Cyclopedia Of Economics 3rd edition

February 27, 1976 — Memorandum of Agreement concerning assurances, consultations and United States policy on matters related to Middle East peace.

February 27, 1976 — Memorandum of Agreement concerning the United States role at any future Geneva peace conference.

March 26, 1979 — Memorandum of Agreement relating to assurances concerning Middle East peace.

March 26, 1979 — Agreement relating to the implementation of the Egyptian-Israeli peace treaty.

October 1, 1982 — Agreement relating to privileges and immunities for United States military members and civilian observers of the Multinational Force and Observers on leave in Israel.

October 31, 1998  — Memorandum of agreement concerning ballistic missile threats.

According to a survey of German executives by the influential Ifo think tank, German business confidence rose in January 2003 for the first time in eight months - albeit imperceptibly, from 87.3 to 87.4. A poll conducted by ZEW, another brain trust, confirmed these findings. On past form, though, this confidence level heralds a contraction of 5-6 percent in industrial production.

This is consistent with other dismal figures: negligible growth, stiflingly high real interest rates imposed by the European Central Bank, an export-discouraging strong euro and a disheartening surge in unemployment to more than 10 percent. German woes are compounded by a global recession, the evaporation of entire industries (such as telecoms) and a sharp, universal decline in investments.

The main victims are the Mittelstand - the 1.3-3.2 (depending on the definition) million mostly family-owned German small to medium enterprises (SMEs). Of every 1000 German businesses, 997 are Mittelstand by one liberal definition. The real figure is closer to one third. Strict criteria reduce it to one in thirty firms.

These differences of opinion reflect the fuzziness of the concept which has more to do with the style of ownership and management and with a unique historic-cultural background than with objective, economic yardsticks.

The Mittelstanders form the backbone and trusty barometer of the German economy. They engage close to 22 million workers and apprentices as well as well over 3 million "self employed" (owner-employees) - 70 percent of Germany's total active workforce. More than two fifths of all commercial turnover in the country are generated by them as well as half the value added and one third of all exports.

The investment requirements of Mittelstand firms total $20 billion annually. But access to capital is narrowing. Tottering local banks are risk averse, the capital markets are lethargic, private investors are scared and scarce. The Basle 2 capital adequacy requirements will considerably increase the cost of bank loans to risky borrowers, as are most Mittelstand firms.

According to a survey by Kreditanstalt für Wiederaufbau, the German state-owned development bank, one third of all companies found access to bank credits restricted in 2002. In the 12 months to March 2002, German banks approved 7 percent fewer new credits. Listed banks reduced lending by a debilitating one sixth.

According to The Economist, lending to Handwerk (craft) companies declined by half between 1993-2003. Public sector savings banks, hitherto the main source of Mittelstand financing, are hobbled by an increasingly intrusive European Commission. The Neuer Markt, touted as Germany's answer to NASDAQ, slumped by  staggering 96 percent and was merged out of existence.

The family is not what it used to be. Less than 40 percent of Mittelstand businesses are handed down the generations nowadays. Many are forced to introduce pesky outside investors and directors, or hired management. The banks are far more inquisitive than they used to be. A traditional long-term, epochal, business horizon gives ground to a quasi-American focus on the tyranny of the bottom line. Capital spending, product development and job security all suffer.

Founders are often to blame, unable as most are to calmly contemplate their own death, or retirement and prepare a plan for orderly succession. It is at these junctions of regime change that most business failures occur, according to Sir Adrian Cadbury, author of "Family Firms and their Governance".

According to Creditreform, quoted by The Economist, a record 37,700 companies went under in 2002. The Financial Times puts the figure at 45,000. And 2003 witness another bumper crop. The figures, according to the Institut für Mittelstandsforschung in Bonn, are even more harrowing. In 2001, 386,000 startups were liquidated and 455,000 formed to yield 69,000 new firms.

New startup formation is at a low ebb. In 1991, net creations amounted to 223,000, in 1995 - 121,000, in 1998 - 100,000. The picture is especially grim in the east. About 129,000 net new startups sprouted there in 1991. But the dilapidated east succeeded to spawn only 6000 a decade later with its bloated and venal construction sector all but wiped out. Again, 2002 was only marginally better.

