LEGAL
The 2015 FIFA scandal demonstrates just how far and wide money laundering now reaches, as all of the allegations incorporate elements of money laundering.1 The international body driving anti-money laundering (AML) laws and regulations, the Financial Action Task Force (FATF), has been in place more than a quarter century, and there is no doubt many successes have been achieved. Of course, as AML laws and regulations are enhanced, the money launderers evolve and adapt. As a phenomenon, money laundering impacts businesses way beyond banking and financial services.
Of course, as AML laws and regulations are enhanced, the money launderers evolve and adapt. As a phenomenon, money laundering impacts businesses way beyond banking and financial services. Consequently, business people need to know how and why they may be vulnerable to potential exploitation and abuse by those seeking to launder money, in particular international organized crime groups.
Thus, it is necessary for big businesses in particular to identify where they may fit into the big money laundering picture.
Those corporate entities operating outside of the traditional regulated sector are now within the scope of the launderers and by extension the authorities pursuing the launderers. Launderers are limited by two primary factors, their imagination and the controls imposed by others. Thus, the increasing effectiveness of the controls within financial services is making it more difficult for launderers to achieve their objectives. As a result, launderers are seeking to identify new opportunities and new laundering methods. This is where the corporate comes in, because the corporate ordinarily has weaker controls or perhaps no controls at all.
Nowhere is this highlighted more clearly than Miami, which has long been targeted by parties seeking to launder the proceeds of drug trafficking, often with the aim of repatriating funds to Mexico, Colombia, and Bolivia. The U.S. authorities have applied huge penalties to banks for failing to implement adequate controls to prevent the laundering of the proceeds of drug trafficking. As a consequence, banks have improved their controls, causing criminals to look for alternative laundering methods and service providers (inadvertent or otherwise).
In April of 2015, the U.S. authorities imposed restrictions upon corporate entities selling and exporting mobile telephones and other consumer electronics. By way of a legal order, some 700+ corporate entities were required to report any transactions that involved sums of cash greater than $3,000. The small piece in the big picture is the high-value, low-volume commodity, which in this instance is primarily the mobile telephone, but undoubtedly extends to watches (including the iWatches and of course Swiss watches) and other high-value consumer goods.
To better understand how and where corporate entities fit into laundering, it is helpful to replace the word “money” with the word “value.” When corporate entities sell goods and services, the sale is for value. Whereas, the launderer is seeking to exchange cash for value in one country and subsequently, the value for cash in another country.
For some time, banks and other regulated businesses have been monitoring for value laundering, through which launderers seek to acquire the high-value, but not always low-volume goods. There have been instances of banks and law firms being used to acquire aircraft, boats, real estate, an oil rig, and other vehicles. Thus, the senior managers of corporate entities need to have an understanding of their normal business activity; how they sell value; where they sell value; average quantities sold; and the profile of an average customer.
Often the best ways to counter the launderer’s imagination is to think logically and imagine how we would undertake the purchase of the goods a business sells. This thinking equips people to challenge the unusual and the suspicious, and in doing so they will likely prevent value laundering. In the event a customer seeks to pay with cash, an employee should ask him/herself the question, “Would I do the same? Would I feel comfortable carrying large sums of cash or would I feel vulnerable?” Essentially this is all about risk: In the event a customer takes big risks with cash, we should ask what other risks are they taking and, in the value supply chain, what risk are they exposing the corporate business to?
If a person can run the risk of losing a large quantity of cash, by way of mishap, robbery, or otherwise, what other risks do they run? Do they really care where the money comes from? Many drug traffickers in Mexico and Colombia sell U.S.D and €uros to businesses seeking to import goods. Thus, the legitimate businesses use the value of illegitimate cash to buy the goods their businesses rely upon and trade in.
