successfully implemented its standards on
member as well as non-member countries. However, the FATF compelled and
confronted non-members that failed to comply with its demands. Within this
situation, there is no choice for non-members who are dependent on the
international financial services but to comply with the FATF standards. This
condition leads to the following essential questions: to what extent should these
international standards interfere with the domestic affairs of sovereign states?
Is there any legitimacy for the FATF in imposing a sanction on non-member
states? These issues will be analyzed in more detail below. To begin with, the
following elaborates on the meaning of sovereignty.
5.4.1. Defining Sovereignty
There is no single conception and definition of sovereignty.151 Oppenheim, for
example, articulated that ‘sovereignty comprises the power of a state to
exercise supreme authority over all power and things within its territory and
citizens’.152 Another writer says that sovereignty can be differentiated into three
major aspects: external, internal, and territorial. In detail, it can be set out
below:
‘The external aspect of sovereignty is the right of the state freely to determine its relations with
other states or other entities without the restraint or control of another state. This aspect of
sovereignty is also known as independence. It is this aspect of sovereignty to which the
rules of international law address themselves primarily. External sovereignty of course
presupposes internal sovereignty.
The internal aspect of sovereignty is the state's exclusive right or competence to determine
the character of its own institutions, to ensure and provide for their operation, to enact
laws of its own choice and ensure their respect.
The territorial aspect of sovereignty is the complete and exclusive authority which a state
exercises over all persons and things found on, under or above its territory. As between any
group of independent states the respect for each other's territorial sovereignty is one of the
151Sovereignty
as a personalized monarch; sovereignty as absolute, unlimited control or power;
sovereignty as political legitimacy; sovereignty as political authority; sovereignty as selfdetermined, national independence; sovereignty as governance and constitutional order;
sovereignty as a creterion of jurisprudential validation of all law; sovereignty as the juridical
personality of sovereign equality; sovreignty as international recognation; sovereignty as a formal
unit of a legal system; sovereignty as legal immunities; sovereignty as jurisdictional competence
to make and/or apply law; sovereignty as basic governance competencies’. See Winston P. Nagan,
FRSA and Craig Hammer, “The Changing Character of Sovereignty in International Law and
International Relations”, Colombia Journal of Transnational Law, Vol.43, 2004-2005, p.143-5.
152Benedict
Kinsbury, “Sovereignty and Inequality”, European Journal of International law,
Volume 9(4), 1998, p.559.
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most important rules of international law. Although the external aspect of sovereignty often
appears to be the only one which is implied whenever sovereignty is discussed in international
law, in fact, sovereignty in international law is the sum total of all three aspects’.153
Based on the aforementioned description, it can be argued that each
country has the right to arrange any actions in their own jurisdiction without
interference from other countries. In other words, any country has the right to
exercise its power internally without subject to any external superior;154 or it
has the power to do anything to govern itself.155 The above explanations
produce several assumptions concerning the sovereignty of states, which are
relevant to international law. There distinct roles of a state in relation to
sovereignty are to have absolute supremacy over its internal affairs, to have the
absolute right to govern its people, and to create freedom from any external
interference of the above matters.156 Therefore, any state is sovereign if it has
the ability to make and implement laws within its territory, can function
without any external power and assistance, and does not recognize any
authority other than itself in the world of independent states.157
5.4.2. Implementing International Standards in the Framework of Anti
Money Laundering Regime: The Indonesian Experience During and
After Blacklisting
On February 2000, the FATF set out twenty five criteria that were used for
evaluating the implementation of the FATF standards. Countries that do not
sufficiently meet the requirements were categorized as Non-Cooperative
Countries or Territories (NCCTs). The FATF placed Indonesia on the NCCTs
list in June of 2000. The country was determined to meet criteria 1, 7, 8, 9, 10,
11, 19, 23, and 25, and partially met criteria 3, 4, 5, and 14. 158 In this case, the
153Sorenson,
M (ed), Manual of Public International Law, 1968, p.523. Cited in Henry
Burmester, National Sovereignty, Independece and the Impact of Treaties and International
Standards, Sydney Law Review, Vol.7, 1995, p.131.
154Neil
MacCormick (1993), Beyond Sovereignty, 56 MOD.L.REV.1, 56. See also Kris
Hintersee (2002), Criminal Finance: The Political Economy of Money Laundering in a
Comparative Legal Context, the Hague/London/New York: Kluwer Law International, p.360.
