FBI Law Enforcement Bulletin - May01leb

ISSN 0014-5688 USPS 383-310

Features

Departments

10 Technology UpdateThe Public Safety Wireless Network Program

12 Unusual WeaponBarrel Gun

Money Laundering By William R. Schroeder

Investment Fraud By John Cauthen

Enterprise Theoryof Investigation

By Richard A. McFeely

Law Enforcement PhysicalFitness Standards and Title VII

By Michael E. Brooks

1

May 2001Volume 70Number 5

United StatesDepartment of Justice

Federal Bureau of InvestigationWashington, DC 20535-0001

Louis J. FreehDirector

Contributors' opinions and statementsshould not be considered an

endorsement by the FBI for any policy,program, or service.

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Innovative investigative techniquescan help law enforcement officerssuccessfully prosecute fraudulentinvestment schemes.

Working together, law enforcementand financial institution administratorsand regulators can combat moneylaundering.

19Law enforcement investigators can usethe enterprise theory of investigation tohelp dismantle criminal enterprises.

13

26Title VII of the Civil Rights Acts of1964 and 1991 may prohibit employersfrom creating discriminatory physicalstandard limits.

18 Book ReviewPolice Trauma: Psychological Aftermath of Civilian Combat

May 2001 / 1

new era of globalizationhas emerged, and it isshrinking the world and

Money LaunderingA Global Threat and the InternationalCommunity’s ResponseBy WILLIAM R. SCHROEDER

Ashaping domestic politics and inter-national relationships.1 Globaliza-tion involves the international inte-gration of capital, technology, andinformation in a manner resulting ina single global market and, to somedegree, a global village.2 This inte-gration enables individuals and cor-porations to reach around the worldfarther, faster, deeper, and cheaper

than ever before. However, thesame aspects of globalization thathave expanded opportunities forfree-market capitalism also haveresulted in new risks. Globaliza-tion has turned the internationalfinancial system into a moneylaunderer’s dream, siphoning offbillions of dollars a year fromeconomies around the world andextending the reach of organizedcrime. This unintended conse-quence of globalization presents a

serious challenge to law enforce-ment agencies and financialregulators.

Because globalization repre-sents an overarching internationalphenomenon, the internationalcommunity’s response to the chal-lenge posed by money launderinghas to address the financial, legal,and enforcement issues in a univer-sal manner, through harmonizationof remedies. Understanding the glo-bal threat of money laundering and

© Digital Stock

2 / FBI Law Enforcement Bulletin

the international community’sresponse will assist investigatorspursuing the evidentiary trail ofa launderer by identifying theenforcement tools and techniquesdeveloped to overcome obstaclesencountered when crossing interna-tional boundaries.

WHAT IS MONEYLAUNDERING?

Generally, money laundering is“the process by which one concealsthe existence, illegal source, or ille-gal application of income and thendisguises that income to make it ap-pear legitimate.”3 In other words,the process used by criminalsthrough which they make “dirty”money appear “clean.” Though ini-tially considered an aspect integralto only drug trafficking, launderingrepresents a necessary step in al-most every criminal activity thatyields profits.

Criminals engage in moneylaundering for three reasons. First,money represents the lifeblood ofthe organization that engages incriminal conduct for financial gainbecause it covers operating ex-penses, replenishes inventories,purchases the services of corruptofficials to escape detection andfurther the interests of the illegalenterprise, and pays for an extrava-gant lifestyle. To spend money inthese ways, criminals must makethe money they derived illegally ap-pear legitimate. Second, a trail ofmoney from an offense to criminalscan become incriminating evi-dence. Criminals must obscure orhide the source of their wealth oralternatively disguise ownership orcontrol to ensure that illicit pro-ceeds are not used to prosecutethem. Third, the proceeds fromcrime often become the target ofinvestigation and seizure. To shield

ill-gotten gains from suspicion andprotect them from seizure, crimi-nals must conceal their existenceor, alternatively, make them looklegitimate.

HOW IS MONEYLAUNDERED?

Money laundering consists of athree-stage process. The first stageinvolves the placement of proceedsderived from illegal activities—themovement of proceeds, frequentlycurrency—from the scene of thecrime to a place, or into a form, lesssuspicious and more convenient forthe criminal. For example, a gov-ernment official may take a bribe inthe form of cash and place it in asafe deposit box or bank accountopened under the name of anotherindividual to hide its existence orconceal the ownership.

Layering constitutes the secondstage of the laundering process andinvolves the separation of proceedsfrom the illegal source through theuse of complex transactions de-signed to obscure the audit trail andhide the proceeds. This phase of thelaundering process can include thetransfer of money from one bankaccount to another, from one bankto another, from one country to an-other, or any combination thereof.Criminals layer transactions to in-crease the difficulty of tracing theproceeds back to its illegal source.They frequently use shell corpora-tions and offshore banks at thisstage because of the difficulty inobtaining information to identifyownership interests and acquiringnecessary account informationfrom them.

...law enforcementmust work closely

with financialinstitution

managers andregulators.

”Mr. Schroeder, former chief of the FBI's Legal Forfeiture Unit, now serves aspresident of a private law enforcement consultant company in Woodbridge,Virginia, and is a technical advisor for the U.S. Department of the Treasuryregarding money laundering and asset forfeiture and corruption.

“

May 2001 / 3

Integration, the third stage ofmoney laundering, represents theconversion of illegal proceeds intoapparently legitimate businessearnings through normal financialor commercial operations. In-tegration creates the illusion of alegitimate source for criminally de-rived funds and involves techniquesas numerous and creative as thoseused by legitimate businesses to in-crease profit and reduce tax liabil-ity. Common techniques includeproducing false invoices for goodspurportedly sold by a firm in onecountry to a firm in another country,using funds held in a foreign bankas security for a domestic loan,comingling money in the bank ac-counts of companies earning legiti-mate income, and purchasing prop-erty to create the illusion of legalproceeds upon disposal.

The successful money laun-derer closely approximates legaltransactions employed routinely bylegitimate businesses. In the handsof a skillful launderer, the paymentfor goods that appeared to havebeen delivered by one companybased upon an invoice of sale pre-pared by another company coversthe laundering of the purchase pricewhen the goods never existed, andthe companies are owned by thesame party; the sale of real estatefor an amount far below marketvalue, with an exchange of the dif-ference in an under-the-table cashtransaction, launders what, on thesurface, appears to be capital gainwhen the property is sold again; anda variety of lateral transfer schemesamong three or more parties or com-panies covers the trail of monetarytransactions between any two ofthem.4

”Criminals engage

in moneylaundering forthree reasons.

“

WHY IS MONEYLAUNDERING ANINTERNATIONAL THREAT?

Money laundering has becomea global problem as a result of theconfluence of several remarkablechanges in world markets (i.e., theglobalization of markets). Thegrowth in international trade, theexpansion of the global financialsystem, the lowering of barriers tointernational travel, and the surge inthe internationalization of orga-nized crime have combined to pro-vide the source, opportunity, andmeans for converting illegal pro-ceeds into what appears to be legiti-mate funds. Money laundering canhave devastating effects on thesoundness of financial institutions

and undermine the political stabilityof democratic nations. Criminalsquickly transfer large sums ofmoney to and from countriesthrough financial systems by wireand personal computers.5 Suchtransfers can distort the demand formoney on a macroeconomic leveland produce an unhealthy volatilityin international capital flows andexchange rates.6

A recent and highly publicizedcase prosecuted in New York pro-vides an example of the ease with

which criminals can launder largeamounts of money in a short timeperiod.7 Several individuals andthree companies pleaded guilty tofederal money laundering chargesin that case in connection with ascheme that funneled more than $7billion from Russia through a bankin New York over a 2-year period.The laundering scheme involvedthe transfer of funds by wire fromMoscow to the United States andthen to offshore financial institu-tions. Additionally, in 1998, federalauthorities in Florida announced ar-rests in an international fraud andmoney laundering scheme involv-ing victims from 10 countries, withlosses up to $60 million launderedthrough two banks on the Caribbeanisland of Antigua.8

Emerging market countries9 areparticularly vulnerable to launder-ing as they begin to open theirfinancial sectors, sell government-owned assets, and establish fledg-ling securities markets.10 The eco-nomic changes taking place in theformer Soviet States in Eastern Eu-rope create opportunities for un-scrupulous individuals wheremoney laundering detection, inves-tigation, and prosecution toolsslowly take shape. Indeed, as mostemerging markets began the pro-cess of privatizing public monopo-lies, the scope of money launderingincreased dramatically.

The international community ofgovernments and organizations thathave studied money laundering rec-ognize it as a serious internationalthreat.11 The United Nations and theOrganization of American States(OAS) have determined that thelaundering of money derived fromserious crime represents a threat to


• Enhance cooperation among law enforcement,financial institutions, and judiciary: a coordi-nated response involving the financial indus-try, the judiciary, and law enforcement isnecessary to address the issues regardingeffective counterlaundering measures.

• Criminalize laundering: adopt legislation thatcriminalizes the laundering of the proceedsof all “serious crime.”

• Establish a financial intelligence unit (FIU):an FIU is a central office, generally composedof investigators, banking experts, and finan-cial analysts, that obtains and analyzes infor-mation from financial institutions and thenprovides that information indicative oflaundering to an appropriate governmentauthority for investigation.

• Repeal bank secrecy laws: laws that undulyrestrict the flow of information betweenfinancial institutions and law enforcementshould be repealed and specific protectionsafforded those appropriately disclosinginformation to the authorities.

• Report large/suspicious transactions: to obtainneeded information on a reliable basis, banksand other covered institutions should berequired to report all “suspicious” transac-tions and all “large” transactions, where thereports on large transactions would help lawenforcement agencies in a manner that is notcost prohibitive.

Ten strategies that countries and territories can follow to synthesize the universalstandards adopted by the international community to combat money laundering:

• Identify bank customers: because laundererscovet anonymity for their clandestine activ-ity, institutions must identify their customersand pass pertinent information to the appro-priate authorities.

• Record customer and transaction informa-tion: banks and other covered institutionsmust record information obtained in identify-ing their customers and certain transactionsand keep such records for up to 5 years.

• Establish effective antimoney launderingprograms in banks: banks should establisheffective internal antilaundering programs,conduct laundering-detection training forofficers and employees, and provide formeaningful institutional accountability.

• Ensure international cooperation: giventhe ease and speed that criminals can layerand integrate funds across internationalboundaries, cooperation among enforce-ment authorities on an international basisis essential. Countries should adopt lawsto facilitate such international cooperation.

• Adopt forfeiture laws: countries shouldadopt laws that permit the forfeiture ofproperty connected to laundering offensesand the pretrial restraint and seizure ofproperty subject to forfeiture in domesticcases and upon request by authorities fromforeign jurisdictions.

the integrity, reliability, and stabil-ity of financial, as well as govern-ment, structures around the world.12

In October 1995, the President ofthe United States, in an address tothe United Nations General Assem-bly, identified money laundering,along with drug trafficking and

terrorism, as a threat to globalpeace and freedom. Immediatelythereafter, he signed PresidentialDirective 42, ordering U.S. law en-forcement agencies and the intelli-gence community to increase andintegrate their efforts against inter-national crime syndicates in general

and against money laundering inparticular.13 The U.S. Departmentof the Treasury Deputy Secretarysummed up the seriousness of thedomestic and international threatwhen he testified before the U.S.Congress on March 9, 2000. Duringhis testimony before the House

May 2001 / 5

Committee on Banking and Finan-cial Services, he advised that moneylaundering encouraged corruptionin foreign governments, risked un-dermining the integrity of the U.S.financial system, weakened the ef-fects of U.S. diplomatic efforts, andfacilitated the growth of seriouscrime.14 These assessments make itclear that money laundering pre-sents not only a formidable law en-forcement problem, but also a seri-ous national and internationalsecurity threat as well.

Money laundering threatens ju-risdictions from three relatedperspectives. First, on the enforce-ment level, laundering increases thethreat posed by serious crime, suchas drug trafficking, racketeering,and smuggling, by facilitating theunderlying crime and providingfunds for reinvestment that allowthe criminal enterprise to continueits operations. Second, launderingposes a threat from an economicperspective by reducing tax rev-enues and establishing substantialunderground economies, whichoften stifle legitimate businessesand destabilize financial sectorsand institutions.15 Finally, moneylaundering undermines democraticinstitutions and threatens good gov-ernance by promoting public cor-ruption through kickbacks, bribery,illegal campaign contributions, col-lection of referral fees, and misap-propriation of corporate taxes andlicense fees.16

HOW MUCH MONEYIS LAUNDERED?