Half-hearted measures declared by the fragile coalition government on January 6, 2003 - grandiosely titled the "Mittelstand Offensive" - are unlikely to reverse the tide of red ink. Less red tape, more generous financial support, simplified accounting and a fusion of the country's cumbersome development banks will do little to help the flood ravaged east, for instance, where crumbling domestic demand cripples local entrepreneurship.

Eastern businessmen sorely lack management experience and skills. Their networks of customers and suppliers are thin on the ground. Most of them are single-product outfits. Successes are few and far between and usually involve foreign equity-holders. Luckily, the labor market in the east is more flexible than its ossified and bureaucracy-laden western counterpart. Hourly labor costs - wages plus inanely vertiginous and generous social benefits - are also substantially lower in the eastern Lander.

An arthritic and worker-friendly regulatory framework and a pro-big business tax regime have, indeed, burdened the Mittelstand. Still, if anything, Germany's labor market has been liberalized under Chancellor Schroeder's governments and tax rates went down across the board. One must look elsewhere for the causes of the inexorable deterioration of the country's SMEs.

It is remarkable that the decline of the Mittelstand coincides with an unprecedented surge in small to medium scale entrepreneurship in both developed and developing countries. It would seem that Germany simply spectacularly pioneered what has become, decades later, an economic fad.

Indeed, it is Germany's overwhelming success - its post-war industrial miracle - that harbored the seeds of its decline and fall. Sated, rich people make bad risk-taking entrepreneurs. Germany's unification was its last attempt at rejuvenation. It failed because the west chose to smother the east with an unrealistically priced Deutschmark, a tangle of rules and regulations, an artificial construction bubble and a forced liquidation of its industrial base.

If it ain't broke, don't fix it, goes German folk wisdom. On the surface, everything functions impeccably: German infrastructure is gleaming, its healthcare efficient, its environment pure, its welfare unsurpassed. Why tinker with success? - wonders the average citizen of this regional economic powerhouse. Only lately did a few brave souls admit that the miracle has been consumed and that Germany, unreformed, may be facing a Japanese decade.

Germany's second attempt at revitalization is unfolding outside its borders. The enlargement of the European Union to incorporate countries in central and east Europe is largely a German project. Cheap labor, abundant raw materials, hungry, growing consumer markets in the new members - promise to resuscitate the German industrial sector.

Big German firms have taken note of this repossessed hinterland and moved decisively - but not so the Mittelstand.

Preoccupied by their multidimensional crisis, they failed to colonize the east. Battered by cost pressures, better-informed customers, aggressive international competition, dizzying and costly technological changes, spiraling needs for investment in R&D, vocational training and marketing - the Mittelstand companies are punch-drunk and more xenophobic and self-destructively "independent" than ever.

One would be hard pressed to find a substantial Mittelstand representation in the German drive to diversify abroad either by establishing a presence in major export markets, or by sourcing from cheaper countries. As the Center for Advanced Studies at Cardiff University notes, Mittelstanders rarely out-source to key suppliers, maintain open-book accounting, engage in simultaneous engineering, sign long-term contracts, or reduce the number of direct suppliers as part of implementing a lean production strategy.

Many SMEs function as family employment agencies rather than as properly governed businesses. From hubs of innovation and early adoption of bleeding edge technologies - the Mittelstanders have lately become the bastion of paralytic conservatism. Most of them support self-interested liberalization and deregulation. But few would know what to do with these poisoned chalices, having become far less competitive than they used to be in the 1970s.

So, is the Mittelstand sector doomed?

Not according to a report published in 2001 by the Institute for Development and Peace at the Gerhard-Mercator University in Duisburg. The authors believe that, despite all the shortcomings of the Mittelstand business model, it could serve as a blueprint for the countries of Latin America and other developing regions.

The Mittelstand have survived largely intact wars and devastation, division and unification. There is no reason why they should not outlive this second round of globalization - they did marvelously in the first round, a century ago. But the government must recognize the Mittelstand's contribution to the economy and reward these struggling firms with a tax, financing and regulatory environment conducive to job creation, innovation, ownership continuity and exports.