155http://legal-dictionary.thefreedictionary.com/National+sovereignty.
156Guiguo
Wang, “The Impact of Globalization on State Sovereignty”, Chinese Journal
International Law, Volume 3, 2004, p.473.
157Orfan
Badakhshani, “Globalization: The End of State Sovereignty?”, Paper, written
assignment for International Relation. Available at http://www.khorasanzameen.net/rws/
gb01e.pdf.
158FATF
Review to Identifiy Non-Cooperative Countries or Territories: Increasing the
Worldwide Effectivenes of Anti-Money Laundering Measures, Second Review, 22 Juni 2001,
pr.68.
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FATF categorized Indonesia as lacking a basic set of anti-money laundering
provisions, where money laundering is not considered a criminal offence,
where no mandatory system of reporting suspicious transactions to an FIU is
present, and where the regulations of customer identification has been
introduced but it only applies to banks and not to non-bank financial
institutions.
In meeting the requirements of the FATF, the Central Bank of Indonesia
enacted the Bank Regulation No.3/23/PBI/2001 of 13 December 2001 and the
Circular Letter of 31 December 2001, which required banks to establish ‘know
your customer’ policies, compliance officers, and employee training. Two
years after the blacklisting, Indonesia enacted Law No.15/2002 concerning the
Crime of Money Laundering. This law expanded customer identification
requirements, created a new framework for an FIU, criminalized the laundering
of illicit proceeds exceeding the threshold of 500 million rupiah ($60,000), and
mandated the reporting of suspicious transactions.
However, in 2003 the FATF still maintained Indonesia in the blacklist.
The FATF noted that the threshold of 500 million rupiahs ($60,000) was too
high. The FATF also noted that Indonesia needed to hasten its activities in
addressing its deficiencies, especially in the removal of the threshold that
defines the proceeds of crime, a more comprehensive regulatory threshold for
non-bank financial institutions, a more comprehensive suspicious transaction
reporting requirement, and enhanced international cooperation.159 In 2004,
Indonesia achieved some progress. Law No.15/2002 was amended by Law
No.25/2003, addressing the main legal deficiencies by removing the threshold
that defines the proceeds of crime, improving suspicious transaction reporting
requirements by penalizing unauthorized disclosure of such reports, extending
the reporting obligations to non-bank financial institutions, and enhancing
international co-operation.160 Through the BAPEPAM Decree, Indonesia
extended customer identification onto non-bank financial institutions such as
securities companies, mutual funds companies, and custodian banks.161 The
Ministry of Finance also issued a decree, which extended the KYC and STR
requirements for insurance, pension funds, and financing companies.162
Furthermore, the Bank of Indonesian regulations imposed KYC requirements
on rural banks and money changers.163 The progress was completed in October
159FATF
Review to Identifiy Non-Cooperative Countries or Territories: Increasing the
Worldwide Effectivenes of Anti-Money Laundering Measures, Second Review, 22 Juni 2003,
pr.46.
160FATF
Review to Identifiy Non-Cooperative Countries or Territories: Increasing the
Worldwide Effectivenes of Anti-Money Laundering Measures, Second Review, 22 Juni 2005,
pr.30.
161BAPEPAM
162Ministry
163Bank
(The Capital Market Supervisory Agency) Decree 02/PM/2003 of January 2003.
of Finance Decree No.45/KMK.06/2003 of January 2003.
of Indonesia Regulation No.5/23/PBI/2003 and No.6/1/PBI/2004.