Cash is a commodity with exceptionally high risk, and many corporate entities are limited in the quantity of cash they are permitted to handle within the terms of their business insurance policies. Of course, cash is but one method of payment. The employees of corporate entities should also challenge payments made for goods and services by third parties who are not actually customers. The potential risks increase significantly when such payments originate from an unconnected country or from multiple third parties.
Previously, Latin American drug traffickers have used a black market exchange to sell reduced-price foreign currency to local brokers for local pesos. The foreign currency is then sold to local companies operating internationally and importing goods from other countries/jurisdictions, such as the U.S. and EU. The challenge being, the U.S.D and €uros are held within multiple accounts in different banks, which leads to corporate entities receiving payments from a number of different parties, none of which are customers.
Payments can also be made by multiple cheques. Some launderers actually trade in cheques, which have been used to pay debts to third parties who have insisted the payee details not be applied to the cheque. This creates an instrument of value that can be sold to third parties. Essentially the cheque changes to a bearer2 form, often with a very high value.
In other instances, launderers seek to overpay for goods, once again using cheques, and request that the difference between the purchase price of the goods and the value represented by the cheque be paid back in cash. The incentive for the corporate entity is the sale of the goods. It is the unusual nature of the proposed transaction that carries significant risk. In such a scenario, an employee would do well to pause and reflect, “Would he/she pay for the goods in such a way?” Given the answer will likely be no, such transactions should be rejected.
The new frontier for AML is tax evasion. In the wake of the global financial crisis (GFC), many governments are broke and are therefore hunting unpaid taxes, nationally and internationally. The impact of this change of focus is an increased demand for alternative, nonbank money laundering services, high-value goods, and obscurity.
This particularly applies to businesses operating internationally. A good way of demonstrating how this impacts corporate entities is to consider the trade of high-value watches. While many retailers of high-value watches are regulated, manufacturers and international wholesalers are not, and as a consequence, opportunities and vulnerabilities arise.
In 2011, a major Swiss-based jeweler sold a watch with a value of $25 million. Cluttered with jewels and diamonds, the watch fits as neatly upon a wrist as any other watch, albeit it has absolutely no obscurity. For sure the watch holds value and travels easily, characteristics that are attractive to a launderer.
As business people, launderers are impacted by market trends, logistical challenges, and threats to their business, be they commercial or legal. As a result, launderers are responsive, dynamic, and often innovative. Presently, the border between America and Mexico presents increasing numbers of obstacles and hurdles that the launderers and traffickers need to carefully navigate. The risks of being caught have increased substantially, in line with the increasing number of law enforcement resources being allocated to the border. This has led to the traffickers and launderers seeking out new, safer routes for the drugs and laundered proceeds.
Such routes now include West Africa, where the U.S. Drug Enforcement Agency (DEA) arrested senior figures in Guinea Bissau, including the head of the country’s navy who, having been charged with drug trafficking, is now awaiting trial in New York. The Sinaloa Cartel has established there are significant opportunities within West African countries and communities. One commentator proposed Guinea Bissau was now a satellite state of the Cartel.
The impacts of these diversifications include increased money laundering risks for banks and corporate entities operating in West Africa; such risks can be transferred through supply chains, including correspondent banking. Thus, while money laundering is on the move, some of the moves are circular and ultimately take the money/assets to the same place, but via a different vehicle, product, or route.
All of these changes need to be carefully considered by the senior managers of both regulated financial service businesses and unregulated corporate entities. While the AML laws and regulations may not fully apply to some entities, this does not present some form of immunity from law, likewise it does not stop an individual reporting any suspicion to law enforcement agencies. Those persons showing disregard for the origin of funds or assets will more likely be exploited by launderers and thereafter interviewed or prosecuted by law enforcement agencies.
Actions and inaction send messages, so be careful to ensure your business is sending the right message to all parties. Money launderers are seeking new homes and new opportunities; are they looking for you?
1It has been alleged former FIFA Vice President Jack Warner laundered $5 million in a supermarket.
2Owned by the party holding the cheque.
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