On Anti-Money Laundering

22 Mar

I’m an equal opportunity blogger.  So when I read on the Wall Street Journal’s Corruption Currents Blog about a new anti-money laundering initiative, I just had to pass along the word.  I’m not all about FCPA.  I have other interests too.

Jennifer Shasky, chief of the Asset Forfeiture and Money Laundering Section (you’d think that’d be “anti-money laundering,” but it’s a common error), said that she wants the unit to go after the “gatekeepers” to money laundering.  These are lawyers, accountants, bankers, etc.  People who help the bad guys disguise where their money is coming from and where it’s going.

People hear the term “money laundering,” but don’t necessarily understand what it means.  Let me give you one example of money laundering: the black market peso exchange.

Here’s the problem: drug selling generates lots of cash, in the local currency where the drugs are sold.  For example, a Columbian kingpin has distribution networks in the US, Germany, and France.  Those businesses generate lots of dollars, marks, and francs.  Back in Columbia, the drug dealers want stuff: cars, houses, etc.  These things cost money.  But the money is in the US, Germany, and France.  In the old days, the kingpins would have the money deposited in a US bank and then wired to Columbia.  They could then buy the cars and houses etc.  Dealers would physically transport the cash to a bank.  That method, the physical carting of large amounts of cash, still continues, either to Columbia, or to other banking hotspots like the Cayman Islands.  But modern banking rules, like forced disclosure of transactions over $10,000, put a cramp in that channel, however.

So on the whole, it was much more difficult to get the cash.  Now comes the peso brokers.  Peso brokers existed in Columbia for a long time because of strict money-transfer rules.  The government wanted a cut, “import tariffs” on goods bought with US dollars; if you tried to exchange pesos for dollars, the government would ask you all sorts of questions.  Peso brokers acted as money changers at better rates than the government offered, with no questions about whether the purchased goods had their import tariffs paid.

Here’s the system: the kingpins “sell” their US dollars to the peso broker.  The drug dealer is now out of the equation.  But the broker is now left with tons—literally, the cash weighs tons—of cash.  The broker needs to get that money into a US bank.  See below for placement methods.  Once the dollars are in a bank, the peso broker now needed businesses, legitimate businesses, who wanted US goods for Columbian markets.  The “legitimate” business in Columbia would place an order for 1,000 washing machines from a US company.   The peso broker pays for the washing machines using the drug kingpin’s dollars.  The goods get smuggled into Columbia via South America or Europe.  The Columbian “legitimate” business would get the washing machines.  And everyone is happy: the drug kingpin gets pesos, the Columbian “legitimate” business gets the washing machines without paying the import tariff, the US companies get paid in US dollars from a US bank, and the peso broker gets a cut.  In addition to washing machines, common US exports purchased through this system include other household appliances, consumer electronics, liquor, cigarettes, used auto parts, and footwear, among others.

Red flags for the exchange include

  • Third-party payments for goods or services made by an intermediary unrelated to the seller or buyer
  • A customer’s inability to produce appropriate documentation, like invoices, to justify the transaction
  • Discrepancies between the bill of lading, the invoice, and other documents.
  • A lack of interest in price discounts

[Do these sound familiar?…this stuff isn’t totally divorced from FCPA compliance, after all].

Placement

How would the peso brokers get the cash into the banking system?  That’s called, in anti-money laundering parlance, “placement.”  How would that get done?

  1. Smurfing.  It was disturbing to me having the name of a cultural icon of my youth being used to describe illegal financial activity, but I got over it.  Smurfing is having lots of people deposit small amounts into a bank account.  Ever had an email telling you that you can make lots of money if you let someone use your account for wire transfers?  That’s smurfing.  A smurf would deposit $9,000 or so at 10 different banks: poof, $90,000 just got placed.  If you have 10 smurfs, you’ve got almost $1 million. 
  2. Straight up smuggling:
  3. Shipping money abroad.  FedEx, anyone?  Or they’d convert the cash to diamonds, smuggle and sell those abroad, and buy US-denomination bank checques from foreign banks.
  4. Deposit the money in banks.  Some banks don’t have effective compliance programs (or didn’t), so they don’t monitor their transactions well, or don’t look for red flags well. 
  5. Buy life insurance.  And then sell it, or leverage it.
  6. Buying stock.
  7. Buying art.
  8. Anything that puts the money to use, and then allows the purchaser to get their money back.
  9. Lots of other ways that owe themselves to the creativity of money launderers.

Once the money is in the system, lauderers will often send the money on a round-robin so that prosecutors have to “follow the money” a long way.  Wire transfers between banks (sometimes to places with lax banking rules), money order purchases and deposits, false invoices to shell companies getting paid via wire etc.  The harder part is placement; once the money is in the system, it’s easy to move it around. 

What the Department of Justice is doing is going after the enablers.  Those shell companies require legal formalities: go after the lawyers.  The accountant see all kinds of weird financial activity; and the bankers, well, they’re up to their eyeballs in it.  The Department hasn’t had the best records going after the “gatekeepers,” but it’s probably good they’re taking another swing at it.

Advertisements

3 Responses to “On Anti-Money Laundering”

Trackbacks/Pingbacks

  1. Some Red Flags « FCPA Compliance and Ethics Blog - March 23, 2011

    […] his blog posting yesterday entitled ”On Anti-Money Laundering“, our colleague Howard Sklar, discussed a new anti-money laundering initiative from the […]

  2. Some Red Flags - March 23, 2011

    […] his blog posting yesterday entitled "On Anti-Money Laundering", our colleague Howard Sklar, discussed a new anti-money laundering initiative from […]

  3. e-BIM : Upstream Energy Legal Issues » Blog Archive » Some Red Flags - April 1, 2011

    […] his blog posting entitled ”On Anti-Money Laundering“, our colleague Howard Sklar, discussed a new anti-money laundering initiative from the Asset […]

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: