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Logo of Phnom Penh Post newspaper Phnom Penh Post - Can Cambodia win the fight against money laundering?

Can Cambodia win the fight against money laundering?

The drug law, passed in December 1996, contains several provisions to combat money

laundering. An informal survey of lawyers, bankers, and businesspeople reveals widely

varying opinions about the likely effectiveness of these provisions. Robert Lang

reports.

THE drug law, recently passed by the National Assembly, contains anti-money laundering

provisions that many observers hope will fight international drug trafficking.

The law will go into effect after King Sihanouk officially promulgates it. The Post

obtained an English translation of the law and asked a dozen lawyers and business

people to respond to the law's anti-money laundering provisions.

Based on the French model, Cambodia's new anti-money laundering provisions place

the responsibility for monitoring suspected cash transactions on banks. The banks

determine which transactions are suspicious and report them to the government.

This approach differs from anti-money laundering laws in the United States, for example,

where banks must report all cash transactions above $20,000 to the government.

Those surveyed were unanimous in believing that Cambodia should combat money laundering.

They disagreed, however, on the effectiveness of the provisions, the extent the law

will distort the existing legal system and the current monitoring structure, as well

as their faith in the government to enforce it in a fair and just manner.

Certain Cash Transactions Prohibited

Article 18 in the law declares that "any settlement of payment in cash which

exceeds the amount as determined by the competent institution shall be prohibited."

Those surveyed voiced two concerns about this article. First, "Who is the 'competent

institution'?" one asked. An earlier draft had specified that the Ministry of

Finance would determine the illegal amount, but the law that was passed is intentionally

more vague, prompting observers to question the government's motives for the alteration.

Second, critics said that given the extent of cash in the Kingdom, Article 18 is

inappropriate and potentially damaging to the economy.

"Cambodia has a cash econ-omy," explained one banker. "There are no

alternatives to cash. Checks and other cash substitutes are non-existent. It is not

unusual for people to deal in several hundred thousand dollars in cash. [By declaring

an amount illegal] this law will criminalize the normal activities of banks, money

changers, and companies."

"The business community, especially foreign investors, should be worried,"

another banker said.

"There is no such thing as credit," said another executive. "[With

the anti-laundering provisions in effect] if you're a car dealer, do you sell or

not?"

Several executives, however, expressed optimism that this provision could strengthen

the banking industry by promoting the use of checks, letters of credit, and inter-bank

transfers.

If the illegal amount is set too low, economic activity will slow and banks will

be overwhelmed with paperwork; too high and the provision will be ineffective in

the fight against money laundering.

One banker "normally" sees cash transactions of $200,000, primarily for

property transactions. A $1 million cash transaction is "large," he said,

while cash transactions above $2 million are rare. Another banker said $500,000 cash

transactions are "common" for medium-sized companies.

"If the [illegal] amount is set above $1 million, I would feel comfortable [with

this article]," one banker said.

Reporting Requirements

The anti-laundering provisions require that financial institutions record cash transactions

above a certain amount and the identity of customers making them. The institution

must report "suspected" transactions to the National Bank of Cambodia.

These provisions will hamper the development of the banking industry, said several

worried executives. "Many Cambodian people don't trust banks," said one

banker. "If we ask a lot of personal questions, they will not bother to come

to banks anymore, and this will hurt the banking industry."

"We usually ask customers to give their identity documents," said another

executive. "But the articles [about reporting] will hurt the banking business

because bankers must then act as policemen. If bankers are also policemen, no businessmen

will come to the bank."

Several executives disagreed. "I'm not concerned," said Patrick Key, Manager

of Operations of SBC Bank. "We know who our customers are and we know their

track record. We know exactly what they are doing."

"This [article] is not onerous," commented one observer. He pointed out

that the reporting requirements will create a paper trail which is crucial to combat

drug trafficking. "This law opens up the transactions of businessmen to scrutiny

- not an unjustifiable level of scrutiny.

