Transcript Money Laundering Typologies in the Securities and Capital

Susan L. Berger
Intermittent Advisor
Office of Technical Assistance
[email protected]
Actual Examples of how money laundering
happens in the securities and capital
markets
Or
Actual Cases brought by Regulators
against securities firms
Stockbroker accepts criminal
funds in cash
Broker continuously accepts cash
deposits from customer
 Deposits range in individual amount
USD 7,000-18,000
 Cash deposited in customer’s sister’s
money market account
 Funds subsequently withdrawn by
checks.

Source: FATF Report on Money
Laundering Typologies 20022003
Stockbroker accepts criminal
funds in cash
Stockbroker arrested on unrelated
charge.
 Following arrest, law enforcement learns
of customer’s identity.
 Customer was a known drug dealer.

Issues?
Know your employee
 Know your customer
 Activity in account consistent with
brokerage account?
 Cash Deposits

Criminal Proceeds Placed in
Financial System Through Margin
Trading
Case involves the theft of USD 384
million over a 10 year period from a
bank in Country A by 4 individuals.
 4 individuals sent the money to Country
B where it was deposited into
approximately 550 bank accounts
opened by 80 companies (all fictitious
companies established for purposes of
opening accounts).

Source: FATF Report on Money
Laundering Typologies 20022003
Criminal Proceeds Placed in the
Financial System Through Margin
Trading
Money in these accounts withdrawn by 4
individuals and used to invest in real
estate and stock market in Country B.
 One of 4 individuals traded very actively
in Country B’s stock markets and had a
huge turnover of stocks in Country B
public companies.

He was known as the largest margin
investor in Country B.
 Stock brokers who handled individual’s
trading never made any disclosures
about customers, or trading activity to
regulators.
 4 individuals charged with criminal
offenses including money laundering.

Issues?
Know Your Customer
 Layering-extraordinary number of
accounts, institutions, etc. Meant to be
confusing!
 Margin trading-considered higher risk?
 Should brokers have seen red flags and
reported?
 Stockbrokers: Willful blindness??
Conflict between profit and reporting??

Fraud Money Invested in
Securities Markets
Brokerage firm opened several accounts
for a group of related individuals,
including a non-resident account.
 The non-resident account was used as a
“conduit” to transfer approximately USD
18 million.
 All accounts received large sums from
countries of concern which were then
invested in listed stocks of public
companies.

Source: FATF Report on Money
Laundering Typologies 20022003
Fraud Money Invested in
Securities Markets
Proceeds of securities transactions
transferred to non-resident account.
 Wired out to regions of concern and
offshore financial centers.


Investigation revealed that brokerage firm
had been used to launder the proceeds of
various frauds.

Red flags in this scenario?
In the Matter of Oppenheimer &
Co.
Oppenheimer: US broker-dealer
 Fined USD 2.8 Million by FinCen (U.S.
FIU)
For FAILING TO HAVE ADEQUATE AML
PROGRAM
 Firm did not have adequate procedures for
filing STRs
 Evident in activities of accounts domiciled
in a foreign branch office and a Florida
branch office.

FinCen 12/29/05
In the Matter of Oppenheimer &
Co.

Numerous wire and journal transfers
between related and unrelated accounts
which lacked related securities
transactions and appeared to lack
economic benefit.
ISSUES?
Oppenheimer fined for failing to have
adequate AML program: NOT for money
laundering.
 Large fine
 Red Flags:
1. Activity not consistent with securities
account
2. Transfers to/from unrelated/related
accounts.

Money Laundered Through Sham
Commodities Trades
Patel, a money launderer based in Dubai,
UAE
o Laundering money for Albanian narcotics
trafficking organization operating in Italy
o Patel and 39 others arrested in Dubai for
ML
 According to records seized, Patel
controlled various entities either directly or
through nominees
o
These entities controlled by Patel
included “Hainke & Anderson Trading”
and “Jayna Trading”
 Patel directed that wire transfers be
made from his controlled entities in
Dubai accounts to 15 separate accounts
controlled by him at Man Financial in
NYC

Activity in Man Financial accounts
“inconsistent with legitimate commercial
activity” but rather with layering
 Patel engaged in sham commodities
trading in which he and his nominees
would always suffer losses and other
entities controlled by him would enjoy
profits
 “Wash” trades having no commercial

justification and resulting in no real
change in trading position for either
party
 Similar to trade based ML
Stock Manipulation Launders
Money and Produces a Profit
Organized crime proceeds used to
purchase 2 listed companies (a stock
brokerage and a small bank) in Country A.
 Purchase funds are transferred to Country
A from a private bank in Caribbean
controlled by organized crime.
 Small investors from different countries
using false names bought stock in
companies, making sure not to trigger
individual disclosure rules.