The International MonetaryFund estimates that the amount ofmoney laundering occurring on a

yearly basis could range between 2and 5 percent of the world’s grossdomestic product—or somewherebetween $600 billion and $1.5 tril-lion.17 Estimates come from a vari-ety of sources based upon bothmacroeconomic theories and onmicroeconomic approaches. TheU.S. Department of the Treasuryhas suggested that $600 billion rep-resents a conservative estimate ofthe amount of money launderedeach year, and some U.S. law mak-ers believe that, not only does the

”

...$600 billionrepresents a

conservative estimateof the amount ofmoney laundered

each year....

“amount lie somewhere between$500 billion and $1 trillion, but thathalf is being laundered through U.S.banks.18 Due to the clandestine na-ture of laundering activity, govern-ments and concerned organizationscannot accurately quantify theamount of money laundered eachyear. Some estimates suggest thatthe amount of money launderedeach year is approximately $2.8trillion, an amount more than fourtimes greater than the figure gener-ally accepted.19

Many economists, law enforce-ment executives, and policy makersagree on the need to develop an ac-ceptable means of identifying the

scope of the laundering problem.20

The inability to determine theamount of money laundered im-pedes an adequate understanding ofthe magnitude of the crime, its mac-roeconomic effect, and the effec-tiveness of current counterlaunder-ing efforts.

WHAT IS THEINTERNATIONALRESPONSE?

Efforts by governments to ad-dress money laundering have beenunder way for over 10 years. Theinternational response to launderinghas taken a number of forms,including multilateral treaties,regional agreements, internationalorganizations, and the identifica-tion of universal counterlaunderingmeasures.

The United States’ Response

The United States commencedone of the earliest responses tomoney laundering. The BankSecrecy Act of 1970 authorized theSecretary of the U.S. Department ofthe Treasury to establish regulatorymeasures requiring the filing ofcurrency transaction reports andserved as a foundation for furthermeasures to combat laundering.21

Subsequently, Congress enacted theMoney Laundering Control Act in1986,22 which made the launder-ing23 of proceeds derived from anyone of a long list of offenses (knownas “specified unlawful activities”) acrime.24 This list now includes over100 federal offenses, selected stateoffenses, and certain violationsof foreign laws.25 The act alsocriminalized structuring certaintransactions to avoid filing currency


reports.26 Congress made civil andcriminal procedures availableto forfeit property involved in alaundering offense. Subsequentlegislation has added furtherenhancements.27

Most recently, the MoneyLaundering and Financial CrimesStrategy Act of 1998 called for thedevelopment of a national strategyto combat money laundering and re-lated financial crimes.28 In re-sponse, the Departments of Justiceand the Treasury developed a 5-year strategy that calls for designat-ing high-risk money launderingzones to direct coordinated enforce-ment efforts, providing for greaterscrutiny of suspicious transactions,creating new legislation, and inten-sifying pressure on nations that lackadequate countermoney launderingcontrols. In addition to its domesticefforts, the United States hasbecome a party to multilateraltreaties and agreements, as well asnumerous bilateral efforts, thatsupport enhanced internationalcooperation. The United States par-ticipates in and promotes the effortsof international organizations thathave developed universal standardsand monitor current trends to ad-dress the laundering threat to theglobal community. In furtheranceof international cooperation, theUnited States transfers funds to for-eign jurisdictions (known as “inter-national sharing”) that have assistedin efforts that resulted in the forfei-ture of property.

Vienna Convention of 1988

The Vienna Convention repre-sents the first concerted effortto influence the international

community’s response to drugmoney laundering.29 It requires thesignatory jurisdictions to takespecific actions, including steps toenact domestic laws criminalizingthe laundering of money derivedfrom drug trafficking and providefor the forfeiture of property de-rived from such offenses.30 Thetreaty also promotes internationalcooperation as a key to reducing theglobal threat of money launderingand requires states to provide assis-tance in obtaining relevant financialrecords when requested to do sowithout regard to domestic bank se-crecy laws.

While the Vienna Conventionremains a benchmark in identifyingcounterlaundering measures on aninternational level, it does notcriminalize laundering. Rather, itobligates the parties to adopt do-mestic legislation that makes laun-dering drug proceeds a crime. Un-fortunately, compliance with regardto the antilaundering provisionhas not been universal. The U.S.Department of State recently issueda report tracking the counterlaun-dering measures of various jurisdic-tions. The report listed 38 parties tothe Vienna Convention that failed

to criminalize the laundering ofdrug proceeds.31 In addition, thefact that the treaty defined moneylaundering as a crime predicated ondrug trafficking has limited its ef-fectiveness. Of the countriestracked in the U.S. Department ofState report, 66 have failed tocriminalize the laundering of pro-ceeds derived from nondrug traf-ficking offenses.

The StrasbourgConvention of 1990

The Council of Europe is a re-gional organization established tostrengthen democracy, humanrights, and the rule of law in itsmember states, in part, by harmo-nizing its policies and encouragingthe adoption of common practicesand standards. It adopted theStrasbourg Convention in Novem-ber 1990,32 which, like the ViennaConvention, requires each party toadopt legislation that criminalizesmoney laundering. As of December1999, 27 of 41 member states andone nonmember (Australia) haveratified the Strasbourg Convention.Unlike the Vienna Convention, thistreaty does not limit the underlyingpredicate offense to drug traffick-ing. The Strasbourg Convention re-quires members to adopt lawscriminalizing the laundering of theproceeds from any “seriouscrime.”33 The treaty also requiressignatories to adopt laws authoriz-ing the forfeiture of the proceeds ofserious offenses, as well as any in-strumentalities of the crime, or inthe alternative, the value of suchproperty. Members must provideinvestigative assistance to foreignjurisdictions regarding forfeiture

”Emerging market

countries areparticularly

vulnerable tolaundering....

“

May 2001 / 7

cases and take appropriate mea-sures to prevent disposal of subjectproperty prior to confiscation.

Financial Action Task ForceRecommendations

In response to increasing con-cerns, the governments of theGroup of Seven (G-7)34 industrial-ized countries established the Fi-nancial Action Task Force onMoney Laundering (FATF) in 1989as an intergovernmental body to de-velop and promote policies to com-bat money laundering.35 The FATF,comprised of members from 26countries and two regional organi-zations, includes the major finan-cial centers of Europe, NorthAmerica, and Asia and works bothindependently and in cooperationwith other organizations to estab-lish and strengthen member andnonmember antilaundering mea-sures. One of the guiding principlesof the FATF is that money launder-ing constitutes a complex economiccrime, which conventional lawenforcement methods cannot con-trol effectively. Therefore, law en-forcement must work closely withfinancial institution managers andregulators.

In April 1990, the FATF issueda report containing recommendedcountermeasures to money launder-ing. Commonly known as the“Forty Recommendations,” theFATF designed these countermea-sures to provide governments with acomprehensive framework forantimoney laundering action fo-cused around the criminal justicesystem and law enforcement, therole of the financial sector and gov-ernment regulators in combating

money laundering, and the need forinternational cooperation.36 TheForty Recommendations, revisedand updated in 1996, encourage thefull implementation of the Viennaand Strasbourg Conventions andthe lifting of bank secrecy laws.Strategies encouraged by the FATFinclude the criminalization of thelaundering of the proceeds derivedfrom all serious crime, the forfei-ture of property connected with alaundering offense or its corre-sponding value, the establishmentof customer identification andrecord keeping rules, and the cre-ation of financial intelligence units.

against money laundering. Thereport, adopted on June 22, 2000,named 15 countries and territorieswith systemic problems indicating alack of a serious commitment toeliminating or significantly reduc-ing money laundering.37 The juris-dictions (noncooperating coun-tries)38 either failed to adoptmeaningful legislation criminal-izing laundering or have serious de-ficiencies in their banking laws andimplementing regulations. By pub-licly criticizing these jurisdictions,the FATF and its member countrieshope that international public pres-sure will result in antilaundering re-forms. The list also served as a pre-cursor for countries with majorfinancial centers to issue formal ad-visories to its financial institutionsidentifying the risks of conductingfinancial transactions with the juris-dictions on the list. Accordingly, inJuly 2000, the U.S. Department ofthe Treasury issued such advisorieson each of the jurisdictions on thename and shame list.39 As a result ofthe FATF’s continuing efforts toaddress money laundering on aninternational scale, their recom-mendations have become the ac-cepted international standard forantimoney laundering regimes.

CONCLUSION

The global threat of moneylaundering poses unique challengesto the law enforcement community.To pursue the evidentiary trail of amoney launderer, law enforcementagencies must identify and usetools and techniques that can helpthem when crossing internationalboundaries. Multilateral agree-ments that require participants to

As a part of its ongoing effortsto combat money laundering, theFATF prepares annual launderingtypology reports and conducts mu-tual in-depth evaluations of eachmember’s antilaundering regimes.Consistent with its continuing over-sight role and its efforts to identifykey antimoney laundering weak-nesses throughout the world, theFATF approved a report on the is-sue of noncooperative countries andterritories in the international effort

© PhotoDisc


adopt antilaundering measures andthe regional and world organiza-tions that have developed and en-couraged a standardized approachto addressing laundering all havecontributed to the strides made inaddressing the challenges posed.40

Efforts undertaken by nations inde-pendent of the international com-munity often result in significantvariations from the accepted stan-dard and have the effect of facil-itating laundering activity ratherthan combating it.41 For example,the government of Antigua andBarbuda weakened its laws relatingto money laundering, resulting inthe U.S. Department of the Trea-sury issuing an advisory warningbanks and other financial institu-tions to be wary of all financialtransactions routed into, or out of,that jurisdiction.42 The changes inthe law strengthened bank secrecy,inhibited the scope of launderinginvestigations, and impeded inter-national cooperation. A common,harmonized approach will preventlaunderers from using the differentlaws and practices among the juris-dictions to their advantage both atthe expense and disadvantage ofcountries interested in pursuingthem.43 Only with laws that havebeen harmonized can law enforce-ment agencies, working togetherwith financial institution adminis-trators and regulators, combat thisever-increasing problem.

Endnotes

1 Thomas L. Friedman, The Lexus and the

Olive Tree: Understanding Globalization (NewYork, NY: Farrar, Straus, Giroux, 1999).

2 Ibid.3 President’s Commission on Organized

Crime, Interim Report to the President and the

Attorney General, The Cash Connection:

Organized Crime, Financial Institutions, and

Money Laundering 7 (1984).4 Jack A. Blum, et al., “Financial Havens,

Banking Secrecy and Money Laundering,”Crime Prevention and Criminal Justice News

Letter 8, no. 34/35 (1998).5 See, for example, Eduardo Gallardo,

“Chile Attracts Drug Money for Laundering:Strong Economy, Financial Market LureForeign Cartels,” Washington Times, Oct. 21,1997 (“Most experts believed drug gangs viewChile mostly as a good place for moneylaundering because of its thriving economy,with money flowing in and out of the countrywhich would allow traffickers to make theirmoney look legitimate by channeling it throughbusinesses...Nearly $2 billion in foreign moneypoured into Chile in the first 6 months of theyear for investment in its companies.”).

6 See remarks of Michel Camdessus,managing director of the International MonetaryFund, at a plenary meeting of the FinancialAction Task Force on Money Laundering,February 10, 1998; http://www.imf.org/

external/np/speeches/1998/021098.htm.accessed November 13, 2000.

7 Mark Hosenball and Bill Powell, “TheRussian Money Chase,” Newsweek, February28, 2000, 42-43.

8 Catherine Skipp, “Six Arrested in GlobalFraud, Money-Laundering Case: GroupAllegedly Bilked Victims of $60 Million,”Washington Post, May 8, 1998, sec. A, p. 2.

9 For example, countries in Eastern Europe,Asia, and South and Central America that

have undergone transformation from agovernment-controlled economy to one withfewer government controls and greater marketfreedom for companies to trade on aninternational scale, such as the Czech Republic,Slovenia, and Thailand.

10 See, Stephen R. Kroll, “Money Launder-ing: A Concept Paper Prepared for theGovernment of Bulgaria,” International Law 28(1994): 835, 869 (a discussion oncriminalization of money laundering forBulgaria and the special concerns aboutmisappropriation of value from privatizedenterprises during the transformation of theBulgarian economy from a government-controlled economy to a market economy).