The reason for hope is that Germany is finally waking up. Universities offer courses in family-orientated management. Offline and online exchanges - such as EuroLink - connect German SMEs to willing private equity investors, strategic partners and fund managers. Small business service centers and one stop shops proliferate.

An army of consulting and trading firms proffer everything from management skills to networks of contacts. Others peddler seminars, Web design and Internet literacy syllabi. Software companies like SAP, IBM and Sybase maintain special small business departments. Think tanks and scholarly institutes devote increasing resources to the SME phenomenon. There is even an Oscar award for Mittelstand excellence.

Initiatives spring in the most unlikely places. DG Bank teamed up with the German daily "Die Zeit" to "promote small businesses who have innovative ideas". Mittelstand trade fairs (for instance in Nuremberg last year) are well-attended. Venture capitalists, portfolio managers and headhunters monitor developments closely.

The Business Angels Network of Germany (BOUND) is a group of individual investors who also contribute time and management know-how to fledgling technology startups. Lobbying and advocacy groups, specialty publications, public relations firms - all cater to the needs of German SMEs.

It looks less like a funeral than a resurrection.

The mobile office is a long established reality. Today's laptops are as powerful as most desktops and have as much memory and as many accessories. One can communicate through them, using faxing and electronic mail software. They can be connected to both mobile and fixed phones. A person can carry his whole office, his home, his life with him. This is the "Turtle Syndrome". Ensconced in virtual shells, we move about, conducting our lives, attending to our businesses, absorbing, processing, creating and emitting information in endless streams of data and voice.

Sectors, which will adapt to this sweeping, potent, trend, will survive. Those, that lag behind are doomed. Naturally, not all types of human activities and endeavours are amenable to the changes needed to endow them with the blessings of increased mobility. It is difficult to engage in manufacturing on the move. Fixed assets are required. Still, the manufacturing process itself can be (and is) distributed. Components are manufactured in different locations and assembled in another. Fleets of trucks and trains by land, ships in sea-lanes and air cruising planes shift them around in a "just in time" fashion. Through the back door, mobility reappears. Additionally, the exchange of data and its processing (=its transformation to knowledge) has, by now, become an integral and predominant part of all human activities, industrial manufacturing included.

The old worldview (inherited from the Industrial Revolution) of people moving amongst fixed locations, around which their lives revolve and evolve – is in its death throes. It is being replaced by a fascinating, brave, new vision: the locations now revolve around individuals and they both – the locations and the individuals – evolve through interaction. This is no less than Copernican. The Earth moves around the Sun – not the other way around. The more individualistic and democratic the world became – the more the individual acquired its rightful position as the source of all things, the prima causa, the ultimate cause and mover of all there is. In the past, a person would get up in the morning at his home, in the neighbourhood which he inhabited for decades and proceed to go to his workplace which he joined for a lifelong career. Today, people switch places of residence, careers, workplaces, and even families in a dizzying pace. More and more of them work at home, whenever they choose to (flexitime). The workplace comes to them, via modem, via phone, via satellite. When they travel – and they travel often – they take their office with them. These are a virtual office and a virtual home, of course. But the revolution lies in the realization that both office and home were always virtual. Witness the growing divorce rates, on the one hand – and the growing networking (internet and intranet) of the workplace, on the other. People today can and do collaborate in teams regardless of time differences or geographical disparities. Not only distance, but also time barriers are being gradually dismantled. The Berlin Wall of spatial and temporal separation is being torn down with a vengeance.

One of the more important sub-trends in this forceful trend is evident in banking and finance. Exchanges become more and more ephemeral and virtual – the more computerized they are. Physical pits and trading floors are a relic of a quickly subsiding past. Trading knows no time limits, no geographical boundaries (except those still imposed by Man). Similarly, funds are transferred electronically in minutes. People carry plastic cards that symbolize wealth stored in electronic digits halfway across the world. Ours is a meta-symbolic system. We have taken to consuming and using more and more concentrated forms of symbolism. Land and Cows were replaced by metal, which was replaced by paper, which was replaced by electronic digits, which is partially represented by plastic cards. Chequebooks, credit cards and ATMs (Automatic Teller Machines) represent increased mobility. The bank follows the client. Transactions are concluded outside the premises. Money changes hands in totally automated transactions. The culmination of all this is the smart card. Subject to more clever marketing, home banking will develop to overtake regular banking. The functions of banks might be polarized: low level functions, on the one hand (e.g., check clearing) and high level functions, on the other (e.g., investment banking and private banking).

