Money laundering’s other face

“Not long after the September 11 attacks, I had a conversation with a Pakistani entrepreneur. This businessman could be charitably described as being involved in international gray markets and illicit finance. We discussed … trade-based money laundering, value transfer, hawala, fictitious invoicing, and countervaluation. At the end of the discussion, he looked at me and said, ‘Mr. John, don’t you know that your adversaries are transferring money and value right under your noses? But the West doesn’t see it. Your enemies are laughing at you’.”—John Cassara, preface, Trade-Based Money Laundering.

Anti-money laundering professionals worldwide are constantly being challenged by the broad spectrum of methods that criminals and terrorists use to move illicit funds.

Whether it is mobile banking, bulk cash smuggling, or new products such as virtual currency, those methods make those of us in this field crave resources for understanding and staying current with typologies, case studies, and “red flags” to attack money laundering.

John Cassara has just added to the AML literature with his Trade-Based Money Laundering: The Next Frontier In International Money Laundering Enforcement.

The book is more of a textbook, yet it is not an academic treatise. Cassara assumes a certain level of knowledge, but does provide a “money laundering primer” in the appendix as a refresher for all of us. He also provides his recommendations and a proposal for a “Trade Transparency Unit” or TTU—a concept being gradually adopted in the U.S. Each chapter has a “cheat sheet”—an excellent summary of the points made throughout the section.

Those of us who know John Cassara know him as a man with strong views. He doesn’t hold back on his opinions, and this book is full of both commendations and critiques of certain agencies and organizations.

Threat of trade-based laundering

In establishing the scope of the problem Cassara quotes the definition from the Financial Action Task Force (FATF) that calls trade-based money laundering the “process of disguising the proceeds of crime and moving value through the use of trade transactions in an attempt to legitimize their illicit origins.” (The term is a mouthful, so in the rest of this article I’ll use the abbreviation TBML.)

Cassara emphasizes that the key part of the definition is “value” and he delves into great detail throughout the book to cover that concept as being far beyond cash, checks, wires, or other payment methods.

The book begins with a foreword by Chip Poncy, former U.S. Financial Action Task Force delegation leader. Poncy calls out the lack of a “clear, systemic, and shared understanding of the nature and scope of money laundering risks.” He believes that that challenges the private sector in applying a risk-based approach to AML and counter terrorism finance programs and controls.

Poncy calls for fresh thinking to address these gaps and commends Cassara for focusing on trade-based money laundering to strengthen the counter-illicit financing mission.

The book is well organized for the AML professional. It sets out the scope of the trade-based money laundering problem; outlines TBML techniques; covers and describes various underground financial systems; and offers the red flags that are needed for monitoring, training, and surveillance.

I do not agree with Cassara’s point in the preface that TBML is “still not recognized as significant dangers. (My own organization, ACAMS, has been doing seminars on this topic for a number of years.) But TBML it is clearly an area in need of a source such as this book.

While setting the stage for his analysis, Cassara rejects financial “disruption” as a metric to determine success in money laundering prevention and detection. Instead he prefer to measure success in terms of the “number of arrests, convictions, and illicit money identified, seized, and forfeited.”

I leave to others whether that is a valid assessment. But using it leads Cassara to opine that “we are not doing very well at all” in addressing TBML.

Learning via case studies

One of the basic methods of TBML outlined in the book is invoice fraud. Cassara provides several charts and case studies to assist us in understanding examples of this type of financial crime. Cassara offers specific examples from around the globe in a series of case studies.

One study focused on a group in Argentina that engaged in fraud and TBML against the government. In this case the launderers used gold-plated copper medallions as the exported goods and they overinvoiced the coins’ value. The money laundering was further exacerbated by the Argentine government awarding the conspirators over $130 million in export incentives.

Astute observers had some clear indications that something was wrong. The chapter ends with a number of questions that someone involved in trade finance could ask if a shipment of goods looked suspicious. These include:

• What is the ultimate destination?

• Is the routing logical?

• Is this a regularly scheduled shipment of goods?

• Are the size, weight, and packaging consistent with the contents?

Cassara populates the book with key points in popout boxes in each chapter such as “Follow the money and value trail. But be aware of document fraud and multiple sets of books!”

Financial networks beneath the surface

The middle of the book covers a number of underground banking or informal value transfer systems.

One such is the well-known Black Market Peso Exchange (BMPE). Cassara explains the history of this method, which dates back to the 1960s in Colombia and describes how that process was co-opted by narcotics traffickers. This process is used to move funds connected to corruption, weapons, and drug trafficking. Cassara points out that BMPE also adversely impacts government budgets and important social programs.

The chapter on “hawalas” is also very informative. Hawala, or hundi, in Pakistan or Bangladesh, refers to “money transfer without money movement,” a method of funds transfer orchestrated through brokers who charge small fees for the service. It is important for the AML professional to understand how this age-old mechanism works, and to comprehend its vulnerabilities to financial crime. There are a number of interesting case studies, including one about Somali remittances and another concerning the use of hawalas to commit health care fraud.

Cassara’s “cheat sheet” at the end of the chapter includes this point: “The overwhelming majority of hawala transactions are benign and involve the remittance of wages.” This section distinguishes between legitimate hawalas—some say the concept originated in Islamic law—and so-called “black” hawala.

