Trade-Based Money Laundering is Like a Box of Chocolates

In the cat-and-mouse game of money laundering, which we earlier covered here (in an overview) and here (about what can go wrong), some of the more sophisticated schemes involve trade-based money laundering, which embeds the proceeds of criminal activity in legitimate cross-border commerce.

Take any good that is imported or exported around the world, and you can use the trade in that good to launder money by manipulating or misrepresenting price, quality, or quantity upon shipment.

Just think of a box of chocolates. If you import a box of chocolates worth $10 but agree with the seller to pay $100 for them, you’ve created cover to launder an extra $90 and transfer it abroad. Now add a few zeroes to those numbers and you get the idea.

The basic technique is in the invoicing: if you want to slip money into a country, you over-value exports or under-value imports; to get money out, you do the reverse. You can double-invoice, over-invoice (or under-ship), or under-invoice (or over-ship) to your heart’s content, or until you’ve washed all your money. And because you’re commingling dirty money with clean money and legitimate goods, the subterfuge becomes more difficult to detect. Trade-based money laundering is often a part of worldwide, alternative banking and remittance systems like the famed Black Market Peso Exchange, which is used to run drug money down to Latin America, or the hawala system, which is used to pay drug suppliers in Asia.

But the government is reacting. Since 2004, the U.S. Bureau of Immigration and Customs Enforcement (or ICE) has begun creating so-called trade transparency units (or TTUs) to generate investigative leads. These are agreements with certain trading partners to share data for comparison and analysis. The government then runs the data through a data-mining computer program called DARTTS, or the Data Analysis & Research for Trade Transparency System. The idea is to reveal anomalies that only appear when you examine both sides of a transaction.

Cleanliness is Next to Godliness for George, Tom, Abe, Alex, Andy, Ulysses, and Ben

In common parlance, money laundering is the process of taking illegally-gained, “dirty” money and making it appear legal or “clean.”

Who needs to wash money? A classic case is the drug dealer who’s sitting on a pile of cash but can’t very well explain where he got it from. The same concept, however, applies to other unlawful activity like financial frauds, computer crimes, alien smuggling, arms trafficking, public corruption, and illegal gambling.

How does one wash money? Although there are many ways to skin this cat, the process generally involves three steps:

  1. Introducing the dirty money into the financial system somehow (e.g. by making a deposit, buying an asset, making a loan, or funding an investment);
  2. Moving the money around through additional transfers or transactions to create confusion and make it harder to identify the original source of the funds; and
  3. Disbursing the money back to the launderer through a final set of seemingly legitimate transactions.

Money-laundering laws, however, apply to a broader range of conduct than that. They don’t just apply when people move around dirty money to disguise its source, nature, control, ownership, or location. They also apply when people move dirty money to promote the unlawful activity (e.g. by reinvesting the proceeds into it); to evade taxes; or to avoid currency-reporting requirements. See generally 18 U.S.C. § 1956; 31 U.S.C. §§ 5316, 5324, & 5332. They even apply when people knowingly engage (or attempt to engage) in any transaction involving more than $10,000 in dirty money, regardless of intent. 18 U.S.C. § 1957. And they apply to schemes to mask the source of legal money that is intended to support terrorism.

Below are a few of the important money-laundering laws we’ve enacted and their highlights.

Bank Secrecy Act (1970)

  • Required banks to keep adequate books and records to identify money flows and laundering.
  • Required banks to report cash transactions over $10,000 through a Currency Transaction Report (or CTR).

Money Laundering Control Act (1986)

  • Made money laundering a federal crime.
  • Prohibited the structuring of transactions to evade a CTR filing.
  • Introduced civil and criminal forfeiture for violations of the Bank Secrecy Act.

Annunzio-Wylie Anti-Money Laundering Act (1992)

  • Required banks to file suspicious activity reports (or SARs) if they know, suspect, or have reason to know or suspect that a transaction involves criminal activity.

Money Laundering Suppression Act (1994)

  • Regulated “money services businesses” (MSBs) that convert or transmit money (like Western Union, Check ‘n Go, or even a convenience store that issues money orders).
  • Criminalized the operation of an unregistered MSB. See, e.g., 18 U.S.C. § 1960.

Uniting and Strengthening America by Providing Appropriate Tools to Restrict, Intercept, and Obstruct Terrorism (USA PATRIOT) Act (2001)

  • Criminalized the financing of terrorism.
  • Facilitated government access to bank records.
  • Increased the civil and criminal penalties for money laundering.

Tax Evasion and Swiss Banking Secrecy: Rest In Peace

The days of Swiss banking secrecy are over. In a watershed agreement between the United States and Switzerland, Swiss banks will now disclose details on accounts in which Americans have an interest; inform on other banks that open or maintain secret accounts; close the accounts of Americans who are deemed to be evading taxes; and, in some cases, pay substantial fines and penalties to rectify past transgressions. In return, they will receive non-prosecution letters in some cases and no-target letters in others. The deal does not apply to the 14 Swiss banks and affiliates that are currently under criminal investigation.

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