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East Europe launches tough measures against Russian mafia

Fearful of an upsurge in violence between organised criminals and hopeful of becoming a full member of the EU next year, Hungary has launched draconian measures against money laundering in an about turn for a nation that sees itself as a magnet for criminals who are attracted by its pivotal position between east and west. Hungary was removed from the money laundering blacklist only last year.

The blacklist names and shames countries that fail to pull their weight in the global fight against money laundering. It is reviewed and published annually by the 31-nation Financial Action Task Force (FATF). Hungary's meticulous application of the rules is fuelled by fear, shared by the security agencies throughout formerly Soviet- dominated Eastern Europe, of an imminent renewal of savage turf wars between rival gangs of the Russian mafia.

Money laundering involves the reintroduction of the proceeds of criminal enterprise through corrupt dealers into the mainstream of legitimate finance. Authoritative estimates suggest that as much as US$1.5 trillion -- 5 percent of the gross global product -- is laundered every year.

The EU demands strict compliance by candidate countries with its rules against money laundering in order to deny terrorists their financial support. Hungary, which does not perceive a serious terrorist threat against its citizens, is more than willing to comply -- as a means to counter the renewed threat of organised criminals.

Hungary is the author of several successful innovations in the fight against organised crime, which has been threatening this region since the collapse of the Soviet Union a decade ago. It has been instrumental to the introduction of legislation among its neighbours making money laundering illegal and imposing the same reporting obligations on financial institutions that are now being extended to individuals.

These measures seemed to have contributed to the end of indiscriminate criminal turf wars raging throughout the former Soviet possessions in the 1990s. But experts fear that the murder of gangland bosses and the bombing of nightclubs have merely led to a consolidation of the power of dominant criminal interests, and that they may clash again with renewed ferocity. A spectacular recent arson attack on a popular nightclub in the capital followed by an explosion last Monday in front of a busy Budapest railway station suggest that the process has already begun.

Hungary is nervous because its traditional role as a link between East and West has made it attractive to the criminal underworld. The Russian mafia has already established a bridgehead in Budapest from which it directs operations as far away as Britain, New Zealand and the US. This is an excellent place for criminals to seek legitimate power by investing freshly laundered cash in buying shares and supporting political parties.

Hungary's new rules compel individual dealers as well as professional associations involved in a wide range of financial transactions -- such as antiques, accountancy, property, law, precious metals, banking and insurance -- to prepare and register with the police their detailed internal rules for fighting money laundering.

The requirements include the identification of senior executives personally responsible for the enforcement of the measures.

Traders are obliged to actively seek out any signs of attempted money laundering. These may include prices set at a rate significantly different from conventional market values or notable losses on resale, the movement of money lacking verifiable sources or the acquisition of profits in the absence of appropriate costs. The only group still entitled to keep their suspicions about money laundering to themselves are lawyers defending their clients in court proceedings.

This comes on top of recent tough legislation that compels a widely defined group including gamblers and international travellers handling as little as 1 million forints (US$4,350) in cash to make verifiable financial declarations identifying the origin of their assets.

All remaining anonymous ("numbered") bank accounts, bonds and other savings schemes are being re-coded with their owners' identity established and scrutinised. Personal information thus gathered by the police is used in investigations of organised crime.

"Money laundering is an expensive business," observes Lieutenant Colonel Csaba Molnar, head of the financial task force of the National Organised Crime Directorate.

"It can cost nearly half the dirty money put through the process," he said.

Since its establishment in 1994, his unit has investigated some 16,000 suspicious transactions -- in a country of just 10 million people. The new reporting requirements may well increase that figure considerably.

That is in line with the demands of the Financial Action Task Force, which is coordinating the global drive against money laundering. It was founded in 1989 to lead the fight against organised criminals dealing in drugs, weapons and other contraband by enabling investigators to follow the money trail back to the traffickers. Its original 40 recommendations on tracing dirty cash still form the basis of financial regulation worldwide. The group's profile rose after the terrorist attacks on America on Sept. 11. The task force then issued eight additional recommendations focused on terrorist finance.

This year's revision of the so-called "40+8" recommendations further tightens the net by extending to non-financial institutions the obligation of reporting suspicious deals. East Europeans think that the same measures can net the Russian mafia. If they are right, the whole world will benefit.

Thomas Land is an author and foreign correspondent who writes on global affairs.
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