Mario Draghi: The prevention and suppression of money laundering
Testimony of Mr Mario Draghi, Governor of the Bank of Italy, at the Parliamentary Committee
of Inquiry into Mafia-like Criminal Organizations, Rome, 14 June 2007.
* * *
1. The economic aspects of money laundering
Money laundering - that is, investing the proceeds of crime in legal economic and financial
activities - is the more extensive, the greater the scale of criminal organizations. As these
expand, their need to invest their funds and conceal their origins increases.
Today, money laundering exploits the development of financial markets and globalization,
taking advantage of the same channels that facilitate legitimate transactions, of the greater
ease of communication, of technological and financial innovations and also of the fact that
the reaction of the authorities is hindered by difficulty in acquiring information and by the
costs of international coordination.
The possibility of using unwitting intermediaries for illicit transactions makes criminal
organizations more dangerous. Loopholes in the rules and blind spots in the control
apparatus of various countries enable illegal operators to engage in "regulatory arbitrage" on
an international scale. Prevention and suppression may be further undermined by the
selfinterested tolerance of some States and the opacity of some off-shore financial centres.
Organized crime does not just subvert public order. It also attacks economic and financial
stability by altering the proper functioning of market mechanisms to the advantage of
dishonest operators.
In line with recent European directives, economic crime must be combated by pursuing both
the objective of law enforcement and that of economic development. A balanced strategy of
prevention and suppression must be founded upon rules that, on the principle of
proportionality to the threat, lay down clearly formulated and easily applied obligations; that
avoid intrusive instruments and excessively rigid procedures; that do not overburden honest
businesses; that institute sound mechanisms of enforcement and sanctions that are swift,
effective and proportionate to the seriousness of the infractions; that provide incentives for
intermediaries to collaborate with the structures that fight money laundering; and that
strengthen domestic and international cooperation among authorities.
The States that are most aware of the problem, perceiving that criminal organizations are
most vulnerable when they seek to funnel the proceeds of crime into legitimate channels,
have long concentrated on the financial system. Given the nature of its activity the financial
system can be exploited to launder the proceeds of crime, but at the same time it has proven
to be highly effective in cooperating with the law enforcement authorities.
The Bank of Italy stands ready to step up its own commitment to the fight against crime, both
organizationally and in terms of resources. We are fully aware that money laundering and the
financing of terrorism, with their great inherent danger of contagion, now constitute a grave
threat to the democratic order.
Today I will briefly review the main problems impeding the prevention and suppression of
money laundering and suggest possible remedies. The results of action to date are set out in
documents annexed to my report.
2. The development of the law on money laundering
2.1 The basic guidelines
Italy's series of legislative measures to coordinate the battle against organized crime began
in the early 1980s. In 1982, having perceived the extreme danger of criminal attacks on the
legal economy, Parliament introduced the crime of Mafia criminal conspiracy, characterized
among other things by the aim of controlling business enterprises and reinvesting the
proceeds of crime.
Italy's current legislation on the prevention of money laundering is thus the product of more
than two decades of engagement on the part of Parliament and the authorities. It has
adopted, and in a number of instances anticipated, the indications of the various international
fora. Its development has been consistent with several fundamental choices: the distinction
between prevention and suppression; the central management of information and
evaluations; and cooperation between intermediaries and law enforcement authorities.
The changes made in recent years have incorporated the innovations introduced by
international standards and, subsequently, by Community law. The revision of the 40
recommendations of the Financial Action Task Force (FATF) in 2003, the issue of 9 special
recommendations to combat the financing of terrorism, and the approval of three Community
directives, two of them quite recently1, represent the tangible sign of a regulatory framework
that is attentive to the changes in criminal techniques.
Legislative trends have followed two lines of development. One - found in the Second
Directive on Money Laundering (2001/97/EC) - involves extending to additional professional
and commercial categories exposed to the risk of laundering the obligation to cooperate
actively in prevention and suppression, previously limited to banks and other financial
intermediaries. The second - introduced by the Third Directive (2005/60/EC) - makes the
stringency of the know-your-customer requirements commensurate with the risk of money
laundering as the intermediary infers it from the nature of the counterparty, the type of
service requested, and geographical location. This makes the rules more flexible, but it also
heightens the responsibilities both for intermediaries, who must institute appropriate
procedures, instruments and controls, and for the supervisory and oversight authorities in
their duties of governing, promoting and verifying the proper application of the new
provisions. Effective oversight presupposes specific knowledge of the risk factors, enabling
supervisors to judge the adequacy of intermediaries' safeguards and, if necessary, to call for
suitable correctives.
