Transcript Pan American Congress Money Laundering and Terrorism

Pan American Congress
Money Laundering and Terrorism Financing Risk, July 29-30
Hilton Hotel- Cartagena, Colombia
The Professionalization of Criminal Finance
Trade Based Money Laundering (TBML)
Wayne Blackburn
Money Laundering Defined as
"taking any action with property of
any form which is either wholly or in
part the proceeds of a crime that will
disguise the fact that that property is
the proceeds of a crime or obscure
the beneficial ownership of said
property.“
Definition by wikipedia
Trade Based Money Laundering
– “The process of moving value through the use of
international trade and related business activities
to disguise an illicit products, production,
distribution and subsequent payment. Such
activities are structured to appear to be legitimate
and comply with taxes, duties and international
Trade agreements”
Wayne Blackburn
The financial Institution’s main
functions
• Make a profit for
owners
• To service the business
community
• Expand the GDP of the
country
• Develop the institution
to offer services
internationally
• Grow internationally
Compliance officers challenges:
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Traditional tasks
Define Policy to run a
profitable Institution
Establish KYC programs and
ensure they will meet
international standards
Ensure that the audits of
the institution meet
compliance needs
Train staff to meet company
standards
Developing Tasks
• Establish programs which
prevent the institution from
being used for criminal
activities
• Conform to enhanced
international standards
• flight corruption from inside
and out by developing KYC
• Understand how international
trade agreements effect your
institution
• Develop new professional
contacts
Criminal’s Problem: How to move illicit
products without detection
Illicit product is ready for sale
criminal organizations want
illicit product
How do I avoid detection and sell and pay for my product???
Motive for most crime is Money
•Petty crime is for amateur small
time unorganized criminals
•Professional profitable crime is
developing at a rapid rate
•To effectively develop markets
and sell product undetected the
criminal groups need to become
and use professionals
•Criminal Groups are evolving to
need professional and business
corporations to conduct their
business in an undetected
manner
Shipping Cargo is the corporate method of shipping products
Each shipment needs to follow international rules, regulations and
financial norms
Professional Criminal Organizations
• Must have a corporate
identity which is
defendable
• Must have international
trade corporate legal
advise
• Must have a customs
broker for shipping
products
• Must have professional
accounting advise
• Must have a
Financial institution
to assist their
business in financial
dealings
What do you know about your
professional Clients?
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Businessman Client
Produces a product within
the country
Finds foreign clients
Ships products to clients
Sells product for a profit
Uses FI for business loans
Uses FI to send and receive
funds related to the sale of
products
Professional Criminal Client
• Produces illicit product
• Finds foreign clients
• Ships product to Clients
• Sells product for a profit
• Uses FI appear to give loans
• Uses FI to send and receive
funds related to the sale of
products
How do you conduct
Corporate Due Diligence
How do you conduct your KYC?
Do you leave your office to do your
due Diligence?
Does the company really exist?
Does the office exist?
Do they really make or sell a product?
Does the business make sense ?
Doe they declare their product to
customs?
Do they pay taxes?
Is their product covered by
international trade agreements?
Does your client’s business relationship really exist
What can you do to make sure there really is a client?
Reputation is a value
which a FI can not afford
to lose
Wachovia agreed to pay
$160 million to settle the
court case in exchange for
charges being dropped
US banks laundering money for
Mexican drug war
• Bank of America and Wachovia
are implicated in drug-money
laundering schemes to purchase
jets to smuggle drugs
• Wells Fargo & Co., which bought
Wachovia in 2008, has admitted
in court that its unit failed to
monitor and report suspected
money laundering by narcotics
traffickers -- including the cash
used to buy four planes that
shipped a total of 22 tons of
cocaine
Reputation problems
• “Wachovia’s blatant disregard for our banking laws
gave international cocaine cartels a virtual carte
blanche to finance their operations,” says Jeffrey
Sloman, the federal prosecutor who handled the case.
Not Quick Enough
• The bank didn’t react quickly enough to the
prosecutors’ requests and failed to hire enough
investigators, the U.S. Treasury Department said in
March. After a 22-month investigation, the Justice
Department on March 12 charged Wachovia with
violating the Bank Secrecy Act by failing to run an
effective anti-money-laundering program.
