The general “rule of thumb” in the AML world is that for every method that the financial industry initiates to detect and deter money laundering, the launderers devise a new way around it. We all play by the same rules and the governing authorities have gracefully published those rules so that they are available to all – including those who wish to circumvent them. And do they ever!
Admittedly, one of the more clever ways the bad actors have devised is the Trade Based Money Laundering (“TBML”) typology, whose proud ancestry includes the Black Market Peso Exchange (“BMPE”). In its essence, the typology looks like this: proceeds assembled USDs from criminal activity in the U.S., buying U.S. goods & products, shipping them to the criminal’s home country, selling the products cheaply there in the local currency, using that to produce more of the criminal’s illegal product, shipping the product to the U.S., selling it and starting the cycle over. The TBML and BMPE typologies have a long association with drug dealing and the sponsoring Cartels.
The most recent expose came in the form of a FinCEN Advisory and Guidance[1] related to Fentanyl/Opioid distribution. FinCEN included in the Advisory an insightful diagram of the TBML method.
As with all money laundering schemes, the process begins with the consolidation of the funds received from the illegal dealing into accounts at reputable financial institutions, possibly through smurfing or seemingly legitimate, cash intensive businesses, and then onto the purchase of consumer type goods, clothing, phones, small appliances, etc. Alternatively – option 2 in the diagram – the funds may go directly to the purchase of those same type of consumer goods.
With the consumer goods purchased, the agents arrange for the shipping of the goods to the target country through the everyday process of international trade. The U.S. purchaser of the goods will arrange through a freight forwarder to have the goods sent – probably by container on an ocean vessel – to the purchaser in the country designated by the Cartel. Letters of Credit and Documentary Collections will finance the shipments, since they are the standard means of finance in international trade. Since the goods are usually normal consumer-type goods, they raise no suspicion in the documentary preparation or appear to conflict with any type of trade restrictions. In the world of international trade, those financing methods may also be used to launder funds by such techniques as over/under invoicing, over/under shipping, etc..
For the sake of clarity, a Documentary Letter of Credit is a written undertaking by a bank (issuing bank) given to the seller (beneficiary) at the request of the buyer (applicant) to pay a stated sum of money against presentation of documents complying with the terms of the credit within a set time limit. In this case the seller (or beneficiary) is the U.S. purchaser of the goods and the buyer (or applicant) is the person or entity who will sell the goods in the Cartel designated country.
Also, Documentary Collection is a set of Documents (including a Bill of Exchange or Draft) submitted through a bank for collection of payment from the drawee. Without getting in to too much detail, a Documentary Collection is basically a simplified version of a Letter of Credit.
In the example above, FinCEN chose Mexico as the fentanyl source; however, China is another major distribution point. When the goods arrive in the target country, the importers sell the goods to the local citizenry at favorable prices, which produces a flow of funds in the target country currency.
Each jurisdiction has a “money broker,” one for the USD and the other for the local currency. They agree on an exchange rate and establish the process; the USD broker arranges for processing of the dollars as directed and described above – smurfing or some other technique for getting the cash into the financial system or buying consumer goods – and the local broker arranges for the delivery to the Cartel, which will produce more of the drug of choice and smuggle it into the US for local distribution, and so on and on.
Another FinCEN Advisory, Advisory to Financial Institutions on Filing Suspicious Activity Reports regarding Trade-Based Money Laundering (Fin-2010-A001)[2], in line with other advisories, listed a number of Red Flags that may indicate TBML activity, as well as BPME activity. We should always keep in mind that a red flag is an indicator of potential suspicious activity, not an assurance. The following indicators, especially when seen in conjunction with shipments to “duty free trade zones,” may be elevated red flags:
Third party payments for goods or services made by an intermediary (either an individual or an entity) apparently unrelated to the seller or purchaser of goods. This may be done to obscure the true origin of the funds.
Amended letters of credit without reasonable justification.
A customer’s inability to produce appropriate documentation (i.e., invoices) to support a requested transaction.
Significant discrepancies between the descriptions of the goods on the transport document (i.e., bill of lading), the invoice, or other documents (i.e., certificate of origin, packing list, etc.).
A close examination of the four items above reveals that they have much to do with .
Trade Based Money Laundering is not just a US phenomenon. The Financial Action Task Force (FATF) has contributed to the body of work focusing on TBML and BPME[3]. In a publication on Money Laundering Typologies, the following appeared concerning the BPME.
