Bank of Bermuda president and CEO Henry Smith has called for international cooperation between enforcement agencies to stop the $600 billion global money laundering trade.

He was speaking at the 12th annual Anti-Money Laundering Audit & Compliance Forum in New York on Friday, attended by representatives from the offshore world and from agencies such as the US Securities and Exchange Commission (SEC), Internal Revenue Service, New York Stock Exchange and some of the world's leading investment firms.

Mr. Smith said law enforcement authorities could be very territorial and that for the system to work, there must be a way to build trust and encourage open communication among the participants.

As an example, Mr. Smith highlighted the bank's own involvement with a ponzi scheme in the bank's Cayman offices a few years ago which arose out of a legitimate cash for titles loan business. He said it was a terribly frustrating experience for the bank and himself as CEO, but added: "What really upset me was the approach taken by the authorities."

He said the first real indication that there was anything wrong was when the US Justice Department announced that, after a multiyear investigation, they were bringing charges against the organisers of the scheme. Mr. Smith said: "It was alleged that investors lost some $300 million in the scheme, and I am utterly convinced that, if the authorities had alerted us and asked for our assistance, the losses would have been a fraction of that number."

Mr. Smith added: "Why didn't the authorities involve us in their investigation? I can only assume that they jumped to the judgment that we were somehow directly involved and couldn't be trusted, and that really angers me. It was a poorly advised and counterproductive judgment to make, and it really brought home to me the enormity of the challenge we face to achieve effective cooperation."

Mr. Smith said it was important not to talk about offshore and onshore jurisdictions in the fight against money laundering, but rather to worry about the big picture: "How do we all work together to break the money laundering chains anywhere we can?" Mr. Smith suggested that it would be impossible to launder $600 billion entirely offshore.

He explained: "Indeed, I think we all know that most of the criminal activity and the initial laundering of the cash takes place onshore, usually in major urban centres.

By the time the money actually arrives offshore, it is usually quite a few steps removed from the initial laundering and pretty well disguised. Yet, when a money laundering scheme blows up and an offshore centre is involved, the centre usually gets the headlines."

Mr. Smith said that he did not know how authorities came up with the $600 billion estimate, but said large scale criminal operations could not succeed without finding ways to legitimise their income.

He also pointed out that money launderers themselves were usually very smart and often had more resources to work with than the authorities did in combating their activities. He added: "And, while we in the offshore world argue strenuously and, I think, correctly, that it is fact that these cash deposits rarely occur offshore, we have to admit that it is also fact that the money laundering chains themselves often include an offshore link or two." He also said it was regrettable that, unlike in fiction, the bad guys were winning far more often than any of us would like to think. Mr. Smith said the Bank of Bermuda, the world's largest offshore bank, took compliance seriously in all of its locations, and in all of its businesses and education of staff was a top priority. He said that like those present at the conference the bank fully co-operated with the FBI search for Al Qaeda funds after September 11 2001, and checked around 2,000 names throughout all their offices globWhile none of the names appeared on the bank's records, Mr. Smith said: "The terrible events of September 11th, however, clearly raised the stakes for all of us. Not only are we now alert for the new problem of "reverse money laundering" - the conversion of legitimate funds to terrorist activity - but we have also all witnessed the terrible price of failure. Global cooperation in the fight against money laundering simply must be a priority."

Mr. Smith said cooperation, however, was easy to talk about and harder to execute and thought that while individual institutions and individual jurisdictions had become much more effective in their efforts against money laundering, the collective performance was falling well short.

He attributed this partly to a simple lack of effort, and also sometimes the result of well intentioned, but short-sighted thinking.

As an example, Mr. Smith highlighted the USA Patriot Act which was causing the bank some trouble. Mr. Smith explained: "While we applaud the Act itself as a necessary, and if anything, overdue piece of legislation, it places an unnecessarily costly burden on non-US institutions by requiring us to provide, to each US institution with which we deal, a Patriot Act Certificate guaranteeing that, among other things, we do not have a relationship with any shell banks. We don't have a problem with the certification itself, but rather with the number of certificates we have to provide. There is no central agency managing the process and no clear definition of which institutions need the certification, so everyone is asking for one. It costs $340 to set up a certificate, and $200 each year to renew. We deal with some 169 US banks and many more brokers, and, on top of that, we have 6 dealing centres in our network, and some correspondents are asking for a certificate from each. This could cost us hundreds of thousands of dollars and, in fact, force us and many other foreign banks to rationalise our US relationships, resulting in lost business for a number of US banks and brokers."

Mr. Smith said he believed the Act would be just as effective if it required the bank to provide one group certification to a central agency, such as the Federal Reserve. Instead, he said: "It is, in effect, raising the cost for us to cooperate in the fight against money laundering. Good intentions, unfortunate results." Mr. Smith highlighted Bermuda's efforts to ensure a high quality regulatory environment with legislation such as the Proceeds of Crime Act and said the Island had received a clean bill of health from the UN, OECD, The Financial Action Task Force and others but added: "We still have our failures."

As he was writing his speech, Mr. Smith said there was breaking news about a Bermuda-based fund manager allegedly conspiring to commit securities fraud and US and Canadian authorities conducted a two year undercover operation - code named "Bermuda Short" - to haul in indictments against a number of individuals, including three directors of the Bermuda company. "It happens," said Mr. Smith. He said no matter how high the standards in individual jurisdictions were raised, fraud would continue to happen unless authorities and institutions co-operated, "authority to authority, institution to institution, jurisdiction to jurisdiction."

Admitting there were a number of mechanical or structural issues getting in the way of cooperation which he felt could be addressed over time, Mr. Smith said: "What worries me most is the insufficient amount of effort we are actually putting into achieving effective cooperation. We continue to see case after case of inadequate information-sharing, where one or two authorities or institutions attempt to tackle a problem without bringing the collective force of our global network to bear. So, no matter how good our individual know your customer (KYC) and anti-money laundering processes are, no matter how smart our enforcement authorities are, no matter what legislation is on our books, the criminals continue to pick us off."

Mr. Smith added: "One of the things that immediately struck me about the "Bermuda Short" investigation was that no Bermuda authorities or institutions were involved in it. Perhaps if they had been, it wouldn't have taken two years to complete!" Mr. Smith's conclusion: "For the system to work, we must find a way to build trust and encourage open communication amongst the participants. We need to spend whatever time and effort it takes to get to know each other, to share information, and to build alliances to block criminal and terrorist activity." While acknowledging the duty to protect the confidentiality of clients, Mr. Smith said: "But, that duty shouldn't apply to criminals and terrorists, and most jurisdictions now have legislation in place that allows us to share information where necessary to identify and isolate criminal activity. That legislation is no help, however, if we don't trust each other enough to work together, and, to me, that means we need to build the same kinds of personal relationships across our compliance and anti-money laundering network as we do with our clients."

Mr. Smith asked law enforcement authorities to give the bank and other financial institutions the chance to be part of the solution and ended his talk with a challenge to law enforcement authorities or anyone else listening to his speech.

He said: "Before you make any judgments about Bank of Bermuda, come talk to us. Check out our 113 year operating history, our governance structure, our compliance and KYC procedures. Look at Bermuda's legislative and regulatory framework. Most important, talk to me, because that's what it really comes down to: we don't trust institutions, we trust people. If you spend some time getting to know Henry Smith, and you still think I'm the kind of guy who would run a questionable operation, then treat us accordingly. But, if you think I can be trusted, then let us work with you and get on with the business of shutting down the bad guys. We may be running out of time."