Institute of International Bankers Anti-Money Laundering Seminar Trade Finance Issues New York - May 23, 2011

Transcription

1 Institute f Internatinal Bankers Anti-Mney Laundering Seminar Trade Finance Issues New Yrk - May 23, 2011 Susan J. Galli HNAH AML Cmpliance PUBLIC 1

2 Trade-Based Mney Laundering Defined Criminal enterprises have lng misused internatinal trade mechanisms t avid taxes, tariffs, and custmers duties. As bth the frmal and internatinal system and mney service businesses ( MSBs ) are subject t increased regulatin, scrutiny and transparency, criminal mney launderers and terrrist financiers are increasingly likely t use fraudulent trade-based practices in internatinal cmmerce t launder, earn, mve and integrate funds and assets. U.S. fficials define trade-based mney laundering as a type f alternative remittance system that allws criminal rganizatins the use f trade t legitimize, cnceal, transfer, and cnvert large quantities f illicit cash int less cnspicuus assets r cmmdities. In turn, the tangible assets r value are transferred glbally withut being subject t financial transparency laws and regulatins 2

3 Trade-Based Mney Laundering Hw it Wrks Value can be mved thrugh this prcess by false-invicing, ver-invicing and under-invicing cmmdities that are imprted r exprted arund the wrld. Glbal trade is frequently used by criminal rganizatins t mve value arund the wrld thrugh the cmplex and smetimes cnfusing dcumentatin that is frequently assciated with legitimate trade transactins. Clmbian drug cartels repatriate drug prceeds cmmnly referred t as the Black Market Pes Exchange ( BMPE ), and undergrund banking, unlicensed mney service businesses and hawalas have all utilized trade t mve value as settlement f a debt arising frm remittances verseas. 3

4 Trade-Based Mney Laundering Red Flags Criminal enterprises can accmplish settlement by purchasing cmmdities in ne cuntry and then transferring them t anther cuntry where the cmmdity is sld, and the prceeds are remitted t the intended recipient. Red flag indicatrs f trade-based mney laundering include: Payments t a vendr made in cash by unrelated third parties Payments t vendr made via wire transfers frm unrelated third parties Payments t vendr made via checks, bank drafts r pstal mney rders frm unrelated third parties False reprting such as cmmdity misclassificatin, cmmdity ver-valuatin r under-valuatin Carusel transactins: the repeated imprtatin and exprtatin f the same highvalue cmmdity Cmmdities being traded d nt match the business invlved Unusual shipping rutes r tran-shipment pints Packaging incnsistent with cmmdity r shipping methd Duble-invicing 4

5 Techniques t bscure the illegal mvement f funds Techniques cmmnly utilized include methds t misrepresent the price, quality r quantity f gds. Over invicing: by misrepresenting the price f the gds in the invice and ther dcumentatin (stating it at abve the true value) the seller gains excess value as a result f the payment Under invicing: by misrepresenting the price f the gds in the invice and ther dcumentatin (stating it at belw the true value) the buyer gains excess value when the payment is made. Multiple invicing: by issuing mre than ne invice fr the same gds a seller can justify the receipt f multiple payments. This is harder t detect if the clluding parties use mre than ne FI t facilitate payments/transactins. 5

6 Techniques t bscure the illegal mvement f funds Techniques cmmnly utilized include methds t misrepresent the price, quality r quantity f gds (cntinued) Shrt shipping: the seller ships less than the inviced quantity r quality f gds in the dcuments. The effect is similar t ver invicing. Over shipping: the seller ships mre than the invice quantity r quality f gds thereby misrepresenting the true value f gds in the dcuments. The effect is similar t under invicing. Deliberate bfuscatin f the type f gds: parties may structure a transactin in a way t avid alerting any suspicin t FIs r t ther third parties which becme invlved. This may simply invlve mitting infrmatin frm the relevant dcumentatin r deliberately disguising r falsifying it. This activity may r may nt invlve a degree f cllusin between the parties invlved and may be fr a variety f reasns r purpses. Phantm Shipping: n gds are shipped and all dcumentatin is cmpletely falsified. 6

