Interesting piece from Forbes Magazine…
You can thank the USA Patriot Act (passed after the 2001 terrorist attacks) for this rapid global change. The Patriot Act required financial institutions to set up rigorous anti-money-laundering programs, ostensibly to thwart terrorist financing. However, with a powerful new tool on their hands, various law enforcement agencies did not wait long to start pursuing cases unrelated to terrorism.
Now financial institutions must have anti-money-laundering departments, hire trained personnel to monitor and investigate financial transactions, research customers’ backgrounds, keep up with frequent changes in official regulations and invest in training and information technology.
Compliance has become an increasingly specialized task. Bankers, for example, must not only thoroughly background their customers but also background their overseas customers’ clients in commercial transactions (This is frequently difficult for banks as they are often limited by bank privacy provisions when they try to obtain such information).
Regulators also expect banks to determine exactly where international clients obtain funds, even when the chain of payment is not easy to detect. For example, if Iran sets up a joint venture with a partner in Latin America and the Latin executives whose names appear on the trade documents want to do business with a financial institution in the United States, how do bankers know if any Iranian money is involved?
A maze of government agencies have roles in detecting, monitoring and regulating money-laundering activities, or in penalizing and prosecuting violators. These are the main players:
• Central Intelligence Agency
• Federal Deposit Insurance Corp.
• Federal Reserve System
• Internal Revenue Service, Criminal Investigation
• National Credit Union Administration
• Securities and Exchange Commission
• State, county and local agencies, including police forces, prosecutors and bank regulators
• U.S. Department of Commerce, Bureau of Industry and Security
• U.S. Department of Homeland Security: Customs and Border Protection, Immigration and Customs Enforcement, Transportation Security Administration, U.S. Coast Guard, U.S. Secret Service
• U.S. Department of Justice: Civil Division, Criminal Division (Asset Forfeiture and Money Laundering Section), DEA, FBI
• U.S. Department of State: Bureau of International Narcotics and Law Enforcement Affairs
• U.S. Department of the Treasury: Financial Crimes Enforcement Network, Office of the Comptroller of the Currency, Office of Foreign Assets Control, Office of Thrift Supervision.
The Language of Money Laundering
To the uninitiated, a technical discussion of money laundering might appear to be a conversation in code. People blithely discuss SARs, not the potentially deadly virus, but the suspicious activity reports financial institutions are required to file to the government, or PEPs — politically exposed persons.
PEPs and their associates perform important public functions for a government or are members of a royal family — and they are sometimes considered risks because of their ability to hide illegally obtained money.
Here are a few more samples from the alphabet soup of money laundering terms:
• AML (anti-money laundering) – Programs and procedures to detect and prevent money laundering.
• BSA (The Bank Secrecy Act) — A key federal law governing anti-money-laundering programs.
• CTR (currency transaction report) — A report U.S. financial institutions are required to file identifying deposits, withdrawals or other transactions of $10,000 or more.
• FinCen (The Treasury Department’s Financial Crimes Enforcement Network) — It issues and interprets regulations related to the BSA and enforces compliance.
• FIU — Not the local university, but rather a financial intelligence unit or a national agency in any country that receives and analyzes financial data as part of an effort to combat money laundering.
• KYC (know your customer) — A requirement that financial institutions thoroughly know the customers they deal with and have documentation to verify identity, address, nature of business and source of funds.
• OFAC (Office of Foreign Assets Control) — A section of the Treasury Department that administers and enforces trade and anti-money-laundering sanctions.
So, How Do You Launder Money These Days?
Imported plain cotton pillow cases from France that cost more than $900 apiece and new bulldozers exported to Venezuela that cost $387 each. Such prices seem rather unusual (Yes, those are real examples) — and could be examples of someone using international trade to launder money. I’ll explain below.
Despite strict enforcement of federal anti-money-laundering laws, individuals are constantly finding ways to transform dirty money — the proceeds of illegal activities — into clean cash, and one of their most important routes is laundering money via international trade.
One way money launderers move large sums is by undervaluing exports to a foreign destination or by overvaluing imports. Alternatively, those overseas can use trade to move money into the U.S. by undervaluing goods shipped here or overvaluing merchandise exported from here to other countries.
Think of the front door of money laundering as the banking system and the back door of money laundering as international trade. The government has fairly effectively closed the front door, but the back door of money laundering still provides a fair amount of opportunity.
In its 2009 report, the U.S. State Department’s Bureau of International Narcotics and Law Enforcement Affairs said annual estimates of trade-based money laundering reached into the hundreds of billions of dollars.
