GLOBAL REACH: DRUG MONEY IN THE ASIA PACIFIC

In the midst of the Asian financial crisis, at least one business is still
booming: the trade in narcotics from the Golden Triangle, the main
drug-producing area in the world. This year has seen not only another
bumper crop of opium from the Burmese sector of the triangle-an area that
also includes parts of China, Thailand, and Laos-but also new scourges from
laboratories in the remote Sino-Burmese border mountains: first
methamphetamines and now also the designer drug Ecstasy.

In Thailand these new drugs are known as ya baa (mad medicine) and ya ee
(Ecstasy medicine), and warning signs are prominently displayed through-out
the country According to a recent survey by the Thai Development Research
Institute, Thailand has at least 257,000 ya baa users, a number surpassing
its 214,000 heroin addicts.

In China the drug problem is escalating rapidly especially in the
southwestern province of Yunnan, which borders Burma. According to China's
National Institute on Drug Dependence, the num-ber of drug addicts in the
country has grown from 70,000 in 1989 to more than half a million today -
and narcotics experts consider this a conservative estimate.

In Australia, New South Wales Premier Bob Carr said this February that the
state's police force was doing its best to stop "an avalanche of heroin and
ice" (methamphetamines) flooding into the country. The authorities in
Melbourne report. of five overdoses a day, some of which are fatal. Cheap
and extremely potent Southeast Asian heroin is now available for as little
as $15 a hit.

In the United States, most heroin seized by the police apparently
originates in Latin America. But agents from the United States Drug
Enforcement Administration (DEA) concede that this may only show that
Southeast Asian traffickers are more skilled and cautious than their Latin
American counterparts. Given the high price of drugs in the United States,
and the number of addicts, it remains the most lucrative market for
traffickers.

But where does all the money from the sales of illicit drugs go? And how
are the millions of dollars the traffickers earn from the Golden Triangle's
booming drug trade "cleaned"? In Burma itself the procedure is
straightforward. According to the March 1998 issue Jane's Intelligence
Review, the country's military government decided as early as 1989 no
longer to confiscate bank deposits and foreign currency earnings of dubious
origin. It instead "opted for a whitening tax" on questionable repatriated
funds levied first at 40% and since reduced to 25%. Equally significant, in
early 1993, de facto legalization of the black-market exchange rate took
place and narco-funds previously held in Bangkok, Singapore and Hong Kong
flooded back into Myan-mar [Burma]," Jane's reported. It also quoted a
retired Burmese banker as saying that 'at least 60% of all private business
in Yangon [Rangoon] is drug-related." This includes new hotels,
supermarkets, infrastructure projects, and other businesses that all
started with money derived from the narcotics trade.

However, Burma and Cambodia (another coun-try rife with lawlessness and
with a thriving drug-related economy) may be the only countries left in
East Asia where someone can still walk into a financial institution lugging
a suitcase full of assorted banknotes and ask to open an account. Burma, a
poor country with a minuscule official economy compared to any other
country in the region, now has 21 local private banks and representative
offices of 43 foreign banks. Apart from accepting large cash deposits, one
of Burma's main domestic banks, which is owned by the Union of Myanmar
Economic Holdings, the ruling military's own holding company, promises in
advertisements in the Burmese press "prompt, accurate, secure, and secret"
services for its clients.

Cambodia's drug economy is equally blatant. According to a recent report
from the Australian federal police, 19 out of 29 banks in the capital city
of Phnom Penh are "suspected of money-laundering activities." The chairman
of Phnom Penh's Chamber of Commerce, Teng Bunma, is barred from entering
the United States because of suspected involvement in the Southeast Asian
drug trade.

But whether it is obscure banks in Burma and Cambodia, or more respectable
financial institutions elsewhere, the essence of money laundering is the
same: to convert ill-gotten cash, usually in small denominations, into a
solid deposit-and then hide the origin of the funds in order to use them
for legitimate purposes.

HIDING THE MONEY TRAIL Money laundering is considered the world's
third-largest industry after oil and foreign currency trading. It is even
bigger than the actual narcotics industry since it is not only drug money
that has to be laundered but also proceeds from illegal arms deals,
corruption, and tax evasion. Even govern-ments launder money to cover the
tracks of covert aid programs, as the United States did in the Iran-contra
affair. But according to the United Nations International Drug Control
Program, most dirty money, or an estimated $500 billion to $750 billion
annually, comes from the drug trade. A 1997 study by economists at
Bangkok's Chulalongkorn Uni-versity estimates that Thailand-which, although
it is not a major drug producer, remains a regional center for banking and
finance-attracts up to $31 billion in illegal money each year from
narcotics, prostitution, gambling, and smuggling.

In the Asia-Pacific region, the most extensive research into money
laundering has been con-ducted in Australia. John Walker Consulting
Ser-vices in Sydney, which has investigated money laundering for the
Australian Transaction Reports and Analysis Center (AUSTRAG), the police
body that provides the government with financial intelligence, divides the
process into three phases:

*Placement: the physical disposal of the bulk cash profits that are the
result of criminal activity;

*Layering: the creation of layers of complex financial transactions such as
wire transfers to separate the proceeds from their illicit sources;

*Integration: the provision of pseudolegitimate explanations for the
appearance of wealth by making investments in the licit economy.