The borders between social institutions will blur. Home and office will merge. So will the office, the car, the aeroplane and the hotel. Many hotels provide their guests with business centres. Home cinema, video-on-demand and the internet will transform the home and make it an entertainment centre. Traditional functions of the family have already been outsourced: education, health, a big part of the process of socialization. Instead of moving among rigidly defined, well separated, both spatially and temporally, realms of living – modern Man will flow, in an almost seamless flux, between one "definition" and another. This is mirrored in the attempts to provide global seamless roaming in wireless telecommunications (pagers and mobile phones) and to eliminate the question of "origin" and route in the internet (the first truly global phenomenon).

One of the grandest revolutions within this sub-trend of "blurring" is the functional merger of banks and retail outlets. On the face of it, this should have constituted no surprise. After all, banks are nothing but retail outlets: they buy and sell money the same way that a grocery store buys and sells bread. Any difference was psychological: banking was thought more respectable because it was considered to be a more intellectual pursuit (which it is not). The truth is that banks came to monopolize the flow of money and, later on, became one of the main money creators (together with the Central Bank – a glorified version of its more regular cousin). This power generated awe and respect.

In the last two decades, major retailers tried their hand in banking activities – not too successfully. Money is as specific a commodity as any and necessitates the availability of both expertise and vast historical databases. The true value added by banks to the economy is precisely in the accumulation and preservation of these data: the financial history, credit worthiness and consumption predilections of each and every one of us. Thus it would have made sense for the banks to relegate the low-level, low margin activities to outside agents in return for sharing the banks' information with them. A typical collaboration involves a retail outlet and a bank. The retail outlet invoices the customers, collects the money, charges the credit card, collects the slips and deposits them in the bank. This is work normally done by bank clerks and tellers. The bank, on the other hand, guarantees the payment. The retail outlet pays the bank (and the credit card issuing company) a commission against this guarantee. It does not charge the bank for the work that it does – which saves the bank a lot of money. This asymmetry of payments is a result, on the one hand, of the abundance of cheap transaction processing venues (computerized and human) in the world (some banks do their processing overnight in developing countries, such as India). On the other hand, information (especially the information provided by the bank) is scarce and valuable.

It is easier for the bank to guaranty the payment because it holds, stores, analyses and evaluates all the information regarding the customer. The guarantee is issued in the form of a plastic (credit or debit) card with strict spending limits and authorization procedures. The retail outlet has to follow a simple procedure to obtain the information that it requires in order to engage in the transaction.

Until recently, the information was available only verbally. The credit card companies and the banks operated big call centres. The retail outlet would call in, provide the details of the client and the card, wait for an authorization (which took from 3-5 minutes per transaction) and only then proceed with the sale. This was time consuming, nerve wrecking, expensive and counter-productive. Hence the development of EFTPOS (Electronic Fund Transfer through Points of Sale).

An apparatus is installed in each retail outlet which can "read" the data embedded in the magnetic strips of credit cards, debit cards, loyalty cards and smart cards. It then proceeds to verify (within 10 seconds, on average) that the card is registered in the relevant database, that it is valid (not cancelled, not stolen, not lost) and what are the limitations applicable to the card (or its special features). The information flows (via phone lines and modems or by radio RF waves) between the POS apparatus and a host computer (server) of the bank, the credit card company, or the retail chain which issued the card. A sub-host can interpose between the point of sale and the main host computer, in order to address the more routine tasks and to alleviate possible bottlenecks or errors.

The advantages are immediately evident: time savings, increased efficiency and better use of resources, minimization of losses due to fraud, more secure data handling, a control of all the stages of the financial transaction in particular and of the finances of the retail outlet, in general. Suffice it to mention the ability to generate reports and statistics, which is greatly enhanced.

The same principles apply to vehicle fleet management, telemetry, service engineering and much more. In all these cases, technology allows us to make the world revolve around us, around our requirements, our money and our plans. Technology is only the way that we respond to deep-seated psychological needs. It is really the need to grow up, to mature, to finally feel at ease in this world of ours that drives this meshing of old social establishments.