For example: As a center for world commerce, South Florida offers abundant opportunities for trade-related money laundering. Last year international trade in the Miami Customs District, which includes airports and seaports along the coast from Fort Pierce to Key West, reached an all-time high of $90.2 billion with exports of $54.9 billion and imports of $35.3 billion.
CHEATING ON INVOICES
Here’s how it would be easy to launder $1 million in cash quickly and move it out of the country: I’d buy 200 Rolex watches in Miami [at about $5,000 each] and export them to my partner in Colombia, charging $5 each on the invoice. My partner there pays me $1,000 for the shipment, sells the watches at the market rate in Colombia and we’ve laundered $1 million.
I’ve heard about Corvettes being bought in Miami for $40,000 in cash and sent to Latin America, invoiced for $500. The cars are then sold for $50,000 or more, thus making a profit while laundering money.
The over-valuation method works like this: Let’s say my partner in Latin America spends $1,000 to buy 10,000 pencils at 10 cents each and ships them to me in Miami. The invoice says the pencils are worth $100 each, and I pay my partner $1 million. That way, I’m able to move $1 million out of the country in one operation.
The same thing can happen with international services, such as marketing surveys, accounting and legal services and concert promotions. For example, a company in Venezuela may offer an advertising and marketing plan to a client in Miami for $2 million, when a plan of this type might cost $50,000. The Miami company writes a check or makes an international funds transfer, and $2 million legitimately leaves the country.
In some cases, companies bill for services that are never delivered. While some of the prices used in these examples may seem unrealistic, it is not illegal to overcharge or undercharge for merchandise or services, unless merchandise mispricing is designed to avoid paying Customs duties. By comparing invoice prices with average world prices, estimates are that $192 billion was moved out of the U.S. in 2005 via undervalued exports and overvalued imports, and $189 billion in 2006.
The IRS and U.S. Customs sometimes find these things, but they don’t have the capability to analyze so much data and so they’re now pressuring the banks to monitor prices. That isn’t to say that they are entirely standing still. To combat trade-related money laundering, U.S. Immigration and Customs Enforcement has set up special operations called “trade transparency units” in Colombia, Brazil, Argentina, Mexico and Paraguay to detect and track money laundering as well as other illegal activities.
In fiscal year 2008, ICE launched more than 3,500 investigations into money laundering and other types of financial crimes, obtained 823 convictions and seized more than $260 million, an 81 percent increase over the previous year.
ICE can spot unusual trade pricing patterns and investigate trade fraud and money laundering through Customs inspections at U.S. ports and its trade transparency units in Latin America. ICE uses average import and export prices to determine if items are grossly overpriced or underpriced, and also checks documentation. Some Latin governments cooperate with U.S. anti-money laundering efforts because they can lose millions of dollars in Customs duties on mispriced merchandise. If ICE detected something similar to the under-priced Rolex watches, the agency could ask an exporter to prove that the watches were purchased for $5 each or investigate where an importer here obtained large sums of money to pay for overpriced merchandise.
But teasing out trade-related laundering is difficult because of the sheer volume of commerce. It’s a game of numbers. What better place to hide illegal money than in trade because it accounts for hundreds of billions of dollars a year? And trade is just one of many conduits for cleaning up dirty money. Money laundering always invents new channels. When it’s blocked in one direction, it cuts a new stream, like water. As long as American demand for illicit drugs continues, there will be a lot of incentive for money laundering and a lot of incentive to produce imaginative ways to move the profits of that trade.”
OTHER CLEVER TRICKS
Launders may funnel money through layers of supposedly legitimate businesses, invest in real estate and art, use foreign exchange dealers/brokers and move money across borders via stored value cards such as pre-paid gift cards, internet payments and online gaming.
Or they may turn to more rudimentary methods, simply smuggling large volumes of cash out of the United States into other countries where anti-money laundering laws and rules are lax.
That’s the route many drug dealers seem to prefer, and drug money often gets most of the media attention, usually when agents seize piles of cash.
Consider though, the government admits it finds only a tiny percentage of drug money. Americans spend approximately $65 billion per year on illegal drugs, according to the Office of National Drug Control Policy, but U.S. seizures by all federal agencies typically total only about $1 billion.
At the end of the day, money laundering efforts are like anti-drug trafficking measures. There’s only so much money around to hire police and build infrastructure. You can slow down money laundering, but you’ll never be able to stamp it out.