11 For example, representatives of the “G-7” (now referred to as the “G-8”), seven major

industrial countries in the world, including theUnited States, the United Kingdom, France,Germany, and Japan, who formed the FinancialAction Task Force (FATF); the Organization ofAmerican States (OAS); the Council of Europe;the United Nations (UN); the Asian PacificGroup on Money Laundering; and the EuropeanUnion.

12 United Nations Declaration and ActionPlan Against Money Laundering, UnitedNations Resolution S-20/4 D (June 10, 1998);and the Ministerial Communique, MinisterialConference concerning the Laundering ofProceeds and Instrumentalities of Crime,Buenos Aires, Argentina (December 2, 1995);http://www.oecd.org/fatf/Initiatives_en.htm;accessed November 13, 2000.

13 U.S. Department of State, International

Crime Control Report, 1999, Money Launder-

ing and Financial Crimes, 599.14 See, House Committee on Banking and

Financial Services, prepared statement of StuartEizenstat, Deputy Secretary, U.S. Departmentof the Treasury (March 9, 2000); http://

www.ustreas.gov/press/releases/ps445.htm,accessed November 13, 2000.

15 Supra note 6, (“Potential macroeconomicconsequences of money laundering include, butare not limited to: inexplicable changes inmoney demand, greater prudential risks to banksoundness, contamination effects on legalfinancial transactions, and greater volatility ofinternational capitol flows and exchange ratesdue to unanticipated cross-border assettransfers.”).

16 See, Barry R. McCaffrey, “Efforts toCombat Money Laundering,” Loyola of Los

Angeles International and Comparative Law

Journal 791, no. 20 (1998). Also, supra note13.

”

...the United Stateshas become a

party to multilateraltreaties and

agreements...thatsupport enhanced

internationalcooperation.

“

May 2001 / 9

17 Financial Action Task Force, Basic

Facts About Money Laundering, http://

www.oecd.org/fatf/Mlaundering_en.htm;accessed November 13, 2000; and supra notes6 and 14.

18 Elise J. Bean, Deputy Chief Counsel tothe Minority Senate Permanent SubcommitteeInvestigations, U.S. Congress, Money

Laundering 2000: What’s Going On? apresentation made at the American BankersAssociation/American Bar Association MoneyLaundering Enforcement Seminar, October29-31, 2000.

19 John Walker, Measuring the Extent of

International Crime and Money

Laundering, paper prepared for theKriminal Expo, a conference held inBudapest, Hungary, on June 9, 1999,http://www.ozemail.com.au/~born1820/

Budapest.html; accessed October 11,2000.

20 There are ongoing efforts in severalcountries to estimate the magnitude ofmoney laundering. An ad hoc groupcomposed of members of the FATF isengaged in a study to quantify theamount of money laundering activity.Supra note 13.

21 Pub. L. 91-508, § 202, Oct. 26,1970, codified at 31 U.S.C. § 5311. (“Itis the purpose of this subchapter...torequire certain reports or records wherethey have a high degree of usefulness incriminal, tax, or regulatory investigations orproceedings.”).

22 Subtitle H of the Anti-Drug Abuse Actof 1986, Pub. L. No. 99-570, 100 Stat 3207,codified at 18 U.S.C. §§ 1956, 1957, 31 U.S.C.§§ 5324-26.

23 18 U.S.C. §§ 1956(a)(1) and 1957(a).24 See, generally, Barrett Atwood and Molly

McConville, “Money Laundering,” Am. Crim.

L. Rev. 36 (1999): 901 for a discussion of theconduct criminalized by this act.

25 18 U.S.C. § 1956(c)(7).26 31 U.S.C. §§ 5322, 5324; 18 U.S.C.

§ 1956(a)(2).27 Annunzio-Wylie Anti-Money Laundering

Act, Pub. L. No. 102-550 (1994). Changesincluded: 1) an expanded definition of“financial transaction” to include the transferof title to vehicles, aircraft, and real property;2) authority for the U.S. Treasury to requirefinancial institutions to carry out antimoneylaundering programs; 3) increased recordkeeping to cover wire transfers; and,4) authority for the U.S. Treasury to requirefinancial institutions to file suspicious

transaction reports. See also, Matthew S.Morgan, “Money Laundering: The AmericanLaw and Its Global Influence,” 3-SUM NAFTA:

Law & Business Review of the Americas 24, 26(Summer 1997).

28 Pub. L. 105-310, § 2(a), 112 Stat. 2942(Oct. 30, 1998) codified at 30 U.S.C. § 5341.

29 The United Nations Convention AgainstIllicit Traffic in Narcotic Drugs and Psychotro-pic Substances of 1988 is commonly known asthe “Vienna Convention,” U.N. Docs. E/Conf.82/15 (Dec. 19, 1998), WL 28 I.L.M. 493(1989). One hundred fifty-three countries areparties to this treaty.

30 See, Vienna Convention, at Article3(1)(b) requiring each signatory state to enactdomestic legislation criminalizing moneylaundering activity and Article 5(1), whichrequires each signatory to adopt measures toenable confiscation of drug trafficking andmoney laundering offenses.

31 Supra note 13.32 Convention on Laundering, Search,

Seizure, and Confiscation of the Proceeds ofCrime commonly known as the “StrasbourgConvention,” Eur. Consult. Ass., Doc. No. 141(Nov. 9, 1990), WL 30 I.L.M. 148 (1991).

33 Ibid., at Article 6 (serious crime underthe treaty may be defined by each signatoryas identified by declaration).

34 Supra note 11.35 House Committee on Banking and

Financial Services, “Committing MoneyLaundering,” prepared testimony of JonathanWiner, Deputy Assistant Secretary of State,U.S. Department of State (June 11, 1998).

36 See, Financial Action Task Force onMoney Laundering: The Forty Recommenda-tions of the Financial Task Force on Money

Laundering, with Interpretative Notes, WL 35I.L.M. 1291 (1996).

37 Review to Identify Non-Cooperative

Countries or Territories: Increasing the

Worldwide Effectiveness of Anti-Money

Laundering Measures, report issued by FATF,June 22, 2000.

38 Jurisdictions named as noncooperatingcountries are: the Bahamas, Cayman Islands,Cook Islands, Dominica, Israel, Lebanon,Liechtenstein, Marshall Islands, Nauru, Niue,Panama, Philippines, Russian Federation, St.Kitts and Nevis, and St. Vincent and theGrenadines.

39 See FinCen Advisories issued bythe U.S. Department of the Treasury foreach of the 15 countries on the nameand shame list in July 2000; http://

www.ustreas.gov/fincen; accessedNovember 13, 2000.

40 There are additional regionalorganizations, not discussed in thisarticle, that address money laundering.They include the OAS (established in1948), which developed modelregulations for member jurisdictions toprevent money laundering through astatutory framework; the Asia/PacificGroup on Money Laundering (APG)(established in 1997) to addresslaundering on a regional basis byapplying, inter alia, the FATF Recom-mendations; the Caribbean Financial

Action Task Force (CFATF), which consists ofrepresentatives of 25 countries and territories inthe Caribbean, along with five cooperating andsupporting nations from outside the region. TheCFATF has adopted the FATF Recommenda-tions and added 19 additional region-specificrecommendations.

41 Jeffrey Lowell Quillen, “The InternationalAttack on Money Laundering: EuropeanInitiatives,” Journal of Comparative and

International Law 213 (1991).42 “Treasury Warns Banks on Transaction

with Antigua and Barbuda,” press releaseissued by the U.S. Department of the Treasury,RR-3066 (April 1999) http://www.ustreas.gov/

press/releases; accessed November 13, 2000.43 At the Summit of Americas held in

Buenos Aires, Argentina, in 1995, representa-tives of 34 countries in the Western Hemisphereagreed to recommend to their governments aplan of action for a coordinated hemisphericresponse to combat money laundering.

© PhotoDisc


nicate with each other seamlessly in real time overtheir wireless communications network. Whether byvoice or through data transmissions, interoperablecommunications can mean the difference between lifeand death for citizens and public safety personnel andoften hold the key to minimizing loss of propertywhen disasters occur. However, the history andevolution of public safety wireless communicationsseems to contradict the need for, and benefits of,interoperability. Stand-alone systems, operatingindependently, consequently have created obstaclesto interoperability. Nonetheless, these obstacles canbe overcome, and the Public Safety Wireless Network(PSWN) Program is leading efforts to do so.

History and Organization

The PSWN Program is a joint effort sponsored bythe U.S. Departments of Justice and the Treasury. Theprogram addresses issues facing public safety wirelesscommunications, primarily in the area ofinteroperability among land mobile radio (LMR)networks used to support public safety missions. Theprogram is working to plan and foster interoperabilityat all levels of government (e.g., local, state, andfederal) and among all public safety disciplines (e.g.,law enforcement, fire, and emergency medicalservices). In 1996, the PSWN Program was foundedin response to a National Partnership for ReinventingGovernment (NPRG) initiative that called for theestablishment of an intergovernmental wirelesspublic safety network as a means of achievinginteroperability. Since then, the vision has evolved toa system of networks, regionally focused, broughttogether through coordination and partnerships amongpublic safety agencies from all levels of government.

Although its task is very challenging, the PSWNProgram has made great strides in achievinginteroperability among public safety agencies acrossthe United States. The program realizes that theremay never be one nationwide wireless communica-tions system, but that statewide or regionalinteroperability is an achievable goal with thefederal government participating where appropriate.

The PSWN Program has been active in severalkey areas of the interoperability challenge. Theprogram is promoting coordination and partnershipsamong public safety agencies, exploring difficulties infunding and the development of funding alternatives,addressing public safety spectrum issues, supportingand participating in standards and technology devel-opment, promoting systems security improvements,and implementing pilots, proof-of-concept projects,and demonstrations in several cities and regions ofthe United States.

Coordination and Partnerships

Agencies must be willing to communicate witheach other. Coordination and partnerships are essen-tial to achieving interoperability. The PSWN Programrealizes officers and departments first must be willing

P ublic safety wireless interoperability refers tothe ability of public safety officials to commu-

Technology Update

The Public Safety WirelessNetwork (PSWN) ProgramA Brief IntroductionBy Derek Siegle and Rick Murphy

May 2001 / 11

to work together and share a mutual commitment tothe goal that no man, woman, and child ever shouldlose their life or be injured because public safetyofficials cannot communicate with each other. ThePSWN Program is very active in bringing representa-tives from different departments together to find asolution to their interoperability challenges. Publicsafety agencies must recognize the importance ofinteroperability and strive for interoperability as theyplan system replacements and upgrades. This requirespublic safety agencies to identify their interoperabilityrequirements and form the necessary partnerships tomeet these requirements.

The PSWN Program is fostering partnerships,providing networking opportunities, raising aware-ness, and sharing solutionsthrough its regional sympo-siums. Working with associa-tions, such as the InternationalAssociation of Chiefs of Policeand the International Associa-tion of Fire Chiefs, and throughthe efforts of the PSWNExecutive Committee, theprogram remains proactive indeveloping these relationships.The Executive Committeecomprises leading representa-tives of local, state, and federalpublic safety agencies. It servesas an advisor to, and an advo-cate of, the program and itsmission. In addition to its symposiums and ExecutiveCommittee, the program sponsors Integrated ProgramTeams with direct representation from radio commu-nications specialists from all levels of government.These persons serve as members of these workinggroups to solve specific interoperability challengesand foster solutions and pilot concepts.

The program also is beginning a new outreachinitiative to facilitate the formation of public safetycommunications councils in each of the 50 states.This campaign hopefully will be a catalyst for thecoordination and partnerships necessary for tacklingthe interoperability challenge. Several states, such as

California, Colorado, and Montana, already haveworking groups addressing interoperability issues.The PSWN Program will offer whatever assistanceit can to states and their communications councils asthey work to resolve the issue of interoperability. Theprogram realizes it cannot accomplish its missionsuccessfully without the direct involvement andactions of individual state and local public safetyagencies across the country.

Funding

The ability of departments to obtain funding forpublic safety wireless projects is a major obstacle toachieving interoperability. Historically, public safetycommunications, particularly those that enable

departments to communicateoutside their normal realm ofresponsibility, have garneredlittle attention. Quite often,this issue is very low amongthe funding priorities of mostlegislatures, administrators,and even the public, untilmajor incidents or disasterscall attention to shortfalls.To help alleviate the fundingdifficulty, the PSWN Programis reaching out and educatingindividual members of Con-gress and making presentationsto the National Association ofGovernors, National League

of Cities, and other similar associations to informstate and local decisionmakers. The goal is to makepublic safety wireless communications systems andinteroperability a priority investment for America’sfuture safety.