In 2005 the International Monetary Fund recognized that Italy's rules for the prevention and
suppression of money laundering had worked well, and in fact had also served, after 11
September, to block the financing of international terrorism, even though unlike money
laundering the latter is defined by the illicit use, not provenance, of the funds. Based on the
IMF's indications, the imminent implementation of the Third Directive on money laundering
will offer an opportunity to enhance the efficacy of a body of law that is crucial to the integrity
of the national economy.
The build-up of successive provisions over the years, the lack of clarity in many rules, and
shortcomings in the set of controls nevertheless make a reordering of this legislation
necessary. The IMF has expressly called on Italy to produce a consolidated
anti-moneylaundering law, which has been envisaged but never drafted. In response the Italian
Government has formed a study committee at the Ministry for the Economy and Finance,
chaired by Undersecretary Antonio Lettieri with Anti-Mafia Prosecuting Attorney Pierluigi
Vigna as coordinator.
2.2 The prevention apparatus
The Italian apparatus to combat money laundering originally involved the fragmentation of
functions between different bodies and the prevalence of investigation over financial
analysis. Reports of suspicious transactions were transmitted directly to law enforcement
bodies (the chief of police) at province level. Only afterwards were they sent on to the
Special Foreign Exchange Unit of the Finance Police for further analysis. In 1997, in keeping
with international experience, which relies on a Financial Intelligence Unit as the heart of the
system of prevention and suppression of money laundering, Italy centralized the functions of
reception and analysis of the reports within a single body, the Italian Foreign Exchange
Office (Ufficio Italiano Cambi, UIC), assigned to inquire solely into the financial aspects.
This arrangement was the outcome of a protracted discussion of alternative proposals: the
constitution of an administrative authority dedicated exclusively to financial analysis or else of
a mixed agency with investigative duties as well, grouping functions deriving from the bodies
responsible for financial supervision, the police and the courts. In Italy the latter solution
would have been hard to realize and manage, given the high cost of creating and operating
such an agency and the difficulty of bringing together qualified resources, removing limits on
access to the confidential information held by single administrative units for their own,
specific tasks.
In the span of just a few years three major legislative changes transformed the UIC's nature
and functions radically: the 1997 law separating the investigative from the financial area,
which assigned the Office a key role in combating money laundering; Legislative Decree
319/1998, following the introduction of the European single currency, which restructured the
Office and made it an instrumental entity of the Bank of Italy; and Law 388/2000,
implementing the principles of an EU Council decision (2000/642/GAI), which formally
instituted Italy's national Financial Intelligence Unit under the UIC.
Within the tripartite division of anti-money-laundering functions among the entities assigned
respectively to financial analysis, investigation and trial, the UIC receives suspicious
transaction reports and examines them further from the financial standpoint, serving as filter
between the persons submitting the reports and the investigative bodies and the courts.
The FIU receives information not only from the persons subject to the reporting requirement
but also from internal and external archives, other government departments and agencies,
and its foreign counterparts. The sources of information also include the database now being
formed in the framework of the Taxpayers Register (provided for by Decree Law 223/2006,
ratified by Law 248/2006), which is the equivalent in some respects of the Register of bank
accounts and deposits contemplated by the law since 1991 but never realized.2 The new
rules require banks, other financial intermediaries and Poste Italiane to report to the
Taxpayers Register all relations with customers, as determined by an instruction issued by
the Director of the Revenue Agency.3
2
Law 413/1991, Article 20.4, provided for the establishment of a register of all persons with accounts or
deposits with banks and other financial intermediaries. The procedures for its constitution were to be specified
in the implementing regulations, which were issued in 2000 by Treasury Decree 269. The decree assigned the
operation of the register to the Ministry of the Treasury and also specified the persons allowed access to the
data (Article 4).