Money

The "paper" notes we use to pay for goods and services (which, together with coins, constitute "money" or "tender") are  made of a blend of cotton and linen.

Throughout history, numerous objects served as money: seashells, stones, whales' teeth, cattle and manillas (ornamental jewelry). The word "salary" reflects the fact that Roman soldiers were paid in salt. As recently as 1932, in Tenino, Washington, USA, notes of $1, $5 and $10 denominations were printed on wood.

Money comes in all sizes, shapes and forms. One meter long and half a meter wide copper plates were used in Alaska in the 1850s. They weighed 40 kilograms.

If you shop with a major bank, chances are that all the transactions in your account are scrutinized by AML (Anti Money Laundering) software. Billions of dollars are being invested in these applications. They are supposed to track suspicious transfers, deposits, and withdrawals based on overall  statistical patterns. Bank directors, exposed, under the Patriot Act, to personal liability for money laundering in their establishments, swear by it as a legal shield and the holy grail of the on-going war against financial crime and the finances of terrorism.

Quoted in Wired.com, Neil Katkov of Celent Communications, pegs future investments in compliance-related activities and products by American banks alone at close to $15 billion in the next 3 years (2005-2008). The United State's Treasury Department's Financial Crimes Enforcement Network (finCEN) received c. 15 million reports in each of the years 2003 and 2004.

But this is a drop in the seething ocean of illicit financial transactions, sometimes egged on and abetted even by the very Western governments ostensibly dead set against them.

Israel has always turned a blind eye to the origin of funds deposited by Jews from South Africa to Russia. In Britain it is perfectly legal to hide the true ownership of a company. Underpaid Asian bank clerks on immigrant work permits in the Gulf states rarely require identity documents from the mysterious and well-connected owners of multi-million dollar deposits.

Hawaladars continue plying their paperless and trust-based trade - the transfer of billions of US dollars around the world. American and Swiss banks collaborate with dubious correspondent banks in off shore centres. Multinationals shift money through tax free territories in what is euphemistically known as "tax planning". Internet gambling outfits and casinos serve as fronts for narco-dollars. British Bureaux de Change launder up to 2.6 billion British pounds annually.

The 500 Euro note makes it much easier to smuggle cash out of Europe. A French parliamentary committee accused the City of London of being a money laundering haven in a 400 page report. Intelligence services cover the tracks of covert operations by opening accounts in obscure tax havens, from Cyprus to Nauru. Money laundering, its venues and techniques, are an integral part of the economic fabric of the world. Business as usual?

Not really. In retrospect, as far as money laundering goes, September 11 may be perceived as a watershed as important as the precipitous collapse of communism in 1989. Both events have forever altered the patterns of the global flows of illicit capital.

What is Money Laundering?

Strictly speaking, money laundering is the age-old process of disguising the illegal origin and criminal nature of funds (obtained in sanctions-busting arms sales, smuggling, trafficking in humans, organized crime, drug trafficking, prostitution rings, embezzlement, insider trading, bribery, and computer fraud) by moving them untraceably and investing them in legitimate businesses, securities, or bank deposits. But this narrow definition masks the fact that the bulk of money laundered is the result of tax evasion, tax avoidance, and outright tax fraud, such as the "VAT carousel scheme" in the EU (moving goods among businesses in various jurisdictions to capitalize on differences in VAT rates). Tax-related laundering nets between 10-20 billion US dollars annually from France and Russia alone. The confluence of criminal and tax averse funds in money laundering networks serves to obscure the sources of both.

According to a 1996 IMF estimate, money laundered annually amounts to 2-5% of world GDP (between 800 billion and 2 trillion US dollars in today's terms). The lower figure is considerably larger than an average European economy, such as Spain's.

It is important to realize that money laundering takes place within the banking system. Big amounts of cash are spread among numerous accounts (sometimes in free economic zones, financial off shore centers, and tax havens), converted to bearer financial instruments (money orders, bonds), or placed with trusts and charities. The money is then transferred to other locations, sometimes as bogus payments for "goods and services" against fake or inflated invoices issued by holding companies owned by lawyers or accountants on behalf of unnamed beneficiaries. The transferred funds are re-assembled in their destination and often "shipped" back to the point of origin under a new identity. The laundered funds are then invested in the legitimate economy. It is a simple procedure - yet an effective one. It results in either no paper trail - or too much of it. The accounts are invariably liquidated and all traces erased.