Conclusion

The ultimate goal of the Public Safety WirelessNetwork Program is to develop and enact a road mapto assist public safety agencies with ongoing andfuture interoperability efforts, known as the PublicSafety WINS. Public Safety WINS will serve as abasis to help public safety agencies formulate

“

”

The PSWN Program isfostering partnerships,providing networkingopportunities, raising

awareness, and sharingsolutions through its

regional symposiums.

strategies for interoperable systems by addressingcoordination and partnership, funding, spectrum,standards and technology, and security issues associ-ated with such an endeavor. Public Safety WINS isscheduled to be finalized by the end of fiscal year2001. Public Safety WINS will include an introduc-tory video supported by an interactive Web site thatwill provide both technical and policy solutions tointeroperability issues.

The PSWN Program is committed to assistingpublic safety agencies with implementation strategiesand their plans to address interoperability. Informa-tion regarding the program, its studies, pilots, and

Mr. Siegle and Mr. Murphy are, respectively, the U.S.Justice and the Treasury Departments’ program managersfor the Public Safety Wireless Network (PSWN) Program.The PSWN Program is a federally sponsored initiativededicated to improving public safety wireless interoperabil-ity, so that no one loses their life because public safetyofficials cannot communicate with one another.

publications, as well as other issues regarding inter-operability can be accessed at http://www.pswn.govor can be obtained by contacting the program at1-800-565-PSWN.


Barrel Gun

Submitted by the Joint Bank Robbery Task Force of theNew York, New York, Police Department

fter an armed bank robbery in New York,police officers arrested two individuals exitingA

the bank and recovered two weapons. One of theweapons was a machine-lathed zip gun containingone .22-caliber bullet. The weapon is loaded byunscrewing the 1 1/2-inch barrel, where the round isinserted. The barrel is screwed back on, and thecocking lever is pulled back engaging the triggerlever. The firing pin has an adjustment spring for theamount of pressure needed to drive the firing pin. Theweapon is 5 inches long and can be concealed easilyin the palm of the hand.

Unusual Weapon

May 2001 / 13

ne detective workingwhite-collar crime en-countered an investor who

InvestmentFraudBy JOHN CAUTHEN

Oclaimed that he did not receive apromised 900 percent annual profiton an investment. To complicatematters, the investor dumped stacksof paperwork on the detective’sdesk attempting to prove the fraud.Upon further questioning, the de-tective learned that the investormade the investment 2 or 3 yearsago, but it had not paid out duringthe past year. The investor ex-plained that he thought he had in-vested in an overseas program guar-anteed by banks involving theFederal Reserve that made moneyby trading some type of bank instru-ments. He had hesitated to issue acomplaint because he believed theinvestment would pay off soon.The scheme involved volumes ofthick contracts, letters of intent,secrecy clauses, and a host of otherfinancial terms that the investor re-ally never understood and could notexplain to the detective. The inves-tor only understood that his in-volvement had no risk and that hewould receive an extraordinary re-turn. But, the investment failed.

This scenario describes a primebank trading program fraud. Thesetypes of investment frauds haveexisted for many years and,historically, have involved indi-viduals investing huge sums of

money—between $500,000 and $1million. Today, these scams haveevolved into targeting larger num-bers of people for smaller dollaramounts—usually between $5,000and $100,000 each.1

Unfortunately, these scam art-ists rarely face prosecution becausecourts traditionally have regardedthe cases as civil in nature, and thecomplexity of the issues and the

difficulty in establishing criminalintent needed for conviction provechallenging. However, the FBI’sSacramento office has implementedinvestigative techniques to success-fully prosecute these schemes.Initially, when investigators receivean investment fraud complaint,they should contact promoters andexplain the illegality of market-ing such schemes. By doing so,

© PhotoDisc


investigators establish the knowl-edge of the promoter and warn thepromoter that continuing the fraudmay result in prosecution. If thepromoter continues to contact po-tential investors to take money, theU.S. Attorney’s Office may chargethe scam artist with mail and wirefraud.

HOW THE FRAUD WORKS

Assuming a department eventu-ally opens a criminal case, most in-vestigators will become discour-aged after the initial interview withthese con artists. Usually, they ad-mit taking money from the victim,promising an extraordinary return,explaining the guarantee of the in-vestment, and failing to perform aspromised. But, investment crimi-nals will advise that they werevictims, too, because although theytook money from investors, theygave it to their contacts whopromised they had access to a traderwho could deliver the promises.Then, they will explain how theircontacts took the money but failed

to perform as expected. At thispoint, they reach into their file cabi-net, pull out a huge stack of paper,throw it on the desk, and advise thatthey are a victim as well.

A number of promoters claimthat they have access to individualswho can purchase bank instrumentsat a discount and resell them for ahigher price for a small profit.These promoters perpetrate primebank scams throughout the worldand claim that they do this continu-ally, making huge profits in a shorttime period with no risk.

The promoters collect fundsfrom investors and have them sign aseries of documents to enter into theinvestment. Types of documentsseen at this stage include “letters ofintent” and “proof of funds letters,”all designed to make investors be-lieve that they have to qualify forthe investment. Additionally, thedocuments lend credibility to thescheme by making the investmentapplication process appear official.

The promoter will enter intoan agreement with another person,

often called an intermediary or fa-cilitator. The promoter will sign let-ters of intent or proof of funds andeventually sign a contract with theintermediary.

Promoters receive payment bykeeping a portion of the investmentand sending the balance to the inter-mediary, or by making arrange-ments to receive a percentage of theprofits. At this point, the moneystarts to flow. The investor givesmoney to the promoter, who, inturn, passes it along to the interme-diary who initially performs aspromised. Usually, the investorreceives one or two payments asprofits. Then, the payments reducegreatly or cease all together. Pro-moters then will provide a series ofexcuses, often in writing, explain-ing in detail exactly why the invest-ment cannot pay this month, but thatit will pay soon.

In the final analysis, no legiti-mate investment ever takes place. Infact, everyone in the chain is anintermediary who takes a portion ofthe money as fees or commissionsand passes the balance to the nextperson in the chain.

At this point, law enforcementeasily recognizes the investment asa classic Ponzi scheme2 in whichmoney paid to old investors repre-sents, in reality, investment princi-pal from the new investors. By thetime the matter comes to the atten-tion of law enforcement, the moneyhas passed through several handsand, often, through several states orcountries.

TACKLING THE PROBLEMS

Several problems arise in thistype of scam. First, investigators

Law enforcementshould ensure that

all promotersreceive this

warning duringthe interview.

”Special Agent Cauthen serves in theFBI’s Sacramento, California, office.

“

May 2001 / 15

have difficulty proving that anyoneinvolved acted with intent to de-fraud, especially promoters of thescheme. These con artists use ex-cuses like “I thought it was real” or“I thought it would work” as theirmost common defense.

Another problem involves thelevel of complexity these types ofschemes present. One judge charac-terized a prime bank scam as inher-ently complex, deliberately de-signed this way by criminals. Thejudge compared the difficulty of in-vestigation to a large jigsaw puzzlethrown to the ground, leaving theinvestigator with seemingly unre-lated pieces to pick up and reas-semble.3 The sheer volume of thepaperwork alone can discourage in-vestigators. Even if investigatorsmanage to understand the case,they probably will have difficultyexplaining it to the prosecutor.Although the investigator and theprosecutor eventually may unravelthe scheme, explaining it to a jurycan feel almost impossible. Never-theless, law enforcement can inves-tigate and prosecute these casessuccessfully with a minimum offrustration, assuming that theypay particular attention to contactwith promoters, investors, and theprosecutor.

Contact with Promoters

Investigators strive to show in-tent to defraud. To prove intent,they have to show that the promoterlied intentionally about the invest-ment to get the investor’s money.Proof of intent can include evidencethat the promoter previously knewthat the investments were fraudu-lent. If the promoters did not know

of the fraud before, investigatorsshould tell them now, as well asprovide an information sheet, whichdescribes different types of invest-ment programs and proclaimscertain ones as fraudulent.4 Thissheet can prove helpful as an inves-tigative tool for law enforcement.Investigators can give the sheet topromoters to advise them of thefraudulent investments—a criminalviolation subject to federal securi-ties laws.

Advising promoters of thefraudulence of these programsalerts them that moving any moneybetween bank accounts in this typeof program may constitute moneylaundering. Documenting the factthat investigators have warned pro-moters about the fraudulent invest-ment may not help in the prosecu-tion of frauds that already haveoccurred; however, it can helpprove fraudulent intent if the indi-vidual continues to promote even

after receiving the warning. Lawenforcement should ensure that allpromoters receive this warning dur-ing the interview. This process canassist prosecutors during trial whennegating a defendant’s claim of ig-norance as to the illegality of thescheme.

Second, investigators need evi-dence that promoters have been in-volved in these types of investmentsin the past and have lost money be-longing to other individuals. Itemsobtained by search warrants, suchas bank records, may prove helpful.Investigators should ask promotersabout specific deals in which theyhave participated in the past. If theyclaim that they have done this suc-cessfully before, investigatorsshould get all the details. On theother hand, some promoters willclaim that they have never done thisbefore. If investigators learn thatpromoters have been involved infailed deals in the past, but still

© PhotoDisc


he purpose of this notice is to alert the public topersons who reportedly have marketed invest-

Information SheetAmerica, in which banks trade securities. Any represen-tations to the contrary are fraudulent.

In addition, investment programs in which afinancial institution is asked to write a letter, commonlyreferred to as a “blocked funds letter,” advising thatfunds are available in the account, that they are “cleanand of noncriminal origin” and are free of “liens orencumbrances” for a certain time frame are usedfrequently to perpetrate fraud schemes. These lettershave no use within legitimate banking circles.

Some phrases are seen commonly in documentspresented by fraudsters in the course of marketingfraudulent investment schemes. If one or more of thesephrases appear in documentation, they should be treatedwith suspicion. These include, but are not limited to—

• noncircumvention, nondisclosure;

• good, clean, clear, and of noncriminal origin;

• blocked funds trading program;

• prime bank trading program;

• federal reserve approved;

• roll programs;

• irrevocable pay orders;

• prime bank notes, guarantees, letters of credit; and

• fresh cut paper.

The marketing of fraudulent investment schemesviolates federal criminal laws. In order to reportinstances of suspected fraud, please contact SpecialAgent John M. Cauthen, FBI, Sacramento, CaliforniaDivision, telephone 916-481-9110 or any of thesources listed below.

Sources that can corroborate the above informationinclude:

• U.S. Treasury Department, Comptroller of theCurrency, Enforcement and Compliance Division,250 E Street, SW, Washington, DC 20219

• Securities and Exchange Commission, SanFrancisco District Office, 44 Montgomery Street,Suite 1100, San Francisco, CA 94104, 415-705-2500

• Bureau of Public Debt, Chief Counsels Office, 2003rd Street, Room G-15, Parkersburg, WV 26106

• Federal Reserve, Washington DC, Office ofGeneral Counsel, 202-973-5021

Tment schemes that appear to be fraudulent. Variousprime bank trading programs or similar tradingprograms which purport to offer above-averagemarket returns with below-market risk through thetrading of bank instruments are fraudulent. Offeringsuch programs, or claiming to be able to introduceinvestors to persons who have access to such pro-grams, violates numerous federal laws, includingcriminal laws.

It is illegal to engage in fraud in the offer or saleof a security. Under most circumstances, it is alsoillegal to sell securities that have not been registeredwith the U.S. Securities and Exchange Commission.A security includes the following items: “note,”“stock,” “bond,” and “debenture,” as well as moregeneral terms, such as “investment contract” and “anyinterest or instrument commonly known as a ‘secu-rity.’” In the leading opinion, the U.S. Supreme Courtheld that the definition of a security includes aninvestment contract, which is “a contract, transaction,or scheme whereby a person invests his money in acommon enterprise and is led to expect profits solelyfrom the efforts of the promoter or third party....”Designating such instruments as “loans” does notalter their legal status as securities.

The FBI, as well as other federal and stateagencies, have identified several characteristicscommon to fraudulent schemes. These characteristicsinclude—

• claims that investor funds can be placed in a bankaccount, and then used, without risk, to tradebank debentures, or other financial instruments;

• claims that invested funds can be used to lease orrent U.S. Department of the Treasury obligationsand then use these same leased securities ascollateral for further trading programs;

• claims that trading medium term notes (MTNs),prime bank notes, or any other bank instruments,on a riskless basis, will yield above marketaverage returns; and

• claims that letters of credit or standby letters ofcredit can be traded for profits.