According to the Australian federal police, some-where between $600 million
and $3 billion a year are laundered in Australia to pay for hotels,
restau-rants, real estate deals, luxury homes, or simply extravagant
lifestyles. To raise funds for such pur-poses, many prominent, otherwise
respectable busi-nesspeople may invest in a major drug deal. The financiers
will never get close to the actual drugs; they hire smugglers and street
gangs to do the dirty work.

Once the drugs have been brought in from South-east Asia and sold in Sydney
or Melbourne, the trick is to get the money out of Australia and have it
transferred back again disguised as profits from a lucrative business in,
for example, Hong Kong or Thailand. Drug dealers usually end up with lots
of small cash, which may be smuggled out in bulk, hidden in suitcases or
even, as senior Australian fed-eral police officers testify inside machinery

An easier and less risky method, police sources say, is "smurfing." This
involves a large number of people who visit various banks with cash, where
they wire or purchase small drafts just below the $6,400 ($10,000
Australian) reporting threshold, which are then sent to accounts in Bangkok
and Hong Kong. Bank drafts in the $3,200-$5,800 range have also become
popular among some money launderers, according to police sources.

Inside Asia, the underground Chinese banking system also facilitates the
movement of money from country to country According to a document from the
DEA, "through the underground banking system, heroin traffickers can
transfer $500,000 from Hong Kong to Bangkok within hours simply by visiting
a gold shop in Hong Kong's Western Market." From Bangkok the money can be
wired to the northwestern Thai city of Chiang Mai, received by the heroin
supplier's organization, and forwarded through another network to Burma to
buy more drugs and to finance trafficking operations. Profits from the
trade can be sent the other way, via the gold shops in Yawarat, the heart
of Bangkok's Chinatown.

When the cash or remittances eventually reach Hong Kong-still the favorite
destination for dirty money-they have to be placed safely in one of the
territory's 177 international banks or 200 finance companies. The lack of
foreign currency controls in Hong Kong once facilitated the movement of
illicit funds through the territory, but tighter rules that were put into
place before the handover to China forced money launderers to use more
roundabout methods.

The most popular is to take the hydrofoil to Macau, change cash or small
bank drafts into gambling chips in one of the territory's casinos, spend a
few at the gaming tables, and then convert most of them back into a "clean"
check. The casino will issue an accompanying document stating that the
money had been won at the casino. A source close to the scene in Macau
claims that some casino man-agers specialize in providing such ser-vices
for money launderers, who have to pay a commission.

"But such minor expenses are part of the busi-ness," said the source. The
check can then be deposited legally in any Hong Kong bank and, if any
questions are raised, the casino manager will testify that his client had
had an unusually lucky day at the gaming table.

The result is that money trails become even harder to follow since casinos
anywhere are ideal for laundering and moving drug money Police sources say
that most casinos are linked to a world-wide credit system through which
gambling profits or credits can be deposited at, for example, a casino in
Las Vegas and later collected in Macau-and vice versa-without going through
an established bank. "Billions of dollars are being moved around the world
in this manner and there's no way we can check it," an Australian police
source said.

THE NEW CAYMAN ISLANDS Once the cleaned-up cash has entered the official
banking system, it can be moved quickly into a variety of financial
instruments and accounts. It is in this context that law enforcement
agencies are taking a keen interest in a string of new "tax havens" that
have been established in the Pacific, paralleling those in the Cayman
Islands and simi-lar "financial centers" in the Caribbean.

The South Pacific island states have little arable land, few natural
resources, and small populations. Unable to develop industry and
agriculture, their greatest strength lies in their proximity to the much
richer East Asian economies. Many have sold fish-ing licenses to fleets
from Japan, Taiwan, South Korea, and the United States. Tonga, Kiribati,
and the Marshall Islands have sold passports, mostly to Hong Kong Chinese,
and Kiribati has mar-keted its prime location near the equator to sell
satellite launch and tracking services.

But the big money seems to be in providing tax-free financial services ~
the Asia-Pacific region. The established South Pacific tax haven is Vanuatu
(formerly the Anglo-French condominium of the New Hebrides), whose tiny,
one-street capital, Port Vila, abounds with nearly 80 banks, 2,000 shell
companies, and numerous insurance agents, accountants, and lawyers.[1]
Although most of these businesses are legitimate, Australian officials
believe that millions of dollars worth of dirty money, including drug
money, is placed in the banks of Vanuatu and other Pacific tax havens
through trusts and shell companies, protected by a web of impen-etrable laws.