All commercial transactions should be questioned
in a business context
Shipping Cargo moves wealth
Each shipment of cargo moves not only materials but wealth also moves
with each container
Products can be exchanged to allow wealth to be moved
Basic TBML Techniques
• Over and under invoicing
for goods and services
• Over and under shipment of
goods and services
• Multiple invoicing goods
and services
• Falsely described goods and
services
Under Invoicing
• Moving value across borders
• Involvers invoicing the goods or service at a price
below the “Fair Market” price
• Exporter is able to transfer value to the importer, as
the payment for the goods lower than the value of
the goods or services the importer receives when it
is sold in the open market
• It is one of the most common TBML techniques to
move money.
• Most customs focus is on contraband and
collection of duties
• Less focus on export transactions involving under
invoicing
Over Invoicing
• Involves invoicing of the goods or service at a
price above the “fair market” price
• Exporter is able to receive value from the
importer as the payment for the goods and
services are higher than the value that the
importer will receive when it is sold on the open
market
• This technique requires that both the exporter
and importer agree to the arrangement (may be
related or common control)
• No innocent party to the transaction
Abnormal Pricing
• Abnormal pricing is the term economists use to
describe the manipulation of prices for the purpose
of manipulation of prices for the purpose of
moving value in and out of a country undetected
• Over and under invoicing are abnormal pricing
techniques
• TBML involves the use of abnormal pricing for the
purpose of moving value connected with criminal
activity across borders
Abnormal Pricing
• Other reasons fro abnormal pricing
• Lack of knowledge of worldwide prices
• Capital flight (to move capital/investments out of a
country undetected)
• Import Duty Fraud ( to reduce the amount of import
duties paid)
• Income Tax Evasion (to reduce the amount of income
taxes paid)
Multiple Invoicing of Goods and
Services
• Technique involves issuing more than one invoice
for same international trade transactions (results
in multiple payments of the same shipment of
goods)
• Techniques may involve the use of multiple
financial institutions to make the additional
payments
• Unlike over and under invoicing, multiple
invoicing schemes do not require the exporter or
importer to misrepresent the price of the goods
or services
Over under shipment of goods and
services
• Techniques involves the overstatement and
understatement of the quantity of goods
being shipped or services being provided
• Exporter may not ship any goods and instead
collude with an importer to ensure that all
shipping and customs documents associated
with the “phantom Shipment” are processed
• Financial institutions may unknowingly be
involved in the provision of trade financing for
these phantom Shipments
• ML are known to operate
single vessels or fleets to
generate funds
• Vessels are owned by front
companies
• Vessels transport mainly
legitimate goods and also
used for illegal shipments of
arms, narcotics, humans etc
• Tracking vessels is difficult
because identities can be
changed easily
• Vessels and parties to the
transactions must be
checked
Transportation of questionable cargo
Objectives Customs
• Imports and exports are efficiently reported,
validated, processed, released and removed
from Customs control within a timeframe
consistent with international best practice
• Imports and exports are subjected to effective
checking/verification arrangements that are
appropriate to the circumstances and needs of
the particular country
Customs Best Practice
• For imports, agents/importers should, as far as
practicable, electronically notify Customs of the
impending import as soon as practicable after the
goods are purchased and/or documents become
available.
• Checking, verifying and/or risk assessing of the
documents should be completed before the
goods arrive.