In general, investment programs that offer secret,private investment markets, which offer above-marketrates of return with below-market rates of risk forprivileged customers in Europe, are fraudulent. Thereare no “secret” markets in Europe, or in North

May 2001 / 17

received a large payment, this factmay prove useful.

Contacts with Investors

When dealing with a large num-ber of victims, sometimes the onlymethod of collecting information ismass mailing questionnaires.5 Anycommunication with victims shouldremain open and honest. Often, vic-tims of such schemes do not trustinvestigators who, they think, mightruin their investment opportunity.When writing to victims, investiga-tors should provide all of the infor-mation that they have about the in-vestigation. Promoters deliberatelymight try to interfere with victimsby disseminating erroneous infor-mation. Being open and candid withinvestors may convince them to co-operate early. To avoid any subse-quent allegations by the defense, in-vestigators should include languageadvising that defendants are pre-sumed innocent. If investors still re-main in contact with promoters, anyevidence of statements made by thepromoter to the investor (known as“lulling” statements) will proveuseful, particularly if promotersmake them after investigators al-ready have contacted the promotersand warned them about the true na-ture of these schemes.

Contact with Prosecutors

These types of cases can be-come inherently complex. Investi-gators should present the case toprosecutors first, then conduct theinvestigation. Also, investigatorsalways should remember thatthe goal is to prove intent to de-fraud, not understanding how theinvestment should have worked. In

fact, understanding the investmentcan prove impossible because ofthe amount of fictional informationinvolved. Investigators should notspend too much time trying to un-derstand the meaning of all of thefinancial jargon and, although in-vestigators might think the invest-ment sounds like it makes sense, noinvestments pay extraordinary re-turns without risk.

Second, law enforcementshould interview the victims. Offi-cers should obtain evidence oflulling statements made to victims,as well as declarations made bypromoters about their past successwith these programs.

Most important, prior to begin-ning any steps, investigators shouldcontact the prosecutor, explainthe case and strategy, and keepthe prosecutor informed throughoutthe investigation. Chances for asuccessful prosecution of the caseincrease if a prosecutor workson the case early in the investiga-tion. If law enforcement waits untilthe end of the investigation to re-quest the prosecutor’s help, con-tinuing with a civil case may be theonly response.

Endnotes

1 Kim Clark, “Pumping the Prime: ‘PrimeBank’ Schemes are Back and Targeting theMiddle Class,” U.S. News and World Report,March 15, 1999.

2 An investment swindle in which someearly investors are paid off with money put upby later ones in order to encourage more andbigger risks. Merriam-Webster’s Collegiate

Dictionary, 10th ed. (1996), s.v. “Ponzischeme.”

3 U.S. vs. Sid Tweady, et al., Cr. S.-99-293DFL (E. D. CA 2000) statements by JudgeDavid Levi.

4 Investigators can obtain this informationsheet, created by the FBI and the SacramentoU.S. Attorney’s Office, by contacting either ofthese offices. A copy of the sheet also isprovided with this article.

5 The questionnaire consists of a cover letterexplaining the nature of the investigation, thestatus of the prosecution, and any informationknown about the disposition of the money. Itconsists of questions such as: “What promiseswere made? What was the promised return?What was the risk? Who made the promises?What is the promoter telling you now?” Also,the questionnaire includes a copy of theInformation Sheet.

CONCLUSION

By using innovative investiga-tive techniques and following cer-tain steps in the investigation, lawenforcement can prosecute fraudu-lent investment schemes success-fully. First, investigators should in-terview promoters, obtain a historyof their past involvement with theseschemes, and warn them that thesetypes of investments are fraudulent.Additionally, investigators shouldobtain evidence of previous scamsthrough interviews, search war-rants, and bank records and searchfor evidence that promoters knewthat the program would not work.

“ Chances fora successful

prosecution ofthe case increase

if a prosecutorworks on the case

early in theinvestigation.

”

Book Review

Police Trauma: Psychological Aftermathof Civilian Combat edited by John M. Violantiand Douglas Paton, Charles C. Thomas, LTD.,Springfield, Illinois, 1999.

Police Trauma offers comprehensive researchfor all law enforcement psychologists and con-sulting clinical psychologists by providing theconditions and precipitants of trauma stressamong law enforcement. Police executives,incident commanders, line officers, policywriters, and law enforcement family membersalso will find this book beneficial. Police Traumamay help prevent or minimize trauma stress byproviding information on how to better deal withtraumatic experiences and establish an improvedsupport system for officers.

The topics discussed in this book suggestfuture policy and procedures for the concep-tualization, intervention, recovery, and immediateand extended treatment of psychological traumain policing. Also covered are suggestions for bothdepartment and officer self-assessment.

The authors have grouped the chapters of thebook into three sections: conceptual and method-ological issues, special police groups, and recov-ery and treatment. Police Trauma begins with athorough assessment of the understanding ofpsychological trauma involving duty-related,patrol-response trauma. The book offers anassessment test, which includes 66 character-istics to help officers understand overall risks tothemselves and others, and offers guidance onhow to analyze the test results for a better under-standing of how trauma can affect officers. Thischapter also introduces a police compassionfatigue model in which authors describe therelationship between an officer’s psychologicaltrauma, how they cope with the trauma, and theirrole in the department and personal family afterexposure.

In another section, Police Trauma assessespolice groups, such as the South African Police’sexposure to violence. Response members ofhigh-profile incidents also were assessed for post-intervention strategies concerning exposure to the

violence and coping and recovery successes. Alsoin this section, the authors analyze and presentorganizational activities that contribute to theincident commander’s emotional recovery fromviolence and trauma.

Police Trauma reviews a successful militarymodel and its application to law enforcementoperations based on the organizational similaritiesof chain of command, training, leadership,response, and commitment to control violenceresulting in trauma aftermath. The military modelcontained three prevention phases: a primaryphase, concerning prior preparation and trainingfor trauma-type incidents; a secondary phasefocusing on the participants during and immedi-ately after a traumatic event; and the last phaseaddressing considerations in limiting long-termeffects of trauma and how to properly prepare,respond, and recover through a shared and well-documented after-action report.

Police Trauma provides a tremendousresearch effort on trauma by experts directlyconnected to the field of law enforcement andserves as an invaluable asset for all levels andjurisdiction of the law enforcement community,including those in private industry. It presentsan understanding of why police respond to traumathe way they do and how they can recoversuccessfully.

The authors have gathered information ontrauma research from professionals associatedwith law enforcement. These contributionsprovide the reader with different perspectiveson police trauma and its aftermath and identifywhat is known, as well as what is not known, onthis complex issue. Police Trauma serves as anexcellent resource for those individuals managinglaw enforcement psychological stress and trauma.

Reviewed byLarry R. Moore

Certified Emergency ManagerInternational Associationof Emergency Managers

Knoxville, Tennessee


May 2001 / 19

lthough the media fre-quently focuses on the con-viction of the leaders of

major criminal enterprises, such asthe Gambino crime family, theColombian Cali Cartel, or the Sicil-ian Mafia, dozens of lesser-knownindividuals belonging to the samecriminal organization also often re-ceive long prison sentences. Thosewho escaped prosecution or servedtheir sentence may return to find thecriminal enterprise to which theyonce belonged extinct due to a pow-erful tool in the law enforcementarsenal—the Enterprise Theory ofInvestigation (ETI).

AThe ETI has become the stan-

dard investigative model that theFBI employs in conducting investi-gations against major criminal or-ganizations. The successful pros-ecutions of major crime bossesserve as direct testaments to thebenefits of this model. Unliketraditional investigative theory,which relies on law enforcement’sability to react to a previously com-mitted crime, the ETI encourages aproactive attack on the structure ofthe criminal enterprise. Rather thanviewing criminal acts as isolatedcrimes, the ETI attempts to showthat individuals commit crimes in

furtherance of the criminal enter-prise itself. In other words, indi-viduals commit criminal acts solelyto benefit their criminal enterprise.By applying the ETI with favorablestate and federal legislation, law en-forcement can target and dismantleentire criminal enterprises in onecriminal indictment.

Applying the ETI

By restructuring both their in-vestigative resources and theory,many law enforcement agencies canuse this model. Initially, some po-lice agencies may hold a skepticalview of the use of the ETI because

Enterprise Theoryof Investigation

By RICHARD A. MCFEELY


its application requires an increasedtime commitment, which may affectcase-closure rates and also becausethey may perceive the ETI as morecomplex than traditional investiga-tive models. However, the advan-tages of the ETI easily outweighthese presumed disadvantages,primarily because the ETI pro-vides a highly effective method oftargeting and dismantling criminalenterprises.

To recognize the value of theETI, investigators must accept sev-eral main premises. First, whilesome major organized criminalgroups commit crimes to supportidealistic views, financial profitremains the underlying motive formost criminal enterprises.

Next, major organized criminalgroups typically engage in a broadrange of criminal activities toachieve this profit goal. While thenexus of these violations may beclosely interrelated (e.g., drug traf-ficking and money laundering), ma-jor criminal enterprises historically

rely on numerous criminal acts tosupport their existence and oftendivide the responsibility for com-mitting these acts among theirmembers and crews. The ETI capi-talizes on this diversity by analyz-ing the enterprise’s full range ofcriminal activities, determiningwhich components allow the crimi-nal enterprise to operate and ex-ploiting identified vulnerable areaswithin each component. For in-stance, to accomplish their profitobjectives, major drug traffickingorganizations must establish fourseparate subsystems within their or-ganization—narcotics transporta-tion and distribution, financial, andcommunication. The ETI identifiesand then targets each of these areassimultaneously, especially thosecomponents viewed as the most vul-nerable. The more diverse thecriminal enterprise, the more poten-tial for exploitation due to the exist-ence of these types of subsystems.

A final premise of the ETImaintains that major organized

criminal groups have a pyramidalhierarchy structure where thelower levels, consisting of morepeople, conduct the majority ofthe enterprise’s criminal activities.Therefore, working a case “up thechain” proves beneficial because itstarts the investigation at the levelwhere most investigative opportu-nities exist.

Defining an Enterprise

What defines a criminal enter-prise? Do two bank robbers com-mitting serial robberies fall withinthe definition? How about employ-ees of a government contractor en-gaged in systematic bid-rigging?Although these criminal groupsmight have a loose-knit organiza-tional structure, application of theETI probably would not prove ben-eficial in these instances.

The FBI defines a criminalorganization as a group of individu-als with an identified hierarchy en-gaged in significant criminal activ-ity. These organizations oftenengage in a broad range of crim-inal activities and have extensivesupporting networks. Generally, theETI only proves effective when theorganization engages in a myriad ofcriminal activities. In the case of thebank robbers, federal and state rob-bery laws sufficiently address thisgroup’s single-purpose criminal ac-tivity. However, if the bank robbersbegin to diversify by stealing carsand guns to support their robberies,the ETI now offers advantages thattraditional methods of investigationdo not. The ETI supports the notionthat the gang’s new found diversityallows law enforcement moreinvestigative opportunities by

By restructuring boththeir investigative

resources andtheory, many law

enforcementagencies can use[the ETI] model.

”Special Agent McFeely serves in theFBI’s Washington, DC, field office.

“

May 2001 / 21

exploiting the most vulnerable areaof their criminal activities. For ex-ample, introducing an undercoverofficer into a close-knit gang to ob-tain their robbery preparations maybe practical. However, if the gangadvances to criminal violations thatrequire assistance from someoneoutside the gang, a departmentcould expand its investigative op-portunities and use an undercoverofficer to provide stolen vehicles.

Most state and federal generalconspiracy laws define a criminalconspiracy as two or more individu-als. The federal Continuing Crimi-nal Enterprise statute,1 applicable tomajor drug conspiracies, requiresthat the individual charged led fiveor more individuals while the fed-eral Racketeering Influenced Cor-rupt Organizations (RICO) statuterequires only two or more individu-als to comprise a criminal enter-prise.2 Law enforcement managersmust decide which statutes to usewhen they form the investigativestrategy to direct the evidence col-lection toward meeting the legal re-quirements of each statute. Thistype of advance decision makingsupports the proactive nature of theETI.

