by Julie DiMauro on July 13, 2012
There are untold numbers of money laundering schemes involving legitimate businesses. Legal businesses, especially those involved in trade based transactions, have played a much bigger role in the cleaning of illicit funds than most people realize.
Money laundering is a process that begins with “placement,” usually involves layering and often winds up including the integration of funds into the “legitimate” economy. Sophisticated money laundering is carried out typically by a loose-knit group of people with varying resources. It is multifaceted and more complex than an otherwise two-dimensional approach carried out by just one method. It’s not typical that one person or resource can, in any sustained manner, entirely complete the money laundering process without detection. Legitimate businesses may participate with banks (wittingly or unwittingly) to complete a series of transactions to launder illicit funds.
1. The purchase of goods from legitimate businesses inside free trade zones is a common method of laundering large amounts of illicit funds.
It is an extraordinarily popular technique; it not only enables the disposal of illicit cash, but offers a legitimate-appearing source of revenue to organizations when purchased goods are sold. In those zones, representatives of organizations tender large amounts of bulk cash, wire transfers, third-party checks, cashier’s checks, money orders and traveler’s checks to businesses that offer the bulk sales of goods manufactured all over the world.
These forms of payment are accepted readily and labeled “normal” in free trade zones. The major free trade zones operating around the globe are often situated inside haven countries with limited or ineffective transaction reporting. Dubai is a prime example of the type of free zone that is attractive to those with illicit funds. My anti-money laundering (AML) contacts tell me that it is amazing to them that some sources suggest trade-based transactions in Dubai are an emerging money-laundering technique. The truth is that it has been used by crooks to clean dirty money for decades.
2. Another popular money-laundering scheme involves the exploitation of the legitimate export companies operating in many countries, such as Colombia.
Colombian export companies offer a unique opportunity for individuals in South America who own illicit funds abroad and want to repatriate dirty money to their countries. The laundering of funds through export companies based outside the United States can best be illustrated with a hypothetical example.
Let’s say that “export company A” in Colombia sells $150m worth of coffee to Starbucks in the United States every year. At the time of exportation, export company A receives a “document of exportation” documenting that $150m worth of coffee was sent to various U.S. ports on behalf of Starbucks. With that document of exportation, export company A can coordinate with its local bank and the Bank of the Republic in Colombia to take advantage of special high exchange rates given to exporters, thus enabling the $150m to end up in Colombia.
Here’s how it works: The U.S.-based buyer sends wire transfers to a U.S.-based correspondent bank, for credit to the account of the Colombian bank in the United States, and for further credit to their foreign branch in Colombia. In some instances, notation is also made that the wire is intended for further credit to export company A. Within 30 days, those funds are converted to Colombian pesos and credited to the account of export company A in Colombia. What the rest of the world doesn’t know is that export company A left much of their U.S. dollar revenue outside of Colombia, because it had no interest in repatriating all $150m. Some of the money might be kept out of Colombia because of concerns about local inflationary rates, or because some of the $150m was needed for other types of US-dollar transactions carried out by export company A.
Hypothetically, let’s say that $30m of the $150m was not repatriated. What often happens is that trafficking organizations pay export company A an under-the-table fee (usually an amount equal to two percent to five percent of the illicit funds moved) to transfer $30m of narco-dollars from the United States to Colombia, under the guise that it came from the sale of coffee. This process creates a legitimate appearance for the $30m that crossed the borders of the United States to Colombia.
3. Large volumes of manufactured goods in the United States are also purchased with illicit dollars converted to third-party checks, cashier’s checks, money orders and traveler’s checks.
These funds are tendered routinely to US companies with Latin American divisions that market products in Latin America. Poultry, cigarettes, aircraft and even global greeting card companies receive these funds, usually through a lock-box arrangement with their local U.S. bank, and often fail to file the 8300 forms disclosing their receipt of these funds. An AML expert with whom I spoke told me that he has spoken to credit managers around the United States who collect debt from Latin American buyers purchasing container loads of U.S.-produced goods. They have reported to him that hundreds of thousands of dollars’ worth of payments from Latin American companies are received most often in the form of third-party cashier’s checks, money orders and traveler’s checks in increments under $10,000.
Compliance and AML officers need more support when these types of situations arise. They should be given a means by which – when the circumstances warrant it – they have the time and resources to come to a fair risk assessment and evaluate “the big picture,” and not just the snapshot transaction of the moment. If many compliance officers don’t have that opportunity, they need to escalate the matter up the line to those with the authority to give them this access and ability to maintain an effective an up-to-date AML program.
Want a daily digest of articles like this one, plus the latest compliance jobs at top-tier organizations? Join 50,000 other compliance, risk governance, and regulatory professionals and subscribe to our free afternoon newsletter. Where do you find news, style, and career all in one place? The Executive Gateway, our new lifestyle magazine.
Julie DiMauro reports on financial services regulatory compliance issues for Thomson Reuters.