Data collection could be key to battling trade-based money laundering

When you consider the problem of money laundering, you may not think much about licorice. But in the world of trade-based money laundering that candy-worthy flavoring has been at the center of nearly $100 million in financial fraud over the years.

It isn’t that licorice itself is a cornerstone of financing terrorism, but that nearly any product can be problematic. Other imports and exports that may be funding terror range from the expected (gold, jewelry) and the less considered (Freon, chicken, watermelons, and garlic).

The issue of trade-based money laundering, and how imports and exports can shield illicit financial transactions, was the subject of a hearing held on Feb. 3 by the House Financial Services Committee.

An anecdote shared at the hearing by John Cassara, a former U.S. Intelligence Officer and special agent for the Treasury Department, illustrated the problem.

“Not long after the September 11 attacks, I had a conversation with a Pakistani entrepreneur,” he said. “This businessman could charitably be described as being involved in international grey markets and illicit finance. We discussed trade-based money laundering, terror finance, value transfer, fictitious invoicing, and counter-valuation. At the end of the discussion, he looked at me and said, ‘Mr. John, don’t you know that your adversaries are transferring money and value right under your noses? But the West doesn’t see it. Your enemies are laughing at you.’ it is because the subterfuges are ‘hiding in plain sight.’”

Trade-based money laundering is the process of disguising the proceeds of crime and moving value through the use of trade transactions that attempt to legitimize their illicit origins. Among the techniques: over-and-under invoicing of goods and services; multiple invoicing; falsely described goods and services; short shipping (shipping fewer goods than the invoiced quantity, misrepresenting the true value of the goods in the documentation); over-shipping; and phantom shipping (where no goods are actually shipped).

“By systematically cracking down on various forms of customs fraud, hundreds of billions in dollars of lost revenue can be returned to cash-starved governments around the world.”
John Cassara, Former U.S. Intelligence Officer

“There are no official estimates on the magnitude of TBML as a whole,” Cassara said, calling that data lapse “remarkable.” He sees some optimism in that trade transparency could be viewed as a revenue enhancer. 

“By systematically cracking down on various forms of customs fraud, hundreds of billions in dollars of lost revenue can be returned to cash-starved governments around the world,” he said. “When I explain to the officials [around the world] how much revenue they can obtain by cracking down on customs fraud they become very interested. The carrot of empowering our partners to strive for trade transparency and increased revenue can be much more effective than the stick of heavy-handed measures that have proved unsuccessful.”

Another suggestion is to leverage the Trans-Pacific Partnership, recently signed by the Obama Administration. Setting aside the pros and cons of the TPP, the volume of increased trade will provide additional opportunities for trade-based value transfer and money laundering, Cassara said. He suggests that, as a response, every TPP signatory country establish a Trade Transparency Unit (TTU) to share targeted trade data needed to spot anomalies that could be indicative of trade fraud or trade-based money laundering.

Strategically, “the misuse of trade is a law enforcement issue, not just a customs issue.” With expanded TTUs, there could be more sharing of targeted trade data with local and federal law enforcement agencies.

Trade is not only a critical support system for numerous terror groups, but also the weakest link in the anti-money laundering infrastructure, frets Nikos Passas, professor of criminology and criminal justice at Northeastern University. “There has been no systematic review or consistent action with respect to trade, which constitutes the biggest security and crime vulnerability, a black hole undermining the entire control framework,” he said. “Even if all current rules were ever to be fully and consistently enforced throughout the world, billions of dollars could still be moved illicitly without detection and sanction.”