7 Trade-Based Mney Laundering Over and Underinvicing One f the lder methds f transferring value acrss brders is accmplished by misrepresenting the price f a gd r service in rder t transfer mney between clluding imprters and exprters Mney may be mved ut f the U.S. t a freign cuntry by undervaluing U.S. exprts r ver-valuing U.S. imprts Mney may be mved int the U.S. frm a freign cuntry by ver-valuing U.S. exprts r under-valuing U.S. imprts 7

8 Trade-Based Mney Laundering Example f Overvalued U.S. Imprts Assume a criminal enterprise wants t launder $1 millin dllars t a freign cuntry. The enterprise requires a freign exprter t cllude n the transactin. The set f transactins used t launder the mney wuld include: 1) Freign exprter purchases 10,000 razr blades fr $.10 per blade (cst - $1,000) 2) Freign exprter exprts 10,000 razr blades t the dmestic imprter fr $100 per razr blade. (Ttal Invice $1,000,000) 3) Dmestic imprter receives 10,000 razr blades wrth $1,000 but pays the freign exprter $1,000,000. Outcme: The dmestic imprter has mved $1 millin t the freign cuntry less the $1,000 cst f the razr blades and shipping csts. Surce: Jhn S. Zdanwicz Flrida Internatinal University 8

9 Trade-Based Mney Laundering Example f Undervalued U.S. Imprts Assume a criminal enterprise wants t launder $1 millin dllars t a freign cuntry. The enterprise requires a freign imprter t cllude n the transactin. The set f transactins used t launder the mney wuld include: 1) Dmestic criminal uses $1 millin t purchase 200 gld watches fr $5,000 per watch (value $1 millin). The watches wuld be purchased n pen accunt. 2) The Dmestic exprter sells the 200 gld watches t a freign imprter fr $5.00 per watch ($1,000). 3) The freign imprter receives the 200 gld watches and is presented with an invice fr $1,000, which he pays by wire transfer t the dmestic exprter. 4) The freign imprter sells the gld watches at the market price f $5,000 per watch and cnverts the 200 gld watches int $1 millin. Outcme: The dmestic exprter has mved $1 millin t the freign cuntry less the $1,000 cst f the invice payment inclusive f shipping fees Surce: Jhn S. Zdanwicz Flrida Internatinal University 9

10 Example f Trade-Based Alternate Remittance System The Black Market Pes Exchange The BMPE is an undergrund financial system used t evade reprting and recrd keeping requirements mandated by the BSA, as well as Clmbian freign exchange and imprt laws and tariffs. The system wrks as fllws: 1. The Clmbian cartels exprt narctics t the US where they are sld fr U.S. dllars 2. In Clmbia, the cartels cntact a third party a pes brker t launder their dirty mney. 3. The pes brker enters int a cntract with the Clmbian cartel, wherein he agrees t exchange pess he cntrls in Clmbia fr U.S. dllar the cartel cntrls in the U.S. Once this exchange ccurs, the cartel has effectively laundered its mney and is ut f the BMPE prcess. The pess brker, n the ther hand, must nw launder the U.S. dllars he has accumulated in the U.S. 10