Using the criminal statutes asguidance, the investigation shouldfocus continually on an essentialpart of the indictment—provingwho belongs to the criminal enter-prise. Obviously, law enforcementcan use traditional investigativetechniques, such as physical sur-veillance, to show criminal associa-tions. However, the act of showingcriminal associations does not nec-essarily involve proactive evidencecollection against the subjects and

often uses historical information toprove this element.

Determining the Scope of theEnterprise’s Criminal Activities

Once investigators confidentlybelieve that an enterprise does exist,the next step involves determiningthe scope of its illicit activities. Thisstep proves important because itwill help define the investigativestrategy.

While larger police agencies of-ten use highly trained and special-ized analytical support teams to as-sist with case analysis, those policeagencies without this resourceshould not skip this important step.Investigators can create simple timelines that chart significant historicalevents based on previous intelli-gence. In doing so, they can helpreveal patterns of criminal activityand possibly predict future trends.3

The investigative strategy that man-agers develop should anticipate thesteps needed to counter these futuretrends, which remains the essenceof the proactive nature of the ETI.

While traditional investigativetheory targets individual criminals,the ETI can show they commitseemingly isolated crimes to benefitan entire criminal enterprise. Theselection of favorable legislation,from simple state conspiracy lawsto the more complex federal rack-eteering laws, will round out theinvestigative strategy by focusingthe prosecution not only on the indi-vidual committing a crime but theleaders who order or benefit from it.

Developing anInvestigative Strategy

Both historical and real-timeevaluation helps form the investiga-tive strategy. Because investigatorsshould base this strategy on per-ceived weaknesses within the enter-prise, they must conduct a thoroughevaluation of the enterprise’s activi-ties. The investigators should ob-tain enough information to analyzeto gain a basic understanding of theextent of the enterprise’s criminalactivities. Investigators should ex-amine the full range of these illicit

“...with the [ETI],the larger the

enterprise...themore investigative

opportunities itprovides for law

enforcement.

”Investigators always treasureany new intelligence regarding anenterprise’s current activities; how-ever, investigations can stillprogress with older information.For example, a review of past inves-tigations, prosecutions, and crimi-nal histories of suspected members,and even open-source information(e.g., newspaper accounts) can as-sist in this process. The task forceconcept allows instant multiagencysearches of historical records andindices. In fact, during this stage,agencies can piece together infor-mation that they might have, butjust could not link to the actions of acriminal enterprise.


activities, separate them into com-ponents, and draw an investigativestrategy that attacks each compo-nent separately, yet simultaneously.

For example, a large and so-phisticated burglary ring must havesome form of each of the followingcomponents in place: methods oftheft, resale of the stolen goods, andconcealment of their illicit pro-ceeds. Police can use a surveillanceteam to try to catch the actual bur-glars and, at the same time, use un-dercover officers to pose as a

the investigation “up the chain.” Atthis point, the use of innovative andmore sophisticated investigativetechniques becomes invaluable be-cause proving a case against theleader of a major criminal organi-zation typically is more difficultthan convicting a “player” of theorganization. For example, defer-ring prosecution of low-level bur-glars in favor of cooperation ora court-authorized wiretap of thering leader’s telephone might sup-port a hierarchical attack on theenterprise.

Additionally, financial profitremains one of the main goals ofmost criminal enterprises. Virtuallyevery major criminal organizationuses a system to reward its membersthrough monetary means. Often-times, successfully dismantling anorganization relies solely on theability of law enforcement to dis-rupt this financial component. Re-moval of a criminal enterprise’s fi-nancial base usually disables theorganization to a point where theycannot recover. This occurs be-cause even the lowest members ofthe organization require promptpayment for their actions. Remov-ing the ability of an enterprise tomake payments generally takesaway the incentive for those doingthe work to continue. Although theenterprise can fill some positions ofthose incarcerated membersthrough upward attrition, only a fewtrusted members of a criminal orga-nization generally handle methodsof dividing, shielding, and account-ing for the profits. Successfully in-carcerating those in such a positionof trust can result in large voidswithin the criminal organization.

“fence” against the ring’s efforts toresell the stolen property. A finan-cial investigator could track pur-chases and asset acquisition of eachindividual. As the case progresses,investigators can shift additional re-sources to the enterprise’s most vul-nerable areas. Because the ETI ulti-mately attempts to indict andconvict all the members of an enter-prise, especially within the leader-ship ranks, the investigative strat-egy needs to address how eachinvestigative method will advance

howing criminal associations does not necessarilyinvolve proactive evidence collection against the sub-

• A recent FBI investigation initially used gang graffiti tonot only determine membership in the gang (enterprise),but to show its area of influence. Investigators also canuse gang colors, clothing, and hand signals in this manner.

• Agencies can use intercepted telephone conversations,call-detail records, and pen registers to show associations.

• Officers executing warrants or processing prisonersshould not overlook the more mundane collection ofdocumentary evidence that can prove useful in showingassociations. Some examples could include pagers andcellular telephones with stored numbers, or address booksor scraps of paper with names and telephone numbers.Standard post-seizure practice should involve electroni-cally capturing this type of information for later linkanalysis.

• Officers should include accomplice information whencompiling a subject’s biographical file, such as otherindividuals arrested and the location of the subjects(i.e., whose house or car) when the arrest took place.This information proves valuable in showing pastcriminal relationships.

Sjects and often uses historical information to prove thiselement. Consider the following successful examples thatfocus on the members of criminal enterprises:

May 2001 / 23

By creating chaos and uncertaintywithin the financial component ofthe enterprise, members quicklylook elsewhere for “employment”and financial rewards.

Attacking the flow of moneyhas become the norm in major fed-eral organized crime and drug traf-ficking investigations. Strategic useof asset forfeiture and money laun-dering statutes removes not only theillegal proceeds (e.g., cars, houses,and jewelry), but, more important,it disables the systems that the en-terprise has put into place to accom-plish its profit goal. Some examplesinclude fraudulent bank accountsused to shield illicit income andproperty used to facilitate the crimi-nal activity, such as “legitimate”businesses.

The plan should remain aggres-sive, yet workable. For instance,case managers may not include tar-geting the head of the criminal en-terprise in the initial plan, but theinvestigative strategy should definethe steps on how to achieve thisobjective.

Investigators should interfacewith prosecutors as early as pos-sible in the case. Because the inves-tigative strategy essentially remainsa start-to-finish blueprint for thecase, investigators must know fromthe outset which elements of thecriminal statutes they must proveand then tailor the investigativeplan accordingly.

Finally, case managers shouldpostpone any actions that might ex-pose the scope of the investigationuntil completion of the covertphase. This remains important be-cause opportunities to arrest sub-jects increase as the case proceeds,

which may conflict with those de-partments that gauge their effec-tiveness on raw arrest data and,therefore, might not delay arrestingindividuals once sufficient evi-dence exists.

Using a Task Force

The use of a joint task forceremains a necessity in the success-ful application of the ETI. Any lawenforcement officer who everserved on a multiagency task forcerecognizes the strength that com-bined resources provide in achiev-ing objectives. Immediate benefits

“The use of a jointtask force remains

a necessity inthe successful

application of the ETI.

”include additional staff, access tomore technical and investigativeequipment (e.g., different sets ofsurveillance vehicles), and the pool-ing of financial resources for items,such as payment of informantsand purchase of evidence. Anothermajor advantage that directly sup-ports the ETI model is that differentpolice agencies bring the potentialto expand jurisdiction and expertiseinto all of the areas that a criminalenterprise engages. For example,while virtually every state and localpolice agency has counterdrug en-forcement as part of its mission,

very few of these agencies employ acriminal tax investigator who spe-cializes in tracking internationalmoney transfers. Thus, getting anInternal Revenue Service specialagent involved in the investigationnot only adds another individual toassist with general investigations,but adds an individual who can pro-vide an area of expertise that thetask force might otherwise lack.

Many federal task forces em-ploy a wide range of individuals,including nonsworn personnel, withspecialized skills not usually foundin the law enforcement realm. De-partments can retain bank examin-ers, accountants, and securities ex-perts as either consultants or as anactual member of the task force.Many federal agencies invest con-siderable effort in developing aclass of nonsworn professionals,ranging from investigative assis-tants to more specialized positionsthat employ an expertise in areasnot typically found in the realm ofsworn personnel (e.g., link analysis,chart preparations, and legalresearch).

Because police agencies havediffering missions and methods ofmeasuring success, the mostimportant part of the task force for-mation involves complete agree-ment by the participating agenciesregarding the objectives and goalsof the investigation and what rulesthe task force will follow. Addition-ally, the participating agenciesshould complete a memorandum ofunderstanding that addresses ques-tions, such as the following:

• Which agency will maintainresponsibility for the overallinvestigation?

• Are the lead agency’s rulesacceptable to the other par-ticipating agencies?

• Will the case be prosecutedin the state or federal courts?

• Will each participating agencyuse their own forms or will thetask force adopt one standardformat for investigativereports?

• Who will maintain seizedevidence?

• Will each agency agree todelay arrests and seizuresif it may jeopardize theinvestigation?

• How much funding (includingovertime) will each agencycontribute to the investigation?

• Whose procurement rules willthe task force follow to acquireequipment and supplies?

• Will each agency acceptliability for the actions oftheir assigned personnel?

• Will the state investigatorsneed to be deputized orvice versa?

• Will the agencies dividethe forfeiture share equally,regardless of the level ofparticipation (e.g., one part-time officer versus threefull-time officers)?

Implementing an Attack

In this stage, task force mem-bers follow the previously devel-oped investigative strategy andmerge traditional methods of evi-dence collection with investigativemethods developed specifically toattack the identified component ofthe criminal enterprise. This ofteninvolves the largest commitment of

personnel, time, and resources.Task force supervisors should con-sider assignments depending on theoutline of the investigative strategyand the areas within the enterprisethat remain vulnerable for exploita-tion, along with the area of eachofficer’s expertise and experience.Investigators should use both tradi-tional and sophisticated investiga-tive techniques to receive optimalresults. However, regardless of theoriginal plan, the task force mustadapt and shift investigatory re-sources as the case develops. Forexample, if the task force obtains awire tap order to penetrate a crimi-nal enterprise’s methods of commu-nications, case managers must con-sider temporarily reassigningperonnel to meet the high resourcerequirements of operating wiretaps.

Careful coordination with pros-ecutors as the case develops ensuresthat all members of the criminal en-terprise receive indictments andthat the enterprise’s establishedcriminal subsystems become per-manently dismantled.

Conclusion

Oftentimes, larger criminalenterprises prove problematicfor agencies to dissolve usingtraditional investigative methods.However, with the enterprise theoryof investigation, the larger the en-terprise and the more diverse itsillegal activities, the more investi-gative opportunities it provides forlaw enforcement.

Because the use of conspiracyor criminal enterprise statutes formthe baseline from which agencies

n a city plagued with chronic drive-by shootings, tradi-tional investigative methods may focus on each shooting

An Example of the EnterpriseTheory of Investigation

Ias an isolated incident. However, a task force suspecting ganginvolvement can develop a time line that shows that each timea member of a street gang was incarcerated, an increase inshootings against rival gang members occurred. Using thisanalysis and adopting an enterprise investigative theory, thetask force can gather “traditional” evidence against the indi-vidual shooters and focus on developing evidence that showsthe shootings as more than just random acts. At trial, theprosecutors can use the investigative efforts to show that gangleaders ordered the shootings to defend a perceived gap intheir turf as a result of the incarceration factor and, therefore,prosecute not only the shooters but the gang leaders as well.


develop their investigative strate-gies, the ETI requires that depart-ments expand the traditional mod-els of evidence collection. Whilethese traditional models generallyonly attempt to identify individualsand the crimes they commit, the ETIrequires that investigators broadenevidence collection to show that anindividual conducted the criminal

activity to benefit the enterprise as awhole. By using favorable statutesalong with a carefully laid out,multipronged attack on each estab-lished component that a criminalenterprise uses to conduct its ille-gal business, investigators can ex-pand criminal culpability for asingle criminal act to all membersof the enterprise, regardless of

whether they actually committedthe crime.

Endnotes

1 18 U.S.C. § 1961 et. seq.2 21 U.S.C. § 848.3 For additional information on the use of

time lines in investigations, see Craig Meyerand Gary Morgan, “Investigative Uses ofComputers: Analytical Time Lines,” FBI Law

Enforcement Bulletin, August 2000, 1-5.