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2003 by actions from the Indonesian Financial Intelligence Unit (PPATK). On
the basis of these progressions, Indonesia was removed from the NCCT list in
February 2005.164 Finally, in February 2006, the FATF ended formal
monitoring of Indonesia.165
After being removed from the blacklist, Indonesia made very significant
progress in meeting the requirements of the FATF recommendations. Indonesia
amended Law No.25/2003 and enacted Law No.8/2010, which is a new law
concerning the Crime of Money Laundering. This law addresses major legal
issues such as the criminalization of money laundering and the proceeds of
crime above a $10,000 threshold, the scope of money laundering offence, the
scope of property covered by the offence, and the issues of corporate criminal
liability. The law also extended the list of predicate offences to serious crimes
and other offences for which the prescribed penalty is 4 years or more.166
Customer identification and reporting obligations have been established not
only for financial institutions but also for designated Non-Financial Business
and Professions (DNFBPs), including lawyers, notaries, accountants, land
registrars, and liquidators.167 In addition, providers of goods and services that
involve property agents, car dealers, jeweler dealers, antique shops, and
auctioneers, are also subjected to customer identification and reporting
obligations.168 The function of the PPATK improved since it was given the task
of receiving, analyzing, and disseminating suspicious transaction reporting and
other reports.169 In addition, the PPATK gained an authority in providing
advice and assistance to authorities concerning disseminated information in
order to issue guidelines to financial service providers concerning the
164FATF
Review to Identifiy Non-Cooperative Countries or Territories: Increasing the
Worldwide Effectivenes of Anti-Money Laundering Measures, Second Review, 22 Juni 2005,
pr.32.
165FATF
Review to Identifiy Non-Cooperative Countries or Territories: Increasing the
Worldwide Effectivenes of Anti-Money Laundering Measures, Second Review, 22 Juni 2006,
pr.46.
166The
proceeds of crime are properties that obtained from the following crimes: corruption;
bribery; narcotic; psychotropic; smuggling of workers; smuggling of immigrants; banking
offences; capital markets; insurances offences; custom offences; tariff offences; trade people;
illegal trading of arms; terrorism; kidnapping; theft; embezzlement; fraud; counterfeiting money;
gambling; prostitution; tax offences; forestry offences; environmental offences; sea and fishery
offences; and crimes that threat 4 years or more imprisonment committed in the territory of the
republic of Indonesia or outside the territory of the Republic of Indonesia and such crime is also a
crime according to Indonesia law. See Article 2 the Law of Republic Indonesia No.8/2010
concerning the Crime of Money Laundering.
167See
Article 17 the Law of Republic Indonesia No.8/2010 concerning the Crime of Money
Laundering
168Ibid.
169See
Articles 39-40 the Law of Republic Indonesia No.8/2010 concerning the Crime of
Money Laundering .
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AML/CFT obligations, and to undertake international cooperation and other
matters.170
Based on the above explanation, the commitment of Indonesia in
combating money laundering has increased significantly. However, in carrying
out the FATF standards as described above, the FATF should intervene and
dictate every detail and in all aspects of governmental functions (legislative,
executive, and judicial). In addition, the FATF collaborates with the IMF and
the World Bank, forcing the FATF standards to be implemented in developing
countries such as Indonesia. As long as Indonesia is dependent on the IMF and
the World Bank, there is no choice but fait accompli, even if it is costly and
contrary to the principle of its national sovereignty. However, the question
remains as to whether the implementation of the AML regime curtails the
sovereignty of a state. This issue will be discussed in more detail below.
5.4.3. The Challenges of the AML Regime to National Sovereignty
5.4.3.1. The AML Regime and the Principle of Sovereign Equality
As reviewed earlier in this thesis, the FATF forty-recommendations are
regarded as ‘international standards’, which were created and developed by the
developed countries. On paper, the forty-recommendations are voluntary and
non-binding rules. Each country must take measures as deemed necessary and
should be taken ‘in accordance with its legal principles’ or ‘within the
framework of its laws and regulations’.171 Practically speaking, however, these
recommendations have come down to coercion because the FATF provides
detailed guidelines on how to formulate and implement measures to combat
money laundering. From this perspective, there is a problem regarding the
position of non-member states of the FATF, which primarily consists of
developing countries.
Some commentators argued that this condition is a restraint towards the
principle of ‘sovereign equality’ where every sovereign state possesses the
same legal right as any other states.172 The United Nations General Assembly
170See
Articles 41-44 the Law of Republic Indonesia No.8/2010 concerning the Crime of
Money Laundering .
171FATF
Recommendation (2003). ‘In various provisions of the United Nations Conventions, it
is provided that each party shall ‘take such measures as may be necessary’ or ‘take any measures
necessary,’ with a provision in some cases that such measures should be taken ‘in accordance with
its legal principles’ or ‘within the framework of its laws and regulations’ or ‘under its laws and
relevant treaties’.’ See also Morais (2001-2002), Supra note 15, p.809.