3
The instruction was issued on 19 January 2007. A circular dated 4 April introduced additional provisions for
the formation of the Register. It must contain the personal identifying particulars, including tax number, of the
persons with whom the institution has relations from 2005 on. Data on the amount of funds in the accounts, on
transactions thereon, or on the amount of assets under management are not to be reported. Access to the
Register - reserved to the tax administration, the courts and the investigative bodies expressly specified by
the law and solely for the purposes specified - is open also to the UIC, which can use the data for its further
inquiry into suspicious transactions. Contacts are under way between the UIC and the tax administration for
the prompt institution of a link, which should become operational in the next few months. The tax
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The FIU, then, is a crucial node in a complex web of relations. Domestically, it engages in
intensive dialogue with the persons submitting the reports, with the supervisory authorities,
with the investigative bodies and with the courts. Internationally, it forms part of the network
of cooperation made up of all its counterpart authorities abroad.4
The most significant money laundering activity has supranational implications. For effective
prevention, therefore, both cooperation between the authorities of the countries involved and
uniform rules to prevent distortion and regulatory arbitrage are essential. Accordingly, FIUs
take part in the international bodies assigned to the prevention and suppression of money
laundering and in bilateral and multilateral initiatives.
As the supervisory authority for the credit system, the Bank of Italy is responsible for
guaranteeing the sound and prudent management of the individual institutions under its
supervision and for the overall stability, efficiency and competitiveness of the financial
system. With a view to these purposes the legislation and regulations in force oppose entry
into the banking sector of unreliable operators; set integrity and experience requirements for
top corporate officers and significant shareholders; subject the owners of intermediaries to
controls on personal qualifications and on conflicts of interest; require adequate organization
and in particular an effective system of internal controls; and promote transparency and
fairness in relations with customers. These are all provisions that help to prevent the
exploitation of financial mechanisms for money laundering and that testify to the existence of
complementary relations and convergence between the aims of credit and financial
supervision and those of the law against money laundering.
In order to strengthen the safeguards against the exploitation of intermediaries for purposes
of money laundering, the Bank of Italy first issued its "Operating Instructions for identifying
suspicious transactions" in 1993. The instructions are intended to assist intermediaries by
specifying indicators of anomaly that point to suspicious transactions. The instructions were
updated in 2001 to take account of the development of the securities market, the technical
advances in the payment system and the spread of new channels for the marketing of
financial products.5 A further update will be effected, as the International Monetary Fund has
recommended, after the transposition of the Third Directive into Italian law.
3. Instruments of prevention and suppression
The fight against money laundering deploys a sophisticated series of instruments. These
include the legal definition of the crime of money laundering itself, the limits on the use of
administration is allowed access to the Register exclusively for the purposes of "activities in connection with
enforceable tax collection" and for the execution of banking investigations.
4
The European FIUs have constituted a "platform" in the framework of the EU Commission for the detection
and resolution of operational problems and for the exchange of experiences and best practices.
5
First of all the instructions lay down organizational rules - consistent with the supervisory regulations - under
which intermediaries must know their customers better, which is a first fundamental safeguard against money
laundering and the infiltration of criminal organizations into the financial system. Intermediaries are required to
take every appropriate action to improve their knowledge of customers and pick up any contradictions
between a customer's economic profile and the services requested. They must procure up-to-date information
on the customer's activities, the economic context in which the customer operates, the financial services
requested and any relationships with other intermediaries. The instructions provide a series of illustrative
cases of indicators of anomaly of individual transactions in the presence of which the intermediary must
determine whether or not to make the suspicious transaction report. The general indicators tend to identify the
techniques used to conceal or split transactions and to detect unusual or illogical forms of transaction. The
case examples also consider relations that could indicate usury, which can be inferred from transactions on a
suspected usurer's account or the sudden, unexpected appearance of financial resources on the account of
customers in difficulty. As a complement to these instructions, the UIC has analyzed the transactions reported
by banks for purported usury to provide intermediaries with specific, technical indicators based on the
similarities of behaviour observed in these financial operations.