• Checking, verifying and/or risk assessing of the
goods (i.e. consignments), should be performed
as soon as practicable after the goods arrive
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Import Process
Importer orders goods
Exporter sends pro forma invoice
Importer notifies Customs of intention to import
Importer arranges finance (letter of credit)
Letter of Credit sent to exporter by Issuing Bank
Exporter packages goods and arranges shipping
including Bill of Lading in favour of importer
• Goods shipped
• Exporter sends final invoice, bill of lading and
packing list to importer
Import Process (cont)
• Funds released to correspondent bank subject to
letter of credit conditions
• Importer lodges final documents with Service
Provider
• Service Provider issues documents including HS
Code, value and Risk Assessment
• Goods arrive
• Importer lodges Declaration to Customs and pays
duty and taxes
• Customs determine level of intervention
• Goods released to importer
Bill of Lading
Harmonised System Tariff
(HS Tariff)
• One structure across world
• Used to describe any product being consigned
• Hierarchical Structure
– Section
– Chapter
– Headings
– Sub Headings
Example
• Section XI - Textiles and Textile Articles
• Chapter 63 Other made up textile articles; sets; worn clothing and worn
textile articles; rags
– 63.06
Tarpaulins, awnings and sunblinds; tents; sails for boats,
sailboards
– 63.07
Other made up articles, including dress patterns:
– 63.09
Worn clothing and other worn articles
Letter of Credit (LOC) Definition
• A payment undertaking given by a bank
(issuing bank)
• On behalf of a buyer (applicant)
• To pay a seller (beneficiary) for a given
amount of money
• On presentation of specified documents
representing the supply of goods
• Within specified time limits
Trade Based Money Laundering
Wayne Blackburn
TRADE PROCESS WITH LOC
$
Advising Bank
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$
Confirming Bank
Issuing Bank
Goods
Supplier
Importer
Funds
Trade Based Money Laundering
Wayne Blackburn
Role Private Stakeholders and
Compliance officers
• Financial Institutions
• Shipping and handling agents
• Importers/Exporters
• Money transmitters/couriers
Trade Based Money Laundering
Wayne Blackburn
Role Public Stakeholders and
Compliance Officers
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Customs Agencies
Financial Intelligence Unit
Tax Authorities
Law enforcement agencies
Banking supervisors
Trade Transparency Units
Port Authorities
Trade Based Money Laundering
Wayne Blackburn
Red Flags
• The shipment does not make
economic sense
• The transaction involves the
receipt of cash or other
payments form a third party
entities that have no apparent
connection with the
transaction
• The transaction involves the
use of repeatedly amended or
frequently extended LoC
• The transaction involves the
use of front or shell companies
• Customers are conducting
business in high risk
jurisdictions
• Customers are shipping items
through high risk jurisdictions
including transit through noncooperative countries
• Customers are involved in
potentially high risk activities
(e.g. drugs, weapons,
chemicals etc)
Red Flags
• Customers are involved in
obvious over and under
invoicing of goods or
services
• Customers and/or issuing
banks submit excessively
amended LoC without
reasonable justification
• Transactions are evidently
designed to evade legal
restrictions including
evasion of necessary
government licensing
requirements
• Letters of credit with one of
more of the following
missing:
• Name and address of
Applicant or Beneficiary
• Name and address of the
issuing or advising banks
• Amount and type of currency
• Sight or time draft to be drawn
• Expiration date
• Description of merchandise
• Type and numbers of
documents that must
accompany letter of credit
Red Flags
• An unsigned letter of
credit
• Numerous inquiries by
Beneficiary regarding
the LoC’s issuance ( a
sense of urgency and/or
angry complaints)
• Presentation of the LoC
documents where the
bank has no record of
the credits existence
• LoC opened by telex
when the fax has not
been tested with the
receiving bank
• LoC involving obscure
ports and or locations
that cannot be
contacted by telephone
or email or fax
Sound the Alarm
• Front line personnel
determine a suspicious
transaction
• Trade finance personnel
have not tasked with the
job of determining at what
point to refure to
compliance officer
• When does a transaction
become suspicious
Compliance
officers Problem
with KYC
•How to you conduct KYC and keep
your clients business confidential?
•If a client is an criminal organization
what do you do?
•How can you ensure staff are loyal
•How do you conduct CDD in other
countries?
•How can you ensure that your clients
are still conducting legitimate business
Corruption and Threats
•If the institution is compromised
what do you do?
•How do we keep the institutions
reputation clean?
•How do we ensure the safety of
the staff?
•How do we keep the criminal
client from being exposed by our
actions?
Conclusion
• TBML represents an increasingly important ML
vulnerability
• As International trade increases TBML can be
expected to become increasingly active
• TBML practices vary in complexity
• Basic Schemes: Fraudulent trade practices such as
over and under invoicing will increase
• The use of complex transactions will continue to
obscure the money trail and complicate detection
by Transnational Organized Crime Organizations
Wayne Blackburn
[email protected]
1-905-338-3739