The attacks in Paris and subsequent events have horrified any right-minded person. The slaughter of innocent civilians sickened the world and the outpouring of support for the city of Paris; the country of France and the French people has been universal. One of the things that I thought about in the aftermath is the intersection of corruption and terrorism. The EU open border policy and its banks notoriously lax money laundering regimes and enforcement could certainly have contributed to some of the underlying factors leading to the attack. I am sure there will be aggressive and robust responses from governments across the globe involving new and beefed up anti-money laundering (AML) laws. This is something the anti-corruption compliance practitioner and all US companies need to prepare for in the days and weeks to come, largely in response to the attacks in Paris.
Most anti-corruption compliance practitioner and most US companies do not focus on AML compliance or corporate AML controls. However, the bad guys think about how to move money around from their ill-gotten gains quite a bit, using the most innocuous types of business. In an article Los Angeles Times (LAT), entitled “Cartels use legitimate trade to launder money, US and Mexico say”, reporters Tracy Wilkinson and Ken Ellingwood described a process whereby teams of money launderers working for cartels use dollars to purchase a commodity from the US and then export the commodity to Mexico or Colombia. A key is that “Paperwork is generated that gives a patina of propriety” which means that drug money is given the appearance of legitimate proceeds from a legitimate commercial transaction. An Immigration and Customs official interviewed said, “It’s such a great scheme. You could hide dirty money in so much legitimate business, and they do. You can audit their books all day long and all you see is goods being imported and exported.” Another scheme involved several executives of Angel Toy Company, who conspired with Mexican drug cartels to launder drug money through a scheme to purchase Teddy Bears (of all things), for shipment back to and for resale in Mexico. The plan was straightforward, just under $10K of cash for each shipment of Teddy Bears, which were then resold in Mexico.
The key is that the commodities being purchased are so mild that large bulk purchases will rarely, if ever, draw any official scrutiny. The goods purchased can be red tomatoes or bolts of cotton fabric. In either case, the commodity itself does not matter, as the simple fact of purchasing in the US, shipping into, and reselling in Mexico allows the drug cartels to “transfer earnings back home to pay bills and buy new drug supplies while converting dollars to pesos in a transaction relatively easy to explain to authorities.”
However, now money launderers use even more sophisticated tactics such as “overvaluing and undervaluing invoices and customs declarations.” There is even a new term “trade-based money-laundering” used to denominate the schemes. It was reported that in another operation, which was estimated to launder over $1MM every three weeks, money launderers were exporting from the US to Mexico polypropylene pellets that are used to make plastic. However, the money launderers inflated the value declared on the high-volume shipments and this eventually attracted suspicion of US bank investigators, “who shut down the export operation by discontinuing letters of credit that the suspected launderers were using.” One official noted, “You generate all this paperwork on both sides of the border showing that the product you’re importing has this much value on it, when in reality you paid less for it. Now you’ve got paper earnings of a million dollar and the million dollars in my bank account – it’s legitimate. It came from this here, see?”
Transactional based due diligence and internal controls are mandatory components of Foreign Corrupt Practices Act (FCPA) minimum best practices compliance program. In addition to due diligence on agents, distributors or others in the sales distribution chain, companies need to perform due diligence on those to whom they sell. If someone from Mexico suddenly comes to your business and wants to buy widgets with cash, this needs to send up a huge Red Flag.
Banks and financial institutions have led the way in fighting money laundering through their robust AML controls. Below I have listed some AML Red Flags that you can begin to use now:
- Legitimacy of the party and/or assets are undeterminable through due diligence or independent verification;
- The party proffers false, misleading or substantially incorrect information and documentation;
- The party suggests transactions involving cash or insists on dealing only in cash equivalents;
- The party refuses to disclose or to provide documentation concerning identity, nature of business, or nature and source of assets;
- The party refuses to identify a principal or beneficial owner;
- The party appears to be acting as an agent for an undisclosed principal or beneficial owner, but is reluctant to provide information, or is otherwise evasive, regarding the identity of the principal or beneficial owner;
- The party is a shell company and refuses to disclose the identity of the party’s beneficial owner;
- The party has assets that are well beyond its known income or resources;
- The party requests that funds be transferred to an unrelated third party and is unable to provide sufficient legitimate and independently verifiable justification for such request;
- The party requests a wire transfer to a jurisdiction other than the one in which the party is located and is unable to provide sufficient legitimate and independently verifiable justification for such request, particularly if located in an “offshore” bank secrecy or tax haven;
- The party engages in transactions that appear to have been structured so as to avoid government reporting requirements, especially if the cash or monetary instruments are in an amount just below reporting or recording thresholds;
- The party exhibits unusual concern about compliance with government reporting requirements;
- The party exhibits a lack of concern regarding risks or other transaction costs;
- The party wishes to engage in a transaction that lacks business sense, economic substance or apparent investment strategy;
- The party lacks general knowledge of its industry or lacks adequate facilities or qualified staff to perform the required tasks or work;
- The party requests that a transaction be processed in a manner that circumvents procedures or avoids documentation requirements;
- The party is included on list of Specially Designated Nationals, or similar lists maintained by the U.S. Government and the United Nations, or is associated with such individuals and entities;
- The party is located or has accounts or financial dealings in countries either identified as being non-cooperative with international efforts against money laundering by the Financial Action Task Force, or against whom the U.S. Treasury Department has issued an advisory;
- The party, or any person associated with the party, is or has been the subject of any formal or informal allegations (including in the reputable media) regarding possible criminal, civil or regulatory violations or infractions; and
- The independent due diligence conducted uncovers allegations that raise concerns regarding the party’s integrity.
Obviously there is a large overlap with anti-corruption due diligence and red flags. While most anti-corruption compliance practitioners understand the basic concepts behind KnowYourCustomer programs, including due diligence and policies and procedures, most of corporate America is quite far behind banks and financial institutions in the sophistication around detecting, investigating and reporting suspicious transactions. I think companies will need to take a look at the steps they place around AML compliance and the sooner the better.
This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at email@example.com.
© Thomas R. Fox, 2015