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cash for payments between private parties, the identification of persons who establish
continuous relationships with intermediaries or who effect transactions larger than the legal
threshold, the recording of these transactions in special databases, the statistical analysis of
financial flows to detect indicators of anomaly, the requirement to report all transactions,
regardless of size, that arouse suspicions of being connected with illegal activities. The
framework is completed by the application of sanctions and the confiscation of property of
criminal origin.
3.1 The definition of the crime
Italian penal law has conducted a protracted process of refinement and extension of the legal
definition of the crime of money laundering, upon which the detection of illegal conduct
depends.
In 1978 the crime was defined with reference to funds originating in a small number of
particularly grave offences aimed at the appropriation of goods (robbery, extortion,
kidnapping). In 1990, as part of the fight against Mafia-style criminal organizations, Law 55
extended the list of "predicate offences" to include drug trafficking. In 1993, Law 328
extended predicate offences to all crimes not of negligence, thereby simplifying the job of the
persons called on to detect and report suspicious transactions.6
Under the present law, "active accomplices in the predicate crime" cannot be charged with
money laundering as well (Article 648-bis of the Penal Code). The criminal law approach
taken here provides for the illegality of money laundering to be included in that of the
predicate offence. Consequently, when it is advantageous for the perpetrators, skilful trial
defence based on false confessions of participation in the predicate crime allows defendants
to escape conviction for money laundering.
The IMF has suggested reconsidering this choice, citing the good results attained by laws
against "self-laundering", i.e. money laundering by the perpetrator of the predicate crime that
originates the illegal acquisition of financial resources.7 The question is now before the
Lettieri Committee, which may weigh the need for a better definition of the crime of money
laundering focusing on acts serving to conceal the illegal origin of the money or property.
3.2 Limits on the use of cash
The rules in Italy prohibiting transfers of significant amounts of funds between private parties
in cash or with bearer instruments are aimed at impeding money laundering by obligating
6
Article 648-bis of the Penal Code made punishable "whoever substitutes or transfers money, assets or other
benefits deriving from a crime not of negligence, or effects in relation to such money, assets or benefits other
transactions such as to conceal their criminal origins". Article 648-ter makes "whoever invests money, assets
or benefits deriving from a crime in economic or financial activities" punishable for illicit use of funds."
7
The assessment must take into account relations with other crimes, such as the reinvestment of illegal
proceeds (Article 648-ter of the Penal Code); criminal conspiracy (Article 416), which is a hallmark of the
Italian legal order; assisting and abetting crime (Article 379); and fraudulent transfer of assets for the purpose
of facilitating money laundering, under Law 356/1992, Article 12-quinquies. While making "self-laundering" a
criminal offence in itself could make it easier to get evidence of complex crimes, it must also be considered
that where the predicate crimes are less serious, such an approach could lead to excessively severe
punishment.
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economic agents to use the banking channel for payments.8 Such rules are not common in
legislation within the Community.9 The number of violations, often involuntary, remains high.
The consensus opinion in our country is that the limitations on the use of cash constitute a
fundamental bulwark against money laundering; that it should be confirmed and made more
efficient by lowering the permitted amount and introducing more stringent monitoring of funds
transfers by means of so-called money transfers.
The draft legislative decree for the transposition of the Third Directive, on which the Ministry
for the Economy opened a consultation in February, clarifies some points regarding the
application of the current rules and promotes the spread of registered payment
instruments.10 A significant lowering of the ceiling now set on the use of cash in transactions
between private parties is being examined by the Lettieri Committee.
Certainly, the increasing integration of payment services affects the efficacy of measures
adopted on a purely national basis. In April the European Parliament unanimously approved
the Payment Services Directive, which establishes the conditions for providing retail payment
services in all the members of the Union and defines pan-European payment schemes (for
credit transfers, payment cards and direct debits) and thus contributes to the realization of
the Single Euro Payments Area (SEPA) project developed by European banks to promote
the use of electronic payment instruments. Measures to reduce costs and taxes11 could
further stimulate the spread of non-cash payment instruments, which are traceable save in
marginal cases.12
By European standards, Italy makes scant use of non-cash payment instruments. In 2006
there were 62 non-cash payments per inhabitant, compared with the euro-area average of
150 in 2004.13 Cards are the main instrument that permit consumers to limit their holdings of
money for transaction purposes. Although Italy's infrastructure endowment is up to the
European standard, payment card transactions numbered no more than 22 per inhabitant in
2006, compared with 46 in the euro area as a whole in 2005.