172One
of the fundamental rights of a state is equality with all other states. This right is given
general recognition by long-standing state practice. See Thomas H. Lee, “International Law,
International Relations Theory, and Preemptive War: The Vitality of Sovereign Equality Today”,
67 Law & Contemporary Problems, 2004, p.148.
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has declared that the principle of sovereign equality of a state included the
following elements: each state is juridically equal; each state enjoys the rights
inherent in full sovereignty; each state has the duty to respect the personality of
other states; and the territorial integrity and political independence of the state
are inviolable.173 Within this context, it can be argued that sovereign equality
implies respect to another jurisdiction in the creation, application, and
enforcement of laws within their jurisdictions.174
According to Oppenheim, equality occurs only when a country has
control over its own territory and inhabitants.175 A state creates its own
international personality, which signifies equality with all other members,
when it enters the family of nations.176 The basic notion of sovereign equality
refers to the equality in moral dignity, in respect of rights, and in equal
obligation to perform its duties.177 In the case of the Antelope (1825), Chief
Justice Marshall noted that ‘no principle of general law is more universally
acknowledged than the perfect equality of nations’.178 Likewise, A.D. McNair
(1928) described sovereign equality in religious terms as ‘to have doubted it
would have been to lay hands on the art of the covenant’.179
Equality in international law occurs when all nations equally treat lawful
and unlawful actions in the same way.180 Bassiouni commented on this matter,
173Declaration
of Principles of International Law Concerning Friendly Relations and
Cooperation among States in Accordance with the Charter of the United Nations, G.A. Res.2625,
25 U.N. GAOR Supp. (No.28) at 121, U.N. Doc. A/8028 (1970).
174‘All
States are sovereign corporate persons and sovereign territorial corporations. All satisfy
the same conditions according to which they qualify as States. All belong the same legal category.
As sovereign, they all refuse to acknowledge any legal superior and also in this sense all are
equal’. See Bernard Gilson, The Conceptual System of Sovereign Equality, (Leuven: Peeters,
1984), p.59.
175Oppenheim’s
International Law, Vol.1, 1905, p.160-161. Cited in Benedick Kingsbury
(1998), Supra note 114.
176Ibid.
177Edwin
DeWitt Dickinson. The Equality of States in International Law, Cambridge: Harvard
University Press, 1920. Cited in Kurt Taylor Gaubatz, “Democratic States and Sovereign Equality
Norm”, Article, Department of Political Science, Stanford University, California, 2004, p.4.
178
Supreme Court of the United States, 23 U.S. 66 1825 U.S. Lexis 219. Cited in Kurt Taylor
Gaubatz, Ibid, p.6.
179Arnold
D. McNair. “The Equality of States” Michigan Law Review, vol.26 no.2, 1927,
p.134. Cited in Kurt Taylor Gaubatz (2004), Supra note 125, p.6.
180‘The
premise of state’s sovereign equality, as a basic principle of the Westphalian system of
international relations rendered necessary the elaboration of such rules of international law which
are able to regulate the relationship among the colliding competences of states’. See Balazs
Fekete, “Recent Trends in Extraterritorial Jurisdiction - The Sarbanes-Oxley Act and Implications
on Sovereignty”, Acta Juridica Hungarica, Vol.49, No.4, 2008, p.410. See also Stephane Beaulac,
‘An Inquiry into the International Rule of Law’, European University Institute, Working Paper
MWP 2007/14, Max Waber programme, Italy, 2007, p.16. Quoted from E. de Vattel, The Law of
Nations; or Principles of the Law of Nature, applied to the Conduct and Affairs of Nations and
Sovereigns, trans. By J. Chitty, Philadelphia: Johnson Law Booksellers, 1863, p.lxii.
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stating that all nations have equal sovereignty with no hierarchical authority in
international law.181 In relation to the FATF standards, this condition is due to
the lack of authority in requiring non-members to observe the standards.182 The
question is whether it is appropriate for the FATF members, whom are
primarily developed countries, to determine the scope and context of
international standards and their implementation in non-member countries that
are mainly developing countries.
From a legal point of view, the above condition is contradictory towards
various international legal instruments. In reference to the Charter of the United
Nations (1945), and in particular article 2(1), a statement is found proclaiming
that each member state is deemed equal in sovereignty. The article states that
the organization is based on the principle of sovereign equality of all its
members.183 As such, no state has the right to intervene, directly or indirectly,
for any reason whatsoever, in the internal affairs of any other states. In
addition, a General Assembly resolution adopted by the United Nations in 1970
confirmed that sovereign equality became one of the basic principles of
international law. It mentions that all states should enjoy sovereign equality,
even if there are any differences on an economic, social, political, and/or other
nature, and with equal rights, duties, and equal membership of the international
community.