Vanuatu is in the same time zone as East Asia, has no reciprocal-tax
agreement with any other country, and considers breach of confidentiality a
criminal act. Further, what attracts money to cen-ters such as Vanuatu is
not their status as tax havens. According to AUSTRAC's Tim Morris, an
expert on money laundering, "It is not the absence of taxes, or even the
ability to walk into a bank with a suitcase full of cash with no questions
asked, that makes an offshore banking center attractive. It's the strict
bank secrecy the inability of any government to investigate the source of
unusual wealth parked in places like that."

Concerns about Vanuatu's secretive banking laws were highlighted in 1996 by
a scandal in Indonesia surrounding Vanuatu-incorporated Dragon Bank. The
bank, headquartered in a small downstairs room in a Port Vila office
building, had announced plans for a 101-story skyscraper in Jakarta, a $4
bil-lion telecommunications venture (also in Indone-sia), and an $80
million property project on the Malaysian island of Langkawi. But in June
1996 government officials shut down Dragon Bank in Indonesia for operating
without a banking license. In January 1997, the government in Port Vila
also revoked its banking license in Vanuatu.

Although the vast majority of Vanuatu's banks are owned by ethnic Chinese
interests from Indone-sia, Hong Kong, Taiwan, and China, dirty money from
other parts of the world has also ended up there. Alarm bells rang at
AUSTRAC's Sydney head-quarters two years ago when it was discovered that
seven Russian banks had shown interest in opening representative offices in
Vanuatu. The concern reflects the state of Russia's banking system as much
as Vanuatu's. The DEA has estimated that of nearly 2,000 Russian commercial
banks, at least a quarter are owned by major criminal organizations.

The South Pacific seems to have first attracted the interest of Russian
bankers two years ago when the United States government increased pressure
on financial centers in the Caribbean. In February 1996, five of the six
banks in Antigua were closed by the island's authorities. All were
suspected of hav-ing laundered dirty money for the Russian mafia.

Only one bank in Vanuatu has been positively identified as Russian-owned:
Prok Bank, whose name means "profit" in Russian. While there is no
suggestion that Prok Bank has engaged in any illegal activities, law
enforcement officials believe several more Russian banks are operating in
Vanuatu under phony names.

Nauru, Western Samoa, the Cook Islands, Niue, and the Marshall Islands also
provide offshore ser-vices for foreign companies and banks. Tiny Niue, a
territory associated with New Zealand, has only 2,000 inhabitants and is
eagerly protecting its financial center, which is the island's major source
of income. Offshore banking services reported receipts of $118,000 for
1995-1996, but the Audit Office of New Zealand has complained that it
continues to be refused access to records of offshore banking transactions.
In 1997, about 200 companies were registered in Niue, producing about
$227,000 for the territory

The Trust Company of the Marshall Islands (a former United States
dependency) has just opened a new headquarters to cope with expanded
business with offshore corporations. Several ethnic Chinese who have
acquired Marshall Islands citizen-ship are known to have been involved in
the smuggling of illegal aliens from China to the United States.

Long a haunt of buccaneers, beachcombers, and missionaries, the South
Pacific is becoming a new kind of paradise - for crooks and money
launderers flocking to take advantage of the islands' secretive financial
regimes as well as the naivete of many of the leaders of these young and
poor island states. In theory all members of the South Pacific Forum, the
island states' regional body, are pledged to respect the 1992 Honiara
Declaration (named after the capital of the Solomon Islands, where the
meeting was held), which encourages them to outlaw money laundering. In
reality they have neither the funds nor the institutions to carry this out.

In only one case has laundered drug money been seized in Vanuatu. This came
after the United States provided hard evidence that money from drug sales
in America had been transferred to Australia, and then into offshore trusts
in Vanuatu. The seizure took place in March 1995, and the amount, $1.5
million, was forfeited to the Vanuatu government following a United States
Supreme Court order. It was a small and solitary victory for law enforcement.

MONEY IS MONEY With the drug trade booming in East Asia and the entire
region in financial turmoil - and in the case of Indonesia, also political
uncertainty - the need to transfer "hot" money to safer jurisdictions has
become even more urgent than before. Illegal immigration from China, and
the related trade in false and real foreign passports, is also a
multimillion-dollar business. Law enforcement agencies face the herculean
task of trying to stem this traffic in people, drugs, and money; the degree
of their success depends almost entirely on the coopera-tion they receive
from the financial sector, particularly the submission of suspect
transaction reports.

But do bankers, lawyers, and accountants from Bangkok, Rangoon, Phnom Penh,
and Moscow to Hong Kong, Singapore, Jakarta, Port Vila, Sydney and San
Francisco know what kind of money they are handling? The weakness of the
entire system, and all the players it involves, was best summed up by the
infamous American-Sicilian gangster Charlie "Lucky" Luciano: "There's no
such thing as good monev or bad monev. There's just money."

[1] A shell company is a business entity that is registered in, for
example, Vanuatu, the British Virgin Islands, and the Cayrnan Islands.
However, the company does not have a proper office, has no staff, and does
not produce anything. The address could be a solicitor's office in Port
Vila, and the purpose of the company is solely to be a conduit for dirty
money.

Checked-by: Mike Gogulski