May 2001 / 25

T he FBI Law Enforcement Bulletin staff invitesyou to communicate with us via e-mail. Our

Internet address is [email protected] would like to know your thoughts on

contemporary law enforcement issues. Wewelcome your comments, questions, and

suggestions regarding the magazine.Please include your name, title, and

agency on all e-mail messages.Also, the Bulletin is available

for viewing or downloading on anumber of computer services,as well as the FBI’s home page.The home page address ishttp://www.fbi.gov.

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Legal Digest

hen deciding to establishphysical fitness stan-dards for potential or

procedures that either expressly oreffectively discriminate againstspecified categories of individualsexcept under limited circumstances.

Background

The Civil Rights Act of 1964prohibits various forms of discrimi-nation based on race, color, sex, na-tional origin, or religion. Title VIIof this act prohibits such discrimi-nation in the workplace when the

discrimination results in the loss ofan employment benefit. Virtuallyall employment actions fall underthe purview of Title VII. The U.S.Supreme Court has ruled that TitleVII prohibits not only express dis-crimination (disparate treatment)but also prohibits neutral employ-ment actions that have the effect ofdiscriminating against a particulargroup protected by the act (dispar-ate impact).3 The Civil Rights Act

Law Enforcement PhysicalFitness Standards and Title VIIBy MICHAEL E. BROOKS, J.D.

Wonboard law enforcement employ-ees, law enforcement administra-tors must be cognizant of the re-quirements imposed by Title VII ofthe Civil Rights Act of 19641 and bythe Civil Rights Act of 1991.2 Thisfederal legislation requires that allemployers of more than 15 employ-ees must refrain from policies and

© Mark C. Ide

May 2001 / 27

of 1991 established burdens ofproof and other procedural require-ments in litigating a Title VII ac-tion. As a result of this legislation,the only defense an employer haswhen a facially neutral employmentstandard effectively discriminatesagainst a protected group is to provethat the standard is “job related forthe position in question and consis-tent with business necessity.”4

How do these laws apply in thearea of physical fitness standards?They apply when a physical fitnessstandard limits the employmentrights of a group protected by TitleVII. Most notably, they apply whena particular physical fitness stan-dard has a disparate impact onwomen when compared to how thesame standard affects men. An on-going case from Pennsylvania dem-onstrates the impact of these laws.

Lanning v. SoutheasternPennsylvania TransportationAuthority

In 1991, as a part of an effort toupgrade its 234-officer police force,the Southeastern PennsylvaniaTransportation Authority (SEPTA),which operates a commuter rail sys-tem in Philadelphia and its suburbs,instituted a series of physical fitnessrequirements for both onboard andpotential police officers. Amongthese was a requirement that appli-cants run 1.5 miles in 12 minutes.Failure to meet this standard dis-qualified an applicant from employ-ment as a police officer. Prior toinstituting this standard, SEPTAcontracted with a noted exercisephysiologist, Dr. Paul Davis, to de-velop a physical fitness test for its

police officers. Dr. Davis con-ducted extensive studies to deter-mine what physical abilities are re-quired for a SEPTA police officer.5

Dr. Davis determined that SEPTAofficers often are called upon to runvarious distances in the perfor-mance of their duties. He furtherdetermined that a specific aerobiccapacity was necessary for an of-ficer to adequately perform thephysical requirements of a SEPTAofficer. After determining that thisaerobic capacity would have a,“...draconian effect on women ap-plicants,” Dr. Davis decided that aslightly lower aerobic capacitywould meet the goals of SEPTA inimproving the physical abilities ofits police officers, as well as theirjob performance. Dr. Davis advisedSEPTA that applicants who couldrun 1.5 miles in 12 minutes wouldpossess this slightly lower aerobiccapacity.6

During the years 1991, 1993,and 1996, almost 60 percent of maleapplicants to the SEPTA police metthe 1.5 miles in 12 minutes standard

while an average of 12 percent offemale applicants met the standard.SEPTA also began a physical fit-ness test of incumbent officers,which included an aerobic capacitytest. Because of a grievance filedby their police union, SEPTAstopped disciplining officers whofailed the test shortly after institut-ing it. Instead, the agency rewardedthose officers who met the fitnessstandards.7

In 1997, five women who hadbeen rejected by SEPTA because oftheir inability to meet the 1.5 milesrun in 12 minutes standard filed aTitle VII class action lawsuit on be-half of all women who applied toSEPTA in 1993 and 1996 and wererejected for this reason, as well ason behalf of all future women whowould be similarly rejected. TheU.S. Department of Justice, afterinvestigating SEPTA’s employ-ment practices under Title VII,joined the lawsuit in opposition tothe standard. In 1998, the U.S. Dis-trict Court for the Eastern Districtof Pennsylvania entered judgment

“

”

Virtually allemployment

actions fall underthe purviewof Title VII.

Special Agent Brooks is a legalinstructor at the FBI Academy.


for SEPTA after hearing evidencethat included SEPTA studies show-ing that there was a statistically highcorrelation between high aerobiccapacity and arrests and commen-dations among SEPTA officers andalso that officers with the aerobiccapacity approved by Dr. Daviswere better able to perform physicaltasks after running for 3 minutesthan were officers without thataerobic capacity. The District Courtruled that SEPTA had establishedthat the aerobic capacity standardwas job related and consistent withbusiness necessity and that therewas a “manifest relationship ofaerobic capacity to the critical andimportant duties of a SEPTA of-ficer.”8 The women and the UnitedStates appealed to the U.S. Court ofAppeals, Third Circuit.

The Third Circuit ruled that thelower federal court had erred be-cause it did not find that the 1.5miles run in 12 minutes standardwas a “minimum qualification nec-essary for the successful perfor-mance of the job in question.”9 TheCircuit Court reviewed U.S. Su-preme Court case law and the CivilRights Act of 1991 to conclude thatCongress intended to reject the Su-preme Court’s interpretation ofTitle VII in a 1989 case when itruled that in disparate impact casesan employer can prevail if the stan-dard significantly serves a legiti-mate employment goal.10 Congress,in passing the 1991 law, instead re-instated an earlier Supreme Courtinterpretation of Title VII that hadheld that in such circumstances theemployer only prevails by showingthat the standard is “consistent withbusiness necessity” and “bears a

manifest relationship to the em-ployment in question.”11 The ThirdCircuit ruled that this means thatany such standard must measure aminimally necessary skill to per-form the job.

The Third Circuit also rejectedan argument that the employer’sburden to justify a standard thatcauses a disparate impact on a pro-tected group is lessened when thejob involves public safety.12 Thecourt reasoned that had Congressintended such a distinction for pub-lic safety jobs, it would have codi-fied it with the 1991 act. The dissentnoted that several other circuits hadrecognized that public safety is aconsideration in determining what

SEPTA appealed the Third Cir-cuit ruling to the U.S. SupremeCourt, but that Court refused to hearthe case.14 The case was then sentback to the District Court for thepurpose of determining if the 1.5miles run in 12 minutes standardwas minimally necessary to demon-strate the ability to perform the jobof a SEPTA police officer.

On December 7, 2000, the Dis-trict Court ruled that the SEPTAstandard does measure a minimumcharacteristic (the specific aerobiccapacity) necessary to perform theduties of a SEPTA police officer.15

The District Court exhaustively re-viewed all of the evidence pre-sented during the original 1998 trialand concluded that, “meetingSEPTA’s aerobic capacity standardis clearly the minimum required toperform the critical tasks of the jobsuch as pursuits, officer backups,officer assists, and arrests. Anylesser requirement simply wouldnot satisfy the minimum qualifica-tions for the job of SEPTA transitpolice officer and would endangerthe public and undermine deter-rence of crime and apprehension ofcriminals.”16

Discussion

The law enforcement adminis-trator should remember that TitleVII is statutory, not constitutional,law. The Supreme Court has ruledthat for a governmental entity (theonly type of entity restricted by theconstitution) to discriminate underthe equal protection clause of theFourteenth Amendment, a plaintiffmust prove an intent to discrimi-nate.17 Title VII contains no suchrequirement. As a federal statute,

“...the plaintiff mustshow that a facially

neutral standardresults in a

‘significantlydiscriminatory

pattern.’

”is a business necessity justifying adisparate impact.13 However, withthe exception of cases from the 8th,10th, and 11th Circuits, all of thesescases predate the 1991 act, whichcontained the language relied uponby the majority of the Third Circuitin ruling that there can be no specialconsideration of the public safetynature of the job.

May 2001 / 29

it is subject to judicial interpreta-tion and to revision by Congress. Ofcourse, any revisions also are sub-ject to judicial interpretation. Manyof the Title VII standards neverhave been interpreted by the Su-preme Court. Even when they havebeen defined, the federal circuitcourts have differed on what thesedefinitions mean. This presents ad-ministrators with the burden of in-suring that judicial interpretationsand legislative revisions are moni-tored continuously. What passesmuster today may be in violation ofthe statute tomorrow. Also, whatone court says is permissible maynot be controlling law in anotherjurisdiction.

Physical fitness standards areonly subject to scrutiny under TitleVII when they either expressly dis-criminate against a Title VII pro-tected group or, more commonly,when they have the effect of dis-criminating against such a protectedgroup. Where there is no expressdiscrimination, a plaintiff has theburden of proving to a court that thephysical fitness standard has the ef-fect of discriminating against a pro-tected group. Once such a showingis made, the employer has the bur-den “to demonstrate that the chal-lenged practice is job related for theposition in question and consistentwith business necessity.”18 As pre-viously stated, this provision wasadded in the Civil Rights Act of1991 after the Supreme Court hadruled that the plaintiff, not the em-ployer, has the burden of showingthat a challenged standard both hasa disparate impact and that the stan-dard does not “serve in a significantway, the legitimate employment

goals of the employer.” 19 Congress,therefore, not only shifted the bur-den of proving the necessity of sucha standard to the employer, they ar-guably increased the standard by re-quiring “business necessity” in-stead of “significantly serving alegitimate employment goal.” Anemployer could certainly argue thata requirement, although not abso-lutely required to meet a legitimateemployment goal, still could sig-nificantly serve that employmentgoal. Congress has precluded thatargument.

binding on federal courts interpret-ing federal legislation. However,courts will consider these guide-lines in ruling on Title VII issues.The EEOC has provided that a se-lection procedure that results in aprotected group’s selection rate ofless than 80 percent of the groupwith the greatest success willbe considered to have resulted in adisparate impact.21 While this is asignificant issue in most Title VIIlitigations, it usually does not be-come an issue in challenges tophysical fitness standards. In theLanning case, for example, SEPTAconceded that the 1.5 miles run in12 minutes standard had a disparateimpact on women.22 Commentatorshave concluded that most physicalfitness tests legally will have a dis-parate impact on women due to theinherent physical differences be-tween the sexes.23

Where a physical fitness stan-dard has a disparate impact onwomen, the concern of the law en-forcement administrator then be-comes how to successfully justifythe physical fitness standard underthe statutory requirement. How-ever, the Supreme Court has neverruled what “job related for the posi-tion in question and consistent withbusiness necessity” means. As pre-viously mentioned, the Third Cir-cuit ruled in the Lanning case thatthis provision requires that an em-ployer must show that the standardis a “minimum qualification neces-sary for the successful performanceof the job in question.” Other cir-cuits have not been so restrictive.For example, the Eleventh Circuithas ruled that an employer meetsthe statutory standard of business

How does a plaintiff prove thata physical fitness standard has a dis-parate impact? The Supreme Courthas ruled that the plaintiff mustshow that a facially neutral standardresults in a “significantly discrimi-natory pattern.”20 The Equal Em-ployment Opportunity Commission(EEOC) is a federal agency chargedwith promulgating federal regula-tions to implement Title VII andother federal antidiscriminationlegislation. These regulations donot have the force of law and are not


necessity by showing “...that thepractice or action is necessary tomeeting a goal that, as a matter oflaw, qualifies as an important busi-ness goal.”24 The EEOC has statedthat a selection policy that has adiscriminatory impact on membersof a Title VII protected classifica-tion is inconsistent with EEOCguidelines unless the policy hasbeen validated pursuant to theguidelines.25 The guidelines thenlist three means to validate such apolicy: criterion-related validity,content validity, and construct va-lidity.26 Each of these means of vali-dation are defined in the guide-lines.27 All of these means ofvalidation appear less restrictivethan the Third Circuit standard ex-pressed in Lanning.