Criminal and tax evading funds are idle and non-productive. Their injection, however surreptitiously, into the economy transforms them into a productive (and cheap) source of capital. Why is this negative?

Because it corrupts government officials, banks and their officers, contaminates legal sectors of the economy, crowds out legitimate and foreign capital, makes money supply unpredictable and uncontrollable, and increases cross-border capital movements, thereby enhancing the volatility of exchange rates.

A multilateral, co-ordinated, effort (exchange of information, uniform laws, extra-territorial legal powers) is required to counter the international dimensions of money laundering. Many countries opt in because money laundering has also become a domestic political and economic concern. The United Nations, the Bank for International Settlements, the OECD's FATF (Financial Action Task Force), the EU, the Council of Europe, the Organisation of American States, all published anti-money laundering standards. Regional groupings were formed (or are being established) in the Caribbean, Asia, Europe, southern Africa, western Africa, and Latin America.

The least important trend is the tightening of financial regulations and the establishment or enhancement of compulsory (as opposed to industry or voluntary) regulatory and enforcement agencies.

New legislation in the US which amounts to extending the powers of the CIA domestically and of the DOJ extra-territorially, was rather xenophobically described by a DOJ official, Michael Chertoff, as intended to "make sure the American banking system does not become a haven for foreign corrupt leaders or other kinds of foreign organized criminals." 

Privacy and bank secrecy laws have been watered down. Collaboration with off shore "shell" banks has been banned. Business with clients of correspondent banks was curtailed. Banks were effectively transformed into law enforcement agencies, responsible to verify both the identities of their (foreign) clients and the source and origin of their funds. Cash transactions were partly criminalized. And the securities and currency trading industry, insurance companies, and money transfer services are subjected to growing scrutiny as a conduit for "dirty cash".

Still, such legislation is highly ineffective. The American Bankers' Association puts the cost of compliance with the laxer anti-money-laundering laws in force in 1998 at 10 billion US dollars - or more than 10 million US dollars per obtained conviction. Even when the system does work, critical alerts drown in the torrent of reports mandated by the regulations. One bank actually reported a suspicious transaction in the account of one of the September 11 hijackers - only to be ignored.

The Treasury Department established Operation Green Quest, an investigative team charged with monitoring charities, NGO's, credit card fraud, cash smuggling, counterfeiting, and the Hawala networks. This is not without precedent. Previous teams tackled drug money, the biggest money laundering venue ever, BCCI (Bank of Credit and Commerce International), and ... Al Capone. The more veteran, New-York based, El-Dorado anti money laundering Task Force (established in 1992) will lend a hand and share information.

More than 150 countries promised to co-operate with the US in its fight against the financing of terrorism - 81 of which (including the Bahamas, Argentina, Kuwait, Indonesia, Pakistan, Switzerland, and the EU) actually froze assets of suspicious individuals, suspected charities, and dubious firms, or passed new anti money laundering laws and stricter regulations (the Philippines, the UK, Germany).

A EU directive now forces lawyers to disclose incriminating information about their clients' money laundering activities. Pakistan initiated a "loyalty scheme", awarding expatriates who prefer official bank channels to the much maligned (but cheaper and more efficient) Hawala, with extra baggage allowance and special treatment in airports.

The magnitude of this international collaboration is unprecedented. But this burst of solidarity may yet fade. China, for instance, refuses to chime in. As a result, the statement issued by APEC in November 2001 on measures to stem the finances of terrorism was lukewarm at best. And, protestations of close collaboration to the contrary, Saudi Arabia has done nothing to combat money laundering "Islamic charities" (of which it is proud) on its territory.

Still, a universal code is emerging, based on the work of the OECD's FATF (Financial Action Task Force) since 1989 (its famous "40 recommendations") and on the relevant UN conventions. All countries are expected by the West, on pain of possible sanctions, to adopt a uniform legal platform (including reporting on suspicious transactions and freezing assets) and to apply it to all types of financial intermediaries, not only to banks. This is likely to result in...