"For people dealing in cash, not paying taxes, and they don't want others to

know it, it's going to be a pain. [Bankers and companies] must justify cash transactions

over a certain amount, and if it is legitimate, this shouldn't be a problem."

Distorting the Legal System and the Central Bank

The anti-laundering provisions should have been placed in a banking law - not a separate

drug law - according to several observers. The result distorts the legal system and

the monitoring functions of the central bank, they said.

They note that the provisions pertain only to drug trafficking. This means that cash

transactions involved with drugs are illegal, while those involving other illicit

activities, such as kidnappings, logging, and prostitution, are permitted.

In addition, the anti-laundering provisions will fundamentally alter the monitoring

powers and capabilities of the National Bank of Cambodia (NBC). "The central

bank can't monitor banks now," exclaimed one executive. "It won't know

what to do when, and if, banks report all their cash transactions."

NBC turned down repeated requests for interviews so its view of the anti-laundering

provisions are unknown. Several observers doubt-ed that it had any input into drafting

the law.

Bankers in the Big House?

Provisions outlining penalties for money laundering are "extremely vague and

poorly worded," several lawyers complained. Article 39 states that money launderers

will be punished with 10-20 year sentences and 10-50 million riel fines.

This could also apply to bankers who - intentionally or unwittingly - are involved

in laundering, they said.

The threat of imprisonment left some bankers undaunted. "I agree with the sentence,"

said one. "Bankers should pay more attention to money flow. But this law is

imprecise and people might set you up by bringing in large cash transactions."

Enforcement: the Pivotal Point

The possibility that the government could arbitrarily enforce the anti-laundering

provisions, thereby exacerbating corruption, particularly alarmed critics.

"This law provides an open invitation to shake down anyone," complained

one observer. "The actors, offenses, and penalties are too broadly defined.

This law allows whoever the enforcing agency is to arrest a banker - or anyone -

because they didn't pay enough bribes or because they support a different political

party."

"I'm not confident that the government will enforce this law in a just way,"

said one banker. "The law is not defined clearly, so how do we know they will

have a rational judgement?"

More specifically, several of those surveyed expressed concern about Article 24 which

establishes a "Commission of Anti-laundering of money . . . under the power

of the Prime Minister(s)."

Lawyers interpret this to mean that the prosecutor will ask the commission whether

or not to proceed with an investigation. Although a future sub-decree will determine

the composition and powers of this commission, this article gives the Prime Ministers

control over whether these cases are pursued in court or whether information is disseminated,

they said.

"Even the UN [United Nations Drug Control Program, a primary proponent of the

drug law] opposed this provision," said one observer. "But the government

insisted on it, which shows where their real interest lies. Will the commission pursue

a case against a friend of somebody important? I doubt it."

"The commission should have been independent," another observer agreed.

"Otherwise, certain people will be off-limits [to an investigation]."

Some industry executives expressed faith in the government. "The government

must have some level of discretion," one observer argued. "This law does

not give them more power than they already have."

What effect on money laundering?

Critics argue that the drug law will not diminish money laundering. "This law

does not address enforcement," said one lawyer. "Without enforcement, the

drug trade will remain unaffected. The [UNDCP] will probably give the central bank

money to improve its monitoring capabilities, but it could have done this several

years ago without writing this law."

Another believed that since the broadly worded provisions will promote corruption,

the government will only crack down on poor people or people with "the wrong"

political affiliations. Consequently, the people involved in "substantial"

money laundering will be untouched.

The amount that the 'competent institution' sets as illegal will be critical in combating

money laundering. An amount too low will constrict economic activity, while an amount

too high will be ineffective.

Others argued that the law might not be ideal, but at least it's a step in the right

direction. "Cambodian banks have a bad reputation abroad," one banker noted.

"This law is a start to make it better."

One observer provided a more straight forward prediction about the likelihood that

the law will reduce money laundering. "Everything in this country is decided

by one person, and if [Second Prime Minister] Hun Sen is serious [about cracking

down on money laundering], then this law will be effective. Without his direct order,

[the enforcement authorities] will ignore this law."

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