Of particular importance to thelaw enforcement administrator at-tempting to justify a physical fitnessrequirement is whether the courtswill consider the public safety na-ture of law enforcement work in es-tablishing the business necessity ofsuch a standard. While the ThirdCircuit in Lanning ruled that thepublic safety nature of a job will notchange the Title VII requirement ofbusiness necessity, there is no rea-son to believe that public safetyshould not play a role in justifying aphysical fitness standard as a busi-ness necessity. In the most recentLanning District Court ruling, thecourt noted that SEPTA’s studieshad shown that SEPTA officers,who did not possess the aerobic ca-pacity established by Dr. Davis forthe applicants, had failed to make470 arrests during the study perioddue to their inability to physicallyperform their job after running. The

court noted the significant threat topublic safety that resulted fromthese lost arrests in the transit sys-tem.28 The court also noted numer-ous SEPTA studies that showedthat individuals who could meet theaerobic standard could perform thespecific job tasks of a transit policeofficer. These jobs included chas-ing criminal violators on foot, run-ning to a request for officer backupsand assists, and subduing subjects

is a physically demanding job andexpect a court to uphold a physicalstandard that has a disparate impacton women. In Lanning, the SEPTAPolice Department has been forcedto conduct at least seven studies jus-tifying the 1.5 miles in 12 minutesstandard. These studies were allconducted by outside experts, in-cluding physicians, physiologists,and statisticians and used bothSEPTA personnel and others assubjects.31 The studies did not jus-tify law enforcement physical re-quirements in general but, instead,only justified the SEPTA standardas it related to that one department.The latest District Court rulingnoted repeatedly that the job re-quirements of a SEPTA officerwere unique to that one department,even to the exclusion of other tran-sit agencies. For example, the stron-gest justification of the SEPTAstandard is the requirement thatSEPTA officers be able to run fromone station to another to back upanother officer. The SEPTA studiesnoted that their officers are requiredto do this on a monthly basis.32 Un-less another agency can producesimilar statistical evidence, the like-lihood of justifying a similar physi-cal standard under any business ne-cessity requirement remains highlyunlikely.

Even if an agency successfullyjustifies a preemployment physicalstandard under the business neces-sity requirement, what is the effectof not requiring onboard personnelto meet the same standard? TheThird Circuit in the Lanning casenoted that SEPTA mistakenly hadhired a female officer in 1991 whofailed to meet the 1.5 miles in 12

“Disparate treatment,like disparate impact,

is only permissibleunder the business

necessity justification.

”after running distances up to 3blocks.29 In its conclusions of law,the court held that these tasks arethe job of a SEPTA transit officerand failure to be able to performthem compromises the safety of theofficer, other officers, and the pub-lic at large. The court ruled that thisestablishes that the aerobic capacityis a minimum trait necessary to per-form this job.30

Regardless of what standard ofbusiness necessity is applied, thelaw enforcement administrator isgoing to be required to show at leasta significant relationship betweenthe physical fitness requirement andthe responsibilities of members oftheir department. It is insufficient tosimply claim that law enforcement

May 2001 / 31

minutes standard. This officer laterreceived several awards, was nomi-nated for “Officer of the Year,” andwas selected as a defensive tacticsinstructor. The court insinuated thatit found it difficult to understandhow the 1.5 miles in 12 minutesstandard is justified as a businessnecessity if this officer is not onlyon the force but performing at ahigh level.33 The District Court, inits most recent ruling, rejected theplaintiff’s argument in this area bysimply noting that SEPTA is unableto discipline onboard personnelwho fail to meet the standard due toits collective bargaining agree-ment.34 It remains to be seen if theThird Circuit will accept this ratio-nale under its strict business neces-sity standard.

A law enforcement administra-tor may decide to avoid these prob-lems by avoiding a disparate impacton women. This can be accom-plished by simply setting physicalstandards so low that few will fail.However, such a course will not ac-complish much, if anything, for anadministrator trying to improve anorganization. Another course is toset different standards for men andwomen in recognition of the differ-ences in physiology between thesexes. However, such an approachraises another federal statutory is-sue. When Congress enacted theCivil Rights Act of 1991, it in-cluded a provision stating, “It shallbe an unlawful employmentpractice...in connection with the se-lection or referral of applicants orcandidates for employment or pro-motion, to adjust the scores of, [or]use different cutoff scores,...on thebasis of race, color, religion, sex, or

national origin.”35 Here, the chal-lenge would come from a male whocould not meet the male standardbut could meet the female standard.Such an action amounts to expressdisparate treatment of the male.Disparate treatment, like disparateimpact, is only permissible underthe business necessity justifica-tion.36 The administrator who usesdifferent physical selection stan-dards for female applicants would,therefore, have to show whatbusiness necessity justifies such apractice.

Endnotes

1 Title 42, USC § 703(a)(1).2 Public Law 102-166, §§ 3(1), (3), and (4).3 Griggs v. Duke Power Co., 401 U.S. 424,

431 (1971).4 Title 42, USC § 2000e-2(k)(1)(A)(i).5 These studies are detailed in the opinion

of Lanning v. Southeastern Pennsylvania

Transportation Authority 1998 WL 341605(E.D.Pa., 1998).

6 From the facts discussion Lanning v.

Southeastern Pennsylvania Transportation

Authority 181 F.3d 478, 481-82 (3rd Cir.,1999)

7 Id. at 482-83.8 Id. at 484.9 Id. at 491.10 Wards Cove Packing Co. v. Antonio 490

U.S. 642 (1989).11 Griggs v. Duke Power Co. at 431-33.12 Lanning v. Southeastern Pennsylvania

Transportation Authority 181 F.3d 478, 490-91footnote 16 (3rd Cir., 1999).

13 Id., Justice Weis dissenting, at 499-500.Among these circuits are the 9th (Harris v. Pan

American World Airways 649 F.2d 670 (9thCir., 1980)); the 5th (Davis v. City of Dallas

777 F.2d 205 (5th Cir., 1985)); the 6th (Zamlen

v. City of Cleveland 906 F.2d 209 (6th Cir.,1990); the 11th (Fitzpatrick v. City of Atlanta 2F.3d 1112 (11th Cir., 1993)); the 10th (York v.

American Telephone and Telegraph 95 F.3d948 (10th Cir., 1996) and the 8th (Smith v. City

of Des Moines 99 F.3d 1466 (8th Cir., 1996)).14 Southeastern Pennsylvania Transporta-

tion Authority v. Lanning 528 U.S. 1131(2000).

15 Lanning v. Southeastern Pennsylvania

Transportation Authority 2000 W.L. 1790125(E.D. Pa., 2000).

16 Id. at 25.17 Washington v. Davis 426 U.S. 229, 238-

39 (1976). Where a literacy test for police waschallenged on equal protection grounds becauseit had the effect of discriminating againstminority applicants.

18 Title 42, USC § 2000e-2 (k)(1)(A)(i).19 Wards Cove Packing v. Atonio 490 U.S.

642, 659 (1989).20 Dothard v. Rawlinson 433 U.S. 321, 329

(1977).21 29 Code of Federal Regulations Section

1607.4 (D) (2000). For example, if 90 percentof men meet a physical fitness requirement, atleast 72 percent of women (80 percent of 90)must meet the same requirement or a disparateimpact is presumed.

Conclusion

The law enforcement adminis-trator who chooses to use physicalfitness standards must be pre-pared to negotiate a veritableminefield of legal issues when thosestandards have the effect of dis-criminating against a Title VII pro-tected class, such as women. Ashas been demonstrated, even themost well-documented justifica-tions may fail to meet the federalstatutory requirements to whichsuch standards are subject.

Law enforcement officers of other thanfederal jurisdiction who are interested inthis article should consult their legaladvisors. Some police procedures ruledpermissible under federal constitutional laware of questionable legality under state lawor are not permitted at all.



Transportation Authority 181 F.3d 478, 485(3rd Cir., 1999).

23 See David E. Hollar, Physical Ability

Tests and Title VII, 67 University of ChicagoLaw Review 777, 784 (Summer, 2000).

24 Fitzpatrick v. City of Atlanta 2 F.3d 1112,1118 (11th Cir., 1993). In this case, African-American firefighters challenged a no-beardrule as discriminatory under Title VII because ithad a disparate impact on them due to a higherincidence of a physical condition amongAfrican-American men that restricts theirability to shave. The city successfully counteredby presenting proof that firefighters must beclean shaven to successfully use a breathingdevice when fighting fires.

25 29 CFR § 1607.3 (2000).26 29 CFR § 1607.5 (2000).27 29 CFR § 1607.16 (2000). Content

validity requires data showing that the contentof a selection procedure is representative ofimportant aspects of performance on the job.Construct validity requires data showing thatthe selection procedure measures the degree towhich candidates have identifiable characteris-tics that have been determined to be importantfor successful job performance. Criterion-related validity requires data showing that theselection procedure is predictive or significantlycorrelated with important elements of workbehavior.


Transportation Authority 2000 WL 1790125at pg. 10.

29 Id. at 11-16.30 Id. at 24-25.31 Id. at 2-11.32 Id. at 24.33 Lanning v. Southeastern Pennsylvania

Transportation Authority 181 F.3d 478, 483(3rd Cir. 1999).


Transportation Authority 2000 WL 1790125at 26.

35 Title 42, USC § 2000e-2(l).36 29 CFR § 1607.11 (2000).

Wanted:Photographs

he Bulletin staff isalways on the lookoutT

for dynamic, law enforce-ment-related photos forpossible publication in themagazine. We are interestedin photos that visually depictthe many aspects of the lawenforcement profession andillustrate the various taskslaw enforcement personnelperform.

We can use either black-and-white glossy or colorprints or slides, although weprefer prints (5x7 or 8x10).Appropriate credit will begiven to contributing photog-raphers when their workappears in the magazine. Wesuggest that you send dupli-cate, not original, prints aswe do not accept responsibil-ity for prints that may bedamaged or lost. Send yourphotographs to:

Art Director, FBI LawEnforcement Bulletin,FBI Academy, MadisonBuilding, Room 209,Quantico, VA 22135.

The Bulletin Notes

Law enforcement officers are challenged daily in the performance of their duties; they face eachchallenge freely and unselfishly while answering the call to duty. In certain instances, their actionswarrant special attention from their respective departments. The Bulletin also wants to recognizetheir exemplary service to the law enforcement profession.

Officer Smith

On the evening of February 2, 1999,off-duty Officer Howard Smith of theCheyenne, Wyoming, Police Departmentanswered the door at his residence tofind several hysterical young femalesyelling that their house was on fire andthat their grandmother and youngersister were still inside the residence.Without hesitation, Officer Smith ranto the dwellingand entered thesmoke-filled

house to locate the occupants. OfficerSmith escorted the grandmother andcarried the young child from the resi-dence to safety. Although Officer Smithhimself was treated for smoke inhala-tion, his selfless actions prevented moreserious or even life-threatening injuriesto the grandmother and young child.

Officer Williams

While on patrol in January 1999,Officer Lou L. Williams of the FlaglerBeach, Florida, Police Departmentreceived a call to respond to two sky-divers in the ocean. When she arrived onthe scene, Officer Williams removed herduty gear and entered the frigid water.Risking hyperthermia, Officer Williamsswam through 4- to 6-foot waves andstrong riptides to reach the skydivers.After bringing one skydiver to shore,Officer Williams returned to the water to

rescue the remaining skydiver who was tangled in his parachuteand drowning. Eventually, Officer Williams was able to reachthe second skydiver, cut the parachute away from him, andsafely return him to the shoreline. Officer Williams’ quick ac-tion and continued efforts saved the lives of the two skydivers.

Nominations for the Bulletin Notes should be based on eitherthe rescue of one or more citizens or arrest(s) made at unusualrisk to an officer’s safety. Submissions should include a shortwrite-up (maximum of 250 words), a separate photograph ofeach nominee, and a letter from the department’s ranking officerendorsing the nomination. Submissions should be sent to theEditor, FBI Law Enforcement Bulletin, FBI Academy, MadisonBuilding, Room 209, Quantico, VA 22135.

Agent Martines

While off duty, Agent RachaelMartines of the state of Nevada’sGaming Control Board, cameacross a traffic accident wherethe vehicle rolled over, and itsoccupants were ejected. One ofthe vehicle’s occupants, an 18-month-old female, had evisceratedorgans and had stopped breathing.Agent Martines covered theexposed organs and immediatelybegan CPR. She restored thechild’s breathing and cared forher until medical assistancearrived. Thanks to Agent Martines’valiant efforts, the child survivedwith no permanent injuries.

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