Furthermore, the 1988 United Nations Vienna Convention on Drug
Trafficking obligates each member state to fulfill its duties and conform its
respective domestic legislative systems towards the fundamental provisions
whilst respecting the principles of sovereign equality and the territorial
integrity of states.184 These principles also exist in the 2000 United Nations
Convention against Transnational Organized Crime.185 Finally, the 1969 United
181M.
Cherif Bassiouni, “Theories of Jurisdiction and Their Application in Extradition Law and
Practice”, California Western International Law Journal, Vol.5, 1975-75, p.60.
182H.V.
Morais (2001-2002), Supra note 15, p.806.
preamble equates [sic] faith “in the equal rights of men and women and of nations large
and small.” Article 1(2) declares the purpose of developing friendly relations based on respect for
the principle of equal rights of peoples. Article 2(1) reads: “The organization is based on the
principle of the sovereign equality of all members.” And according to article 9 and 18 the General
Assembly shall consist of all members of the United Nations, each shall have one vote, and
decisions shall be made but a majority of the members present. See Klein, R.A, Sovereign equality
among states: The History of an Idea, Toronto Canada: University of Toronto Press, 1974, p.6.
Cited in Juan G. Ronderos, “Transnational Drugs Law Enforcement: The Problem of Jurisdiction
and Criminal”, Journal of Contemporary Criminal Justice”, 1998, p.391.
183The
184See
the UN Convention against Illicit Traffic in Narcotics Drugs and Psychotropic
Substances, 1988, Article 2(1) and (2).
185See
Article 4: (1) States Parties shall carry out their obligations under this Convention in a
manner consistent with the principles of sovereign equality and territorial integrity of States and
that of non-intervention in the domestic affairs of other States; (2) Nothing in this Convention
entitles a State Party to undertake in the territory of another State the exercise of jurisdiction and
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Nations Vienna Convention on the Law of Treaties, especially with reference
to article 34, maintains that the treaty does not create either obligations or
rights for a third state without its consent. States are only bound by rules that
they themselves make and consent to abide by. In other words, no state is
bound to a rule if it has not consented to it.
5.4.3.2. The AML Regime and the Principle of Non-Interference
The principle of non-intervention was first explicitly articulated by Wolf and
Vattel in the 1760s. It stated that to interfere in the government of another is
opposed to the natural liberty of nations. Every state is independent of the will
of other nations in its action. Subsequently, any state is not allowed to interfere
in the territorial of another state without having consent from another state. In
other words, a state is only bound when it consents to be bounded.
By implementing the FATF standards, non-member countries risk losing
control of certain governmental functions such as legislative, executive, and
judicial affairs.186 With regards to legislative affairs, a non-member country
would have to establish a legislative framework for criminalizing money
laundering, to prosecute this type of crime, and to carry out international
cooperation. Executive affairs focus on the requirement of a country to
implement the FATF standards through competent authorities. In this context,
the FATF encourages the targeted countries to support and develop, as far as
possible, the knowledge and skill of their competent authorities in controlling
and eradicating the complexity of money laundering practices. Moreover, the
targeting countries are urged to cooperate on an international level in the fields
of investigation, prosecution, and adjudication. Lastly, judicial affairs concern
the implementation of sanctions by non-member countries on natural and legal
persons within the criminal, civil, and administrative fields who fail to comply
with the anti-money laundering requirements. Many of the FATF policies are
intervened in the affairs of targeted non-member countries and are regarded as
contrary to the basic principle of non-interference. There are a number of
international legal instruments that contain the doctrine of non-interference.
These instruments include the 1933 Montevideo Convention, the 1945 United
Nations Charter, the 1969 United Nations Vienna Convention, and the 20th
session of the United Nations General Assembly.
The Montevideo Convention on the Rights and Duties of States, in
particular article 8, maintains that ‘no state has the right to intervene in the
performance of functions that are reserved exclusively for the authorities of that other State by its
domestic law.