Stock Manipulation Launders
Source:and
FATFProduces
Report on money
Money
a Profit
laundering typologies 2002-2003



Fictitious shareholder meeting elects new
board of directors (front men for organized
crime)
Company issues USD 42 million public
offering
Disbursed through banks in Country A and
laundered by a series of transfers to foreign
accounts. Circuit repeated to further
obscure origin of funds.
Source: FATF Report on money
laundering typologies 2002-2003
Stock Manipulation Launders
Money and Produces a Profit
Activity simulated foreign investment in
stock
 Price of shares inflated 640% of face
value.
 Stock broker complicity

New York Stock Exchange v. Bear
Stearns
Firm and individuals failed to supervise 10
accounts opened by an individual and
various entities involved in a Russian bank
which was the subject of previously
reported news alleging fraud and other
improprieties.
 Accounts were active for 5 years during
which:
 20 incoming wires totaling in excess of
USD 20 million.
 95 outgoing wires totaling in excess of
USD 18 million.

NYSE Hearing Panel Decision
12/22/05
New York Stock Exchange v.
Bear Stearns

145 journal transfers between 10
accounts totaling USD 15 million.
 Most without any underlying security
transaction
 USD 1.5 million fine
Narcotics Trafficker Takes Control
of Publicly Traded Company
Mr. Drug Dealer buys majority of shares of
ABC Ltd., a public company located in
Country A.
 ABC Ltd. is a speculatively traded, low
priced stock trading over the counter in
Country B.
 Mr. Drug Dealer sells drugs to Mr. Drug
Buyer.
 Instead of paying for drugs, Dealer
instructs Buyer to buy shares of ABC Ltd.
through the stock market.

Because ABC Ltd is so thinly traded,
there were no competing bids for the
shares and the trades cleared through a
clearing firm.
 Result: Dealer received the money and
Buyer received the drugs and stock
shares.
 Cost was a few hundred dollars in
commissions

To Make Things Worse…
This transaction repeated several times
through several countries and brokers.
 Public was lead to believe that there
was actual interest in the stock.
 Stock began to increase in value
because of illusion of activity.
 Mr. Dealer’s and Mr. Buyer’s shares
increased in value.

Buyer had previously opened securities
account in non-cooperative jurisdiction
and instructs his agent to buy shares of
ABC
 Agent contacts broker in Country B and
gives order to purchase shares.
 At the same time, Drug Dealer instructs
his agent in Country C to sell shares of
ABC in the same amount.

Source: FATF Report on Money
Laundering Typologies 20022003
Narcotics Trafficker Takes Control of
a Publicly Traded Company





Generated additional profits.
Dealer was able to legitimize source of
funds as market profit.
Issues?
Thinly traded speculative stock-red flag.
Layers of transactions through foreign
entities
TEODORO OBIANG
CORRUPT FINANCIAL OFFICIAL USES
GAPS IN US LAW AND THE
ASSISTANCE OF US
PROFESSIONALS TO FUNNEL
MILLIONS OF DOLLARS OF ILLICIT
MONEY INTO THE US
Politically Exposed Persons
(PEPS)

Teodoro Nguema Obiang- Equatorial Guinea
Teodoro Obiang
41 Year old Son of President of
Equatorial Guinea
 Cabinet Minister in Equatorial Guinea
 Equatorial Guinea, small and oil rich,
with a population approximately
700,000 of which 70% lives on less than
2 USD per day.

Teodoro Obiang
•
Currently under investigation by US Justice
Dept.
• Between 2004 and 2008, Obiang used US
lawyers, bankers and real estate and
escrow agents to move more than 110
million USD
in suspected funds through US bank
accounts.
• Used funds to buy 30 million USD home in
Malibu, CA and 38.5 million USD to
purchase an aircraft.
How Did He Do It?
Obiang used shell companies, attorneyclient and law office accounts controlled
by his attorneys to bring suspect funds
into the US and conduct transactions
through US banks without their knowing
of his activity , including at banks that
had made it clear they did not want his
business.
US AML WEAKNESS
Under current US law, attorneys, lobbyists,
real estate and escrow agents HAVE NO
OBLIGATION TO ESTABLISH AML
PROGRAMS, KNOW THEIR
CUSTOMERS, OR EVALUATE SOURCE
OF FUNDS TRANSFERRED INTO US.
 IN CERTAIN US STATES, ENTITY CAN
BE ESTABLISHED WITHOUT PROVIDING
BENEFICAL OWNERSHIP INFORMATION

Thank you.
Questions?