Flying money—the Chinese hawalla

Modern hawalla rely on networks of trade partners, often linked by family ties, and Cassara notes that Renaissance Italy and other locales developed similar systems due to fears of robbery and piracy that could intercept cash payments. Trade was the common denominator, he explains.

Which leads us to the intriguingly titled chapter “Chinese Flying Money.” I consider this one of the book’s must-read sections. I would venture to say that many of my AML colleagues do not know about the Chinese hawalas known as “fei-chien.”

“Fei-chien” is one of several names. This one is sometimes translated as “flying money.” Another is “hui kuan.” Unlike other such systems, “flying money” was actually created not to evade government requirements but a “tool to facilitate taxation” while avoiding the need to transport large sums.

Cassara describes the many similarities between hawala and fei-chen including:

• Both have existed for centuries.

• Both are based on the concept of money transfer without money movement.

• There are fewer paper trails.

Of course, this mechanism appears in Cassara’s book because it has been used for illicit purposes. One example used of the abuse of fei-chen are Chinese firms working with fei-chien brokers who can send money out of China by underinvoicing exports and overvaluing imports.  So, they may sell $10,000 worth of garments abroad; show an invoice for $8,000 to government representatives and keep the remainder overseas. Cassara also indicates he has personally witnessed a growing Chinese presence in trading in African markets—more in the past 10 years than in the past 400.

For those who wonder about the use of underground banking in and out of China for other crimes, Cassara uses an example of human trafficking where one “businesswoman” charged $40,000 per person to smuggle migrants from China to New York.

All that glitters …

The international gold trade gets Cassara’s attention as well. He points out that in times of uncertainty, gold is seen as more reliable than some national currencies. Gold is also easily smuggled and is a known item that funds terror.

The chapter offers suggestions for compliance officers and authorities in terms of questions to ask gold dealers including:

• Do you deal in “raw” gold or “worked” gold?

• Do you have foreign trading partners?

• Do people in this area use gold as a form of savings?

• Do criminal organizations deal in gold in this area?

Cassara offers a number of case studies covering “cash-for-gold-for-drugs,” fake gold sales, and examples of gold and terrorism financing. He also added a 2015 note that ISIS has announced plans to create its own central bank using a gold-based currency. Sadly, a number of criminal and terror groups around the world have become a “terror-gold nexus.”

An international financial shell game

In the section on commercial TBML, Cassara describes “trade diversion” as one of the most sophisticated forms of money laundering because there is a mix of genuine products and, sometimes, counterfeit goods.

Cassara calls this diversion “hiding in plain sight” and explains situations where counterfeit goods such as pharmaceuticals pose a potential safety hazard since there are no regulatory controls.

One variation on the theme is called “U-boating.” In this scenario, goods are shipped to an intermediary port and directed back to their original point of shipping.

“The containers are stripped, stuffed, and reloaded …,” writes Cassara. “The goods are shipped right back to the country of origin.” Such schemes require an international network of conspirators.

Beginning on fighting back

It is one thing to know about the various machinations Cassara writes about. But what can be done about these crimes?

The final few chapters of the book are excellent training tools for recognizing a variety of schemes.

When in doubt, advises Cassara, rely on the rule of JDLR: “Just doesn’t look right.”

Cassara gives an overview of free trade zones, Latin America’s Tri-border area and the many steps in the international trade process. Readers may want to make extensive notes while reading (and re-reading) these sections.

The latter applies as well to Cassara’s conclusions and recommendations.

Cassara promotes the creation of Trade Transparency Units (TTU’s) as a very important investigative tool for customs and law enforcement. Basically, a TTU is a unit in an agency that “collects and analyzes suspect trade data” and sends the findings for action by law enforcement. 

Cassara offers that he developed the idea in 2003 but it took a “painfully long time for the government’s stars to align” and have the Department of Homeland Security create a TTU, now located within Homeland Security Investigations or HSI. A key point in the chapter is that “Since the creation of the domestic and international TTU initiative, more than $1 billion has been seized.”

Settling some scores

Banker readers will get a good deal of education reading Cassara’s book. He’s added a valuable resource for all of us in the AML and compliance communities.

His aggravation with enforcement efforts is clear. Cassara is frustrated with many of his former government colleagues and I would imagine things are always more complicated than they appear. Cassara takes a number of shots at certain government agencies and strategies—which is anyone’s right—but some of his statements appear to me to be too broad.

For example, TBML is being actively attacked by banks, FATF, and many agencies. Can more be done? Yes, of course, but dismissing focus on cyber-currency, disruptions, and sanctions, as Cassara does, is to give short shrift to very valuable and effective AML strategies.

In addition, I don’t agree with Cassara’s call for enhanced wire transfer reporting. I don’t believe that it will solve anything, as we often simply want more and more reporting but never change existing requirements.

Cassara’s task force proposals are fine—he proposes that the U.S. and other concerned nations create groups focused on remittances and value-transfer networks, patterning them after such a group that was founded in Australia in 2012.

But where is the private sector in this picture? All too often only the government responds and neglects the many experts in the private sector.

However, I’m quibbling. Cassara has given us assistance that is sorely needed. TBML is and will remain an important area of concern. The information and tools he offers here will greatly aid efforts to fight this illicit activity.