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Pan American Congress Money Laundering and Terrorism Financing Risk, July 29-30 Hilton Hotel- Cartagena, Colombia The Professionalization of Criminal Finance.

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Presentation on theme: "Pan American Congress Money Laundering and Terrorism Financing Risk, July 29-30 Hilton Hotel- Cartagena, Colombia The Professionalization of Criminal Finance."— Presentation transcript:

1 Pan American Congress Money Laundering and Terrorism Financing Risk, July Hilton Hotel- Cartagena, Colombia The Professionalization of Criminal Finance Trade Based Money Laundering (TBML) Wayne Blackburn

2 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

3 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

4 The financial Institutions 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

5 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

6 Criminals 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???

7 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

8 Shipping Cargo is the corporate method of shipping products Each shipment needs to follow international rules, regulations and financial norms

9 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

10 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

11 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?

12 Does your clients business relationship really exist What can you do to make sure there really is a client?

13 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 droppedagreed to pay $160 million

14 Reputation problems Wachovias 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.Jeffrey Sloman Not Quick Enough The bank didnt 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. Department on March 12

15 All commercial transactions should be questioned in a business context

16 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

17 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

18 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

19 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

20 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

21 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)

22 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

23 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

24 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

25 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

26 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

27 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

28 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

29 Bill of Lading

30 Harmonised System Tariff (HS Tariff) One structure across world Used to describe any product being consigned Hierarchical Structure – Section – Chapter – Headings – Sub Headings

31 Example Section XI - Textiles and Textile Articles Chapter 63 Other made up textile articles; sets; worn clothing and worn textile articles; rags – 63.06Tarpaulins, awnings and sunblinds; tents; sails for boats, sailboards – 63.07Other made up articles, including dress patterns: – 63.09Worn clothing and other worn articles

32 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 LaunderingWayne Blackburn

33 TRADE PROCESS WITH LOC Trade Based Money LaunderingWayne Blackburn

34 Role Private Stakeholders and Compliance officers Financial Institutions Shipping and handling agents Importers/Exporters Money transmitters/couriers Trade Based Money LaunderingWayne Blackburn

35 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 LaunderingWayne Blackburn

36 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)

37 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

38 Red Flags An unsigned letter of credit Numerous inquiries by Beneficiary regarding the LoCs 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 or fax

39 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

40 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?

41 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

42 Wayne Blackburn


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