By far the most important outcome of this new-fangled juridical homogeneity is the acceleration of the decline of off shore financial and banking centres and tax havens. The distinction between off-shore and on-shore will vanish. Of the FATF's "name and shame" blacklist of 19 "black holes" (poorly regulated territories, including Israel, Indonesia, and Russia) - 11 have substantially revamped their banking laws and financial regulators.

Coupled with the tightening of US, UK, and EU laws and the wider interpretation of money laundering to include political corruption, bribery, and embezzlement - this would make life a lot more difficult for venal politicians and major tax evaders. The likes of Sani Abacha (late President of Nigeria), Ferdinand Marcos (late President of the Philippines), Vladimiro Montesinos (former, now standing trial, chief of the intelligence services of Peru), or Raul Salinas (the brother of Mexico's President) - would have found it impossible to loot their countries to the same disgraceful extent in today's financial environment. And Osama bin Laden would not have been able to wire funds to US accounts from the Sudanese Al Shamal Bank, the "correspondent" of 33 American banks.

Quo Vadis, Money Laundering?

Crime is resilient and fast adapting to new realities. Organized crime is in the process of establishing an alternative banking system, only tangentially connected to the West's, in the fringes, and by proxy. This is done by purchasing defunct banks or banking licences in territories with lax regulation, cash economies, corrupt politicians, no tax collection, but reasonable infrastructure.

The countries of Eastern Europe - Yugoslavia (Montenegro and Serbia), Macedonia, Ukraine, Moldova, Belarus, Albania, to mention a few - are natural targets. In some cases, organized crime is so all-pervasive and local politicians so corrupt that the distinction between criminal and politician is spurious.

Gradually, money laundering rings move their operations to these new, accommodating territories. The laundered funds are used to purchase assets in intentionally botched privatizations, real estate, existing businesses, and to finance trading operations. The wasteland that is Eastern Europe craves private capital and no questions are asked by investor and recipient alike.

The next frontier is cyberspace. Internet banking, Internet gambling, day trading, foreign exchange cyber transactions, e-cash, e-commerce, fictitious invoicing of the launderer's genuine credit cards - hold the promise of the future. Impossible to track and monitor, ex-territorial, totally digital, amenable to identity theft and fake identities - this is the ideal vehicle for money launderers. This nascent platform is way too small to accommodate the enormous amounts of cash laundered daily - but in ten years time, it may. The problem is likely to be exacerbated by the introduction of smart cards, electronic purses, and payment-enabled mobile phones.

In its "Report on Money Laundering Typologies" (February 2001) the FATF was able to document concrete and suspected abuses of online banking, Internet casinos, and web-based financial services. It is difficult to identify a customer and to get to know it in cyberspace, was the alarming conclusion. It is equally complicated to establish jurisdiction.

Many capable professionals - stockbrokers, lawyers, accountants, traders, insurance brokers, real estate agents, sellers of high value items such as gold, diamonds, and art - are employed or co-opted by money laundering operations. Money launderers are likely to make increased use of global, around the clock, trading in foreign currencies and derivatives. These provide instantaneous transfer of funds and no audit trail.

The underlying securities involved are susceptible to market manipulation and fraud. Complex insurance policies (with the "wrong" beneficiaries), and the securitization of receivables, leasing contracts, mortgages, and low grade bonds are already used in money laundering schemes. In general, money laundering goes well with risk arbitraging financial instruments.

Trust-based, globe-spanning, money transfer systems based on authentication codes and generations of commercial relationships cemented in honour and blood - are another wave of the future. The Hawala and Chinese networks in Asia, the Black Market Peso Exchange (BMPE) in Latin America, other evolving courier systems in Eastern Europe (mainly in Russia, Ukraine, and Albania) and in Western Europe (mainly in France and Spain).

In conjunction with encrypted e-mail and web anonymizers, these networks are virtually impenetrable. As emigration increases, diasporas established, and transport and telecommunications become ubiquitous, "ethnic banking" along the tradition of the Lombards and the Jews in medieval Europe may become the the preferred venue of money laundering. September 11 may have retarded world civilization in more than one way.