TRADE-BASED MONEY LAUNDERING EXAMPLES

The following examples of trade-based money laundering were in a committee memorandum prepared by the House Financial Services Committee.
Toys-for-Drugs BMPE Scheme
In a Black Market Peso Exchange scheme involving a Los Angeles-based toy wholesaler, Woody Toys, its owners received millions of dollars in cash payments generated from Colombian and Mexican narcotics trafficking.
The cash payments reportedly were placed directly into the company’s bank account from multiple locations in small deposits that were consistently under $10,000 to avoid reporting requirement (i.e., structuring). The toy company used the cash deposits to purchase toys from China, which, in turn, were exported to Colombia.
The Colombia pesos generated by the toy sales in Colombia were used to reimburse the Colombian drug traffickers through the BMPE. Some of the employees of Woody Toys had previously worked for Angel Toy Company, whose owners had also been implicated in a similar toys-for-drugs BMPE scheme. The law enforcement investigation into this case benefitted from an information sharing arrangement between the United States and Colombia on trade data through the Trade Transparency Units (TTUs) established in both countries.
Trade Finance and Hawala Networks
According to the Asia/Pacific Group on Money Laundering (APG), a Financial Action Task Force-style regional body, a scheme to launder funds derived from multiple major international drug traffickers involved cash couriers, money transfer services, alternate value transfer systems (e.g., hawala), and formal mechanisms of trade finance, managed and directed by an Indian national living in Dubai. The individual involved operated numerous businesses in Dubai as well as numerous affiliates in Europe, Asia, Africa, and the United States.
In Dubai, the individual opened letters of credit through his various companies for various importers, also located in Dubai. These LCs were opened to benefit various affiliated exporters located in India and in other locations and were in amounts that were substantially higher than the market value of the exports.
In opening the LCs, the individual used his businesses connections with certain issuing banks and certain advising banks to transmit the LCs to the affiliated exporters in India. The individual also arranged for trade documents to be prepared that reflected the inflated value of the exports in order to make them acceptable to the issuing and advising banks.
Next, the LCs, with inflated export values, along with funds received from drug trafficking, were remitted to the exporters in India, essentially moving money through the financial system in the guise of trade financing. Once in India, the exporters distributed the drug proceeds to the various affiliates and sold the exports at market value.
Source: House Financial Services Committee

Passas’ diagnosis for what ails these AML efforts is that relevant information collected by U.S. Customs, FinCEN, the Department of Commerce, port authorities, and their counterparts in other countries, is not compiled in one place for consolidated analysis at the national and international level. Other helpful data resides in banks, insurance companies, brokers, shippers, and logistics companies. “No one is getting the full picture because no one collects all of the information in one place,” he says.

Also, “a good deal of compliance work has become an automated tick-the box exercise that yields millions of Suspicious Activity Reports and massive false positives,” Passas said. “These in turn tend to waste the time of personnel that must deal with them, rather than centering on the highest risks, analytical work for typologies or new algorithms, the identification of offenders and closer collaboration with controllers.”

Another problem: Financial institutions can only review data about their clients and have no way of accessing either government or other banks’ clients and analysis, which leads to costly duplication of work and an incomplete view of the problem, Passas said.

What are other steps the government should consider? To start, ensuring that all government data is gathered and analyzed in one place that can liaise also with law enforcement agencies for swift action, Passas says. Also, bringing all available private-sector trade data and open source data together through a trusted third party, such as a university, that can develop a system to receive, securely store, and analyze them in a consolidated way.

Passas also advocates a hearty embrace of open-source data, which he says is underestimated and underutilized. “Reviewing and working only with classified and private data excludes information on the internet, in the press, public reports, and research literature from NGOs and academics,” he said. “This is all particularly relevant to the analysis of illicit networks, identification of true beneficial ownership, adverse media news in local or foreign publications, terrorism finance, sanctions violations, corruption, illicit enrichment, and other issues of interest to those in charge of due diligence and investigative tasks.”

Lou Bock, a former criminal investigator at the Drug Enforcement Agency and U.S Customs, also addressed the importance of Trade Transparency Units. “Unfortunately, today's TTU initiative has been largely ineffective in terms of revenue collection or in targeting major patterns of fraud or obtaining significant convictions,” he said. “The TTU [model] has veered from its initial financial and customs focus, in part because of the culture of the agency in which it is administered, [the Department of Homeland Security].”

His recommendation is for the creation of a reinvigorated U.S. TTU with FinCEN oversight. “Giving FinCEN this focus immediately, and full access to the necessary trade data, is the obvious right step whatever the eventual status of the TTU initiative within the Department of Homeland Security,” he said. “Let's return to our earlier vision, focus, and effectiveness, built on a rapidly increasing number of TTUs.”

“There have been countries around the world that want to create TTUs,” he added. “I still think that’s feasible and the next frontier in international money laundering enforcement. We cannot continue the status quo. We are just treading water, and we need to get to the next level. Its certainly attainable. We just have to have the will to do it.”

Efforts need to be empowered by a commitment to enforcement, Bock added. “The biggest problem I have seen with both U.S. Customs and DHS was that once you found something, you had difficulty bringing it to the people who are interested in making cases.” For the authorities out in the field, “it was easier to pursue small quantities of dope or illegal aliens.” That mindset, he said, must be changed.