Chapter 1
The Next Frontier
The Financial Action Task Force (FATF) has declared that there are three broad categories for the purpose of hiding illicit funds and introducing them into the formal economy. The first is via the use of financial institutions; the second is to physically smuggle bulk cash from one country or jurisdiction to another; and the third is the transfer of goods via trade.1 The United States and the international community have devoted attention, countermeasures, and resources to the first two categories. Money laundering via trade has, for the most part, been ignored.
The United States' current antiâmoney laundering efforts began in 1971, when President Nixon declared the âwar on drugs.â About the same time, Congress started passing a series of laws, rules, and enabling regulations collectively known as the Bank Secrecy Act (BSA). The BSA is a misnomer. The goal is financial transparency by mandating financial intelligence or a paper trail to help criminal investigators âfollow the money.â Today, primarily as a result of the BSA, approximately 17 million pieces of financial intelligence are filed with the U.S. Treasury Department's Financial Crimes Enforcement Network (FinCEN) every year. The financial intelligence is warehoused, analyzed, and disseminated to law enforcement agencies at the federal, state, local, and increasingly the international levels.
The worldwide community slowly followed the U.S. lead. In 1989, the G-7 created the FATF. The international antiâmoney laundering policy-making body championed 40 recommendations for countries and jurisdictions around the world aimed at the establishment of antiâmoney laundering (AML), and after September 11, counterterrorist financing (CFT) countermeasures. These included the passage of AML/CFT laws, the creation of financial intelligence, know your customer (KYC) compliance programs for financial institutions and money services businesses, the creation of financial intelligence units (FIUs), procedures to combat bulk cash smuggling, and other safeguards.
The FATF's initial recommendations were purposefully imprecise in order to accommodate different legal systems and institutional environments. In its infancy, the FATF was also Western centric, focusing on money laundering primarily through the prism of the West's âwar on drugs,â where large amounts of dirty money were found sloshing around Western-style financial institutions. The FATF and its members almost completely ignored other forms of non-Western money laundering. Unfortunately, the FATF's early myopia had serious repercussions. Terrorist groups and criminal organizations continue to take advantage of what Osama bin Laden once called âcracksâ in the Western financial system.2
As FATF evolved and the international community responded to growing financial threats, including the finance of terror, its nonbinding recommendations became increasingly precise. Its recommendations and interpretive notes have undergone periodic updates. In 1996, 2003, and 2012, its standards were significantly revised. The FATF's membership expanded, and today FATF-style regional bodies are found around the world.
Yet outside of FATF's 2006 trade-based money laundering âtypologyâ report and similar studies conducted by FATF-style regional bodies (a study of particular note was conducted by the Asia Pacific Group in 2012), trade-based money laundering and value transfer have, for the most part, been ignored by the international community. This despite the FATF's above declaration that trade is one of the three principal categories of laundering money found around the world. For a variety of reasons, it has not been possible to achieve consensus on the extent of the problem and what should be done to confront it. And there continues to be an ongoing debate about whether financial institutions have the means and should assume the responsibility to help monitor international trade and trade finance as it relates to money laundering.
In 2014, The Economist called trade âthe weakest linkâ in the fight against dirty money.3 I agree with the assessment but believe it will change. Governments around the worldâsimultaneously pressed for new revenue streams and threatened by organized crime's use of money laundering, corruption, massive trade fraud, transfer pricing, and the associated threat of terror financeâare slowly moving to recognize the threat posed by trade-based money laundering and value transfer. (Note: TBML will be used in this book as the accepted acronym.)
So what is TBML? The FATF defines the term as the âprocess of disguising the proceeds of crime and moving
value through the use of trade transactions in an attempt to legitimize their illicit origins.â
The key word in the above definition is value.4 To understand TBML, we must put aside our linear Western thought process. Illicit money is not always represented by cash, checks, or electronic data in a wire transfer, or new payment methods such as stored-value cards, cell phones, or cyber-currency. The value represented by trade goodsâand the accompanying documentation both genuine and fictitiousâcan also represent the transfer of illicit funds and value. This book will provide many examples of the how and why.
The Magnitude of the Problem
To estimate the amount of TBML in the United States and around the world, we must first examine the magnitude of international money laundering in general. Those estimates are all over the map. In fact, the FATF has stated, âDue to the illegal nature of the transactions, precise statistics are not available, and it is therefore impossible to produce a definitive estimate of the amount of money that is globally laundered every year.â5
However, the International Monetary Fund has estimated that money laundering comprises approximately 2 to 5 percent of the world's gross domestic product (GDP)6 or approximately $3 trillion to $5 trillion per year. In very rough numbers, that is about the size of the U.S. federal budget! The United Nations Office on Drugs and Crime (UNODC) conducted a study to determine the magnitude of illicit funds and estimates that in 2009, criminal proceeds amounted to 3.6 ...