11 Example f Trade-Based Alternate Remittance System The Black Market Pes Exchange The BMPE is an undergrund financial system used t evade reprting and recrd keeping requirements mandated by the BSA, as well as Clmbian freign exchange and imprt laws and tariffs. The system wrks as fllws: 4. The pes brker uses cntacts in the U.S. t place the drug dllars he purchased frm the cartel int the U.S. banking system. The pes brker, still perating in Clmbia, nw has a pl f narctics-derived funds in the U.S. t sell t legitimate Clmbian imprters. 5. Clmbian imprters place rders fr items and make payments thrugh the pes brker. Again, the pes brker uses cntacts in the U.S. t purchase the requested items frm U.S. manufacturers and distributrs. The pes brker pays fr these gds using a variety f methds, including his U.S. banking accunts. 6. The purchased gds are shipped t Caribbean r Suth American destinatins, smetimes via Eurpe r Asia, then smuggled r therwise fraudulently entered int Clmbia. The Clmbia imprter takes pssessin f the gds, having avided paying extensive Clmbian imprt and exchange tariffs, and pays the pes brker fr the items with Clmbia pess. The pes brker, wh has made his mney charging bth the cartels and the imprters fr his services, uses thse new pess t begin the cycle nce again. 11

12 Trade-Based Mney Laundering Black Market Pes Exchange U.S. exprts that are purchased with narctics dllars thrugh the BMPE ften include, but are nt limited t, husehld appliances, cnsumer electrnics, liqur, cigarettes, used aut parts, precius metals, and ft ware. Certain types f payment methds ften prvide red flags indicating that BMPE activity might be taking place. Example f red flags are as fllws: Payments fr utstanding invices made in cash by third-party entities having n cnnectin t the underlying transactin fr which the payments is being made, ften frm a secrecy jurisdictin. Payments fr utstanding invices made with wire-transfers frm third-party entities having n cnnectin t the underlying transactin fr which the payment is being made; and Payments fr gds thrugh checks, bank drafts, r mney rders nt drawn n the accunt f the entity that purchased the items. 12

13 Black Market Pes Exchange Implicatins fr FIs BMPE schemes may manifest themselves thrugh a number f prducts and in multiple business lines in a U.S. bank: Depsit services may be used t accept payments by check. This culd be thrugh a whlesale lckbx maintained fr the U.S. exprter, remte depsit capture r cash letter r thrugh check depsits t a retail r business accunt at a branch. Freign cash letter r remte depsit capture depsits received frm freign respndents may cntain items drawn n U.S. retail accunts that are under the cntrl f the pes brker. This may cme frm the imprting cuntry r frm ther nearby cuntries with free trade znes. Wire transfers may be credited t the exprter s accunt that are frm third parties unrelated t the transactin. 13

14 Knw yur Custmer Challenges The ability t detect and deter mney laundering, terrrist financing and sanctins vilatins thrugh trade-based mney laundering will depend t a large degree n the FIs rle in the transactin and the nature f the trade transactin, i.e., pen accunt trade versus, trade finance invlving credit. Fr trade finance, invlving credit, ne f the basic tenets is that Banks deal with dcuments and nt with gds, services r perfrmance t which the dcuments may relate Banks d nt get invlved with the physical gds nr d they have the capability t d s. 14

15 Trade Knw Yur Custmer The FI with the best ability t detect pssible mney laundering is the issuing bank in a letter f credit transactin r fr pen accunt transactins, the FI directly dealing with the imprter/exprter custmer. Based n the FIs custmer risk assessment, the FI shuld develp plicies and prcedures fr cnducting site visits t determine that its business custmer is an actual business, and that the facilities are cnsistent with the stated nature f the business Based n the FIs risk assessment, custmers that are invlved in cmmercial transactins with jurisdictins psing a heightened risk fr mney laundering, terrrist finance r sanctins issues, and custmers engaged in high risk businesses, shuld be subjected t prcedures fr enhanced due diligence This may invlve a mre thrugh understanding f the gegraphies served, the nature f the anticipated transactin/prduct activity, and an understanding f the rle that the custmers plays in the trade/cmmercial transactin. It may be helpful t cllect the names f frequent suppliers and custmers f the FIs custmer, t assist with the mnitring f trade transactins that are settled via wire r check fr pen accunt transactins. 15

16 Other useful infrmatin Surces: The Wlfsberg Grup Trade Finance principles at: FATF s Best Practices Paper n Trade Based Mney Laundering (June 2008) at: 16