8
In particular, the rules: a) prohibit transfers between private parties of money and bearer instruments with a
total value of more than €12,500; b) require that the personal or corporate name of the beneficiary be
indicated and the nontransferability clause be shown on cashier's cheques and personal cheques larger than
that amount; and c) set a €12,500 ceiling on the balance of bearer passbook savings accounts.
9
France alone has provisions comparable to Italy's. The other member states do not prohibit the use of cash
even for large payments, but require economic agents to evaluate the characteristics of the transaction to
detect any anomalies.
10
Article 51 of the draft legislative decree expressly prohibits the opening and use of anonymous accounts or
savings books.
11
Possible measures concerning costs are pricing incentives for the acquisition of more advanced technology
and the reduction of interbank fees, which depends on both payment circuit operators and the Antitrust
Authority. As to taxes, the reference is to "stamp tax" on current accounts and the deductibility of the expenses
incurred by retailers to equip themselves with electronic payment terminals. These matters are addressed in
the Government's bill, now before the Chamber of Deputies, on "measures in favour of consumers and to
facilitate productive and commercial activities and provisions concerning sectors of national importance".
12
The Community provisions permit exempting non-reloadable electronic money instruments up to €150 and
reloadable ones with an annual ceiling of €2,500 from the identification requirements. Nevertheless,
identification is mandatory for transactions greater than €1,000.
13
Factors that help to explain these differences include the lower degree of financial deepening of the economy,
customers' concerns about the security, practicality and cost of alternative payment instruments, the
fragmentation of retail trade and the size of the underground economy.
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3.3 Identification and recording requirements
The current legislation requires intermediaries and other specified persons14 to identify their
clients at the time the business relationship is set up or when they carry out transactions in
an amount of €12,500 or more.15 Consequently, every transaction potentially linked to money
laundering leaves a trace and can be reconstructed even after the passage of time.
As I mentioned, with the implementation of the Third Directive on money laundering the
customer identification rules will have to be calibrated so that the strictness of the
identification procedure is commensurate with the risk of money laundering, as
independently evaluated by every person subject to the requirement. In many cases this will
lead to the adoption of less stringent or more stringent procedures than the present ones.
The data gathered must be recorded by each person in a database. Transposition of the
directive is an opportunity to simplify the rules for keeping electronic databases, so as to
facilitate database management by the persons subject to the requirement and consultation
during inspections.
Aggregated data derived from intermediaries' archives are the basis of the statistical
analyses that the Financial Intelligence Unit uses to conduct studies of individual phenomena
or territories, to supplement the examination of suspicious transaction reports, to check on
possible failures to transmit reports, and to develop models for automatic detection of
anomalies.16
3.4 Reporting of suspicious transactions
The reporting of suspicious transactions is the linchpin of the legislation against money
laundering.
On the basis of their knowledge of their customers, intermediaries and other persons subject
to the requirement identify suspicious cases and send reports to the national FIU. As the
authority expert in financial matters, the FIU functions as a filter, analyzing the reports,
probing more deeply and condensing the results of its analysis in a summary report that it
transmits to the investigative bodies, which evaluate whether to pursue the matter and,
possibly, open a formal inquiry.
The effectiveness of the FIU's work is shown by the outcome of the most important money
laundering trial, which recently concluded at first level, after ten years, before the Brindisi
Court. As this Committee knows, the judgment not only imposed stiff sentences, but also
awarded the UIC €3 million in damages, testifying to the important role it performed, as a civil
party, in reconstructing the banking transactions under investigation.
Among the different systems adopted in Europe, those of Italy and Spain place the greatest
burden of assessment on persons required to make reports, who are asked to make an
accurate prior evaluation in order to report only truly suspicious cases. In the United
Kingdom, where even simple anomalies must be reported, more than 200,000 transaction
reports were made in 2006, aggravating the task of the UK's Financial Intelligence Unit in
sifting the transactions for further investigation. France and the Netherlands use more
composite methods.
