Pan American CongressMoney Laundering and Terrorism Financing Risk, July 29-30Hilton Hotel- Cartagena, Colombia

The Professionalization of Criminal FinanceTrade 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:

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 productsEach 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?

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 existWhat can you do to make sure there really is a client?

Reputation is a value which a FI can not afford to lose

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

Wachovia agreed to pay $160 million to settle the court case in exchange for charges being dropped

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 wealthEach 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

• Multiple invoicing goods and services

• Over and under shipment of 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

Transportation of questionable cargo

• 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

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

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

$

Confirming Bank

$

Issuing Bank

Supplier

Importer

Goods

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

• 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 non- cooperative 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 Blackburnwblackburn@signatureisc.com

1-905-338-3739