186Tod
Doyle, Cleaning Up Anti-Money Laundering Strategies: Current FATF Tactics
Needlessly Violate International Law”. Houston Journal of International Law, Vol.24, 2002,
p.p.300-301
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internal or external affairs of another’. Subsequently, this condition is also
contrary to article 2(7) of the United Nations Charter, which mentioned that
‘nothing contained in the present Charter shall authorize the United Nations to
intervene in matters that are essentially within the domestic jurisdiction of any
State…’. Moreover, the 1969 United Nations Vienna Convention on the Law
of treaties, especially in its Preamble, states a commitment to the principle of
sovereign equality, independent of all states, and non-interfering in the
domestic affairs of any other states. Finally, the policy of the FATF contradicts
with the 20th session of the United Nations General Assembly, which declares
that ‘no state has the right to intervene, directly or indirectly, for any reasons
whatsoever, in the internal or external affairs of any other states. Consequently,
armed intervention and all other forms of interference or attempted threats
against the personality of the state or against its political, economic, and
cultural elements are condemned’. Subsequently, under the 1988 United
Nations Vienna Convention, any state may not intervene in the domestic affairs
of other states, in particular:
“A party has no right to undertake law enforcement action in the territory of another party
without the prior consent of that party. The principle on non-intervention excludes all kind of
territorial encroachment, including temporary or limited operations (so-called ‘in-and-out
operations’). It also prohibits the exertion of pressure in a manner inconsistent with
international law in order to obtain from a party the subordination of the exercise of its
sovereign rights.”187
With regards to the implementation of the FATF standards, as a
consequence, the FATF provides sanctions for countries that do not comply
with its standards. One of the sanctions imposed on non-member countries is
through the publishing of non-compliant states in a country blacklist. This
measure is regarded contrary to the article 41 of the United Nations Charter,
which maintained that nothing in the Charter prevents any member state from
imposing sanctions without the backing of the Security Council.
5.5.
Final Remarks
Globalization leads to the emerging regime of global governance and then it is
followed by the creation and implementation of ‘international standards’ in all
187Commentary
on the United Nations Convention against Illict Traffic in Narcotic Drugs and
Psychotropic Substances, 1988, para.2.17. The Commentary cites as authority the declaration on
Principles of International Lawconcerning Friendly Relations and Co-operation among States in
accordance with the Charter of the United Nations (General Asembly Resolution 2625(25), annex)
and the principles concerning the duty not to intervene in matters within the domestic jurisdiction
of any state, contained in para.2 of the Chater. Cited in Matti Joutsen, “International Instruments
on Cooperation in Responding Transnational Crime”, in Philip Reichal, Handbook of
Transnational Crime and Justice, Saga Publication, London & New Delhi, 2005, p.258.
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aspects of life, including in preventing and controlling money laundering. The
FATF recommendations as international standards have been recognized a
crucial role in preventing and combating money laundering practices. Those
standards were established by industrial countries which joined the group of G7
nations. Non-member countries have not been invited to participate in the rulemaking as well as the implementation and enforcement strategies of these
standards. However, these standards distributed to the non-member countries of
the FATF and came down to coercion. The FATF provides detailed guidelines
on how to formulate and implement measures to combat money laundering.
Each country must take measures as deemed necessary and should be accepted
and implemented those standards in its jurisdiction.
From the standpoint of national sovereignty, the basic concern that
needs to be addressed is that the implementation of the FATF standards on
non-member states is regarded contrary to the right of a country’s own
sovereignty. In this point, the implementation is regarded as one of state
intervention in the domestic affairs of another state. This condition is contrary
to the principle of ‘sovereign equality’ where every sovereign state possesses
the same legal right as any other states. At the same time, it is also regarded
contrary to the principle of ‘non-interference’ because no nation could apply its
laws and regulations within the physical territory of other nations.
The view above is a reflection of das sollen perspective which states that
there is a tension between the principle of national sovereignty and the needs of
the FATF standards to function effectively. In this point, the obstacles
encountered by the effective implementation of the FATF standards are results
of the traditional understanding of sovereignty. However, in the globalization
era, it should be admitted that countries with more advanced human and
technological resources have bigger roles compare to countries that lack of
those resources. Thus, from the view point of das sein, it is common that
country’s capacity determines the directions of policies in managing and
solving global problems such as money laundering. But the problem is how far
democratization has been implemented so that each country both developed
and developing ones can be accommodated their interest. Further, double
standard in which a different treatment between developed and developing
countries in giving a sanction should be avoided in practice****