The approach chosen in Italy seems preferable, even if it is more onerous for operators.
Using the information in their possession, they are required to evaluate the operations of the
persons with whom they have relations and to compare transactions' objective features with
customers' subjective characteristics in order to detect any anomalies. Greater selection at
source reduces the number of transaction reports, making them easier to handle for the FIU,
which received some 10,000 reports in 2006 and more than 5,400 in the first five months of
this year.17
Since 2000 the FIU has had the power to dismiss reports that lack significance; this enables
it to concentrate financial analysis and further inquiry on the cases of real interest.18
The identity of those who report suspicious transactions must remain confidential for the
mechanism to work properly. For some time now the protection of reporting entities and
individuals has received attention from the Italian Parliament and the Community institutions.
The Third Directive also requires member states to adopt appropriate and effective
measures. Efforts must be intensified in this direction.
The involvement of individuals cannot be avoided by entrusting the identification of
anomalous transactions to computer programs based on predetermined standards. These
programs, however sophisticated and technically advanced, can only be an aid; they cannot
replace the personal evaluation that is essential to the good performance of the system.
Cooperation among all those who are involved, in different capacities, in the fight against
money laundering and the financing of terrorism is of crucial importance. Satisfactory results
depend on the correct and efficient functioning of the entire chain of actors, each of whom is
called upon to contribute actively within his competence to the process. Intermediaries are
showing that they are willing to pitch in. Greater cooperation must also meet the need for
faster feedback from the investigative bodies on the outcome of reports. This will serve both
to refine the evaluation process and to preserve business relations with customers who are
found to be in order.
3.5 Sanctions
Backing Italy's legislation against money laundering are penal sanctions whose application in
the courts has been limited and administrative sanctions that have proven ineffective.19
The draft legislative decree to implement the Third Directive reinforces the apparatus of
sanctions, above all by empowering the competent authorities (the Bank of Italy, Isvap and
Consob) to applying sanctions directly to the persons under their supervision for
noncompliance with the provisions on administrative organization and internal control
procedures.
The Government's legislative mandate does not allow it to decriminalize the penal offence of
non-compliance with the customer-identification and transaction-recording requirements,
often caused by mere procedural errors, and to replace it with an administrative sanction.
Such a step would be advisable not least to ensure that intermediaries do not abstain from
exercising the greater discretion that the directive grants them, for fear of committing a crime.
In any event, gross negligence would remain subject to penal prosecution insofar as it abets
the perpetration of more serious crimes.
Another incongruity is the penal sanction for the failure of the control bodies of legal entities
to report even simple organizational irregularities, given that the analogous provisions of the
Consolidated Law on Banking and Consolidated Law on Finance provide for administrative
sanctions.
Altogether, I think a comprehensive reconsideration of the matter is advisable to obtain a
closer correspondence between the severity of the offence and that of sanctions, which must
be applied effectively. Severe punishment of the most serious violations should be
accompanied by a mitigation of the burden placed on the generality of operators. Appropriate
remedies could be introduced during the preparation of the Consolidated
Anti-MoneyLaundering Law, either by supplementing the Government's delegated powers or by direct
legislative amendment.
The decision to enhance the role of the control authorities is certainly endorsable. Their
specific competences and the flexibility of their organization can make verification of
irregularities and the application of sanctions speedier and more effective. Further steps in
this direction would be desirable, aimed at giving the FIU the power to propose sanctions for
failure to report suspicious transactions and simplifying the complex sanction procedure for
violations of the limits on the use of cash.20
3.6 Confiscation of property
There is increasing awareness that the confiscation of property acquired with the proceeds of
criminal activity must be a prime objective of the State in its action to combat crime. Only by
attacking their economic power can we stop criminal organizations from being self-fueling
and using the illegal proceeds of crime to penetrate the legal economy.
"Equivalent confiscation" and "enlarged confiscation" are valid tools for attacking assets of
illegal origin. The former makes it possible to seize property of equivalent value to the profit
of crime even if not originating from crime, while the latter, inverting the burden of proof,
requires the