If this were a test, here is the answer key to the above:
Drug traffickers in the U.S. collect and stockpile cash from illegal drug sales in “stash houses” located throughout the U.S. and this creates a logistical problem for the traffickers. The solution is as follows:
Black market money brokers in Colombia direct Colombians visiting or residing in the U.S. to open personal cheque accounts at U.S. banks, and deposit minimal amounts.
Cheques on these accounts are signed in blank by the customers and given to the brokers who pay them US$200-400 for each account. The brokers keep a stock of signed cheques on these “shell” U.S. accounts.
Colombian drug cartels sell their stockpiled cash at a parallel or “discounted” exchange rate to the Colombian money brokers in exchange for pesos which are paid in Columbia.
The brokers purchase the dollars at the discounted rate and the cartels lose a percentage of their profits but avoid the risks of laundering their own drug money.
Once the drug money is purchased, the broker directs his network smurfs to pick up the cash, and structure deposits into the various “shell” cheque accounts.
The broker then offers to sell cheques drawn on these accounts to legitimate Colombian businessmen (who need U.S. dollars to conduct international trade) at a “parallel” exchange rate.
The broker fills in the dollar amount on the signed cheque but leaves the name of the payee blank. The broker also stamps his symbol on the cheque as a means to guarantee his payment on the cheque in the event there are ever insufficient funds in the “shell” checking account.
The businessman can then fill in the payee’s name when he uses the signed cheque as a U.S. dollar instrument to purchase goods (perfume, gold, etc.) in international markets such as Free Trade Zones.
The businessman then ships or smuggles the goods into Colombia.
The Free Trade Zone distributor, who is often a knowing participant in the black market exchange process, forwards the cheque to his U.S. bank account or it may even clear through his local bank account.
Once cleared, the cheque account is debited, and the distributor’s U.S. account is credited.
Resulting in:
Drug cartels in Colombia receive their profits from the U.S. drug trade in Columbia, without having the normal expenses of money laundering. The brokers make a profit on the “discounted” purchase of U.S. dollars from the drug cartels and a second profit on the subsequent sale of the dollars to Colombian businessmen at the “parallel exchange rate.” The businessmen save money by exchanging their pesos for U.S. dollars on the “parallel” exchange market and avoiding government scrutiny and taxes.
One must admit, money launderers are very clever people.
What am I to do?
In its 2010 Advisory FinCEN noted that SAR filings based on BPME/TBML increased significantly, perceived as the result of increased awareness on the part of Financial Institutions. Admittedly, detecting this typology proves to be more difficult than others. Although international trade carries a high risk BSA rating as product, the goods involved in TBML or BPME are typical consumer goods and not prone to suspicion.
Many financial institutions do not engage in international trade finance – with good reason. The Letter of Credit business has always been and remains paper bound and heavily contractual. Any deviation in a credit could lead to the credit not being honored by the issuing bank, putting substantial risk on both the buyer and the seller. A qualified L/C staff does not come cheap; if they do, this may turn into a “get what you pay for” situation for the FI.
Going beyond the bad news, FIs can protect themselves by the following practices:
As noted above, keep a wary eye on “duty free trade zones.” There are many legitimate FTZs; if they are in high BSA risk countries, take care;
Watch for unrelated third party involvement in a transaction ;
Make sure your country code parsing methodology works with great accuracy and efficiency;
Train your staff to increase awareness of these typologies;
If you are engaged in trade finance, have the necessary tools available to the staff, e.g., vessel / aircraft identification subscriptions (like Lloyds Maritime), container identification subscriptions;
Don’t skimp – the Bad Actors are ahead of you.
Conclusion
As Dennis Woods of OFAC used to say, “It’s a dangerous world out there,” and – gulp – we are on the front lines of protecting citizens against the Bad Actors. Trade Based Money Laundering in all its forms and variations can be especially difficult to detect. Vigilance and strong training will aid in making us alert to the discovery and reporting of illegal activity.
As with all money laundering schemes, the process begins with the consolidation of the funds received from the illegal dealing into accounts at reputable financial institutions, possibly through smurfing or seemingly legitimate, cash intensive businesses, and then onto the purchase of consumer type goods, clothing, phones, small appliances, etc. Alternatively – option 2 in the diagram – the funds may go directly to the purchase of those same type of consumer goods.
