Money laundering was once considered a problem of “rogue” bankers. No longer. It is becoming increasingly clear that no one is immune to the siren song of easy profits. Earlier this month, major U.S. banks were slammed for their willingness to look the other way when dealing with ill-gotten funds. Public exposure and humiliation are integral parts of any strategy to fight money laundering. Penalties that hit the banks where it hurts — in their profits — will also help drive the message home: The flow of tainted funds must be stopped.

A defining feature of global mega-capitalism is the ease with which money moves around the world. But mechanisms that expedite international trade and investment also serve drug traffickers and organized-crime groups. No one knows how much money is being laundered, but estimates are in the hundreds of billions of dollars. Bank-secrecy laws facilitate the process; bankers who knowingly decline to ask questions are just as helpful. A combination of the two tops many criminals’ wish lists.

But even those havens are dependent on the use of other banks to move money around. The worst offenders are usually small banks that are little more than shells. They use the services of other, global players to move the funds they launder. After all, there is little use for the massive amounts of funds these banks have to circulate in their tiny countries.

The willingness of those correspondent banks to turn a blind eye was criticized in a U.S. congressional report released recently. It cites industry giants such as Citibank and Chase Manhattan for allowing foreign financial institutions to launder drug money and engage in other illegal activities. The report looked at the operations of 10 offshore banks, most with headquarters in the Caribbean, and, according to Sen. Carl Levin, “it’s not a pretty picture.” Banks looked away when dealing with suspicious funds and clients, preferring instead to collect the fees and commissions that the business generated.

The congressional report came just days after the Financial Action Task Force, a group established 10 years ago by the G7 nations, announced that it was keeping all 15 of the offshore jurisdictions that it identified as “noncooperative” on a warning list issued last June. That report castigated host governments for facilitating money laundering and criminal activities.

The FATF report was a new salvo in the fight against money laundering. It embraced the philosophy of “name ’em and shame ’em,” to embarrass jurisdictions and get them to clean up banking practices. The 15 governments were embarrassed; their protests after the report came out proved it. All are still on the watch list, but seven others have made considerable progress. The Bahamas, Cayman Islands, Cook Islands, Israel, Liechtenstein, the Marshall Islands and Panama have adopted tougher rules to deter money laundering. The FATF is waiting to see if the new laws are actually enforced, however.

In Luxembourg, the new strategy seems to have worked. Last year, financial institutions reported 160 suspect cases, an increase of nearly 50 percent over 1999. Luxembourg police officials credit the new industry mind-set, which was the product of growing international scrutiny of banking practices and the offensive against money laundering.

But as the new U.S. report proves, money laundering does not just happen “over there.” When investigators tried to trace the funds that former Nigerian dictator Sani Abacha stole from his country, they discovered that the trail ran through banks in Austria, Britain, Switzerland and the U.S. Law-enforcement officials are not sure whether the problem lies with bankers who were not diligent in investigating the source of the funds or with government agencies that failed to follow up on reports filed by banks. Any effective policy will require active efforts, cooperation and coordination by both.

Other measures are in order. U.S. regulators recommend that banks be barred from being correspondent banks for shell banks, and banks should be extra cautious when dealing with institutions in jurisdictions cited by the FATF or other organizations. But few sanctions are as powerful as the perception of taint. Ordinary citizens do not want their funds mingled with those of organized crime, nor are they willing to jeopardize their savings or their livelihoods by being drawn into the vortex of criminal activity. If negligence entails risks to their money, customers will be scared away. That should hit banks where it hurts them most.

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