The following article was written by Stephen Wagner for the Export Compliance Training Institute. Mr. Wagner is a faculty member for the Institute, and frequently lectures and writes on export compliance and enforcement matters. We repost Mr. Wagner’s article here with the Institute’s permission.
You arrived at work today to find the perfect storm of export issues: a shipment of mobile phones to one of your most established South American customers has been detained by the Commerce’s Office of Export Enforcement (OEE); the federal government has seized $40,000 from your company’s checking account; and the banks have frozen all of your accounts. The only clue you have to this mess is from your freight forwarder. When the OEE seized your merchandise, one of the agents told your shipper that the merchandise was being seized, because it is “involved in money laundering.”
You are now afraid to make any other shipments, your company can no longer receive or send payments and that $40,000 is a huge hit to your revenues. And what do they mean by money laundering? You deal only with established customers and you have great relationships with them. They pay their invoices promptly, usually in cash or wire transfers (so no credit card fees), and they order thousands of phones per month. In fact, they send you so much business that you even give them significant discounts off of the regular invoice prices for most of the products you sell.
Where do you even begin to sort out this mess?
In the “old days” (like 10-15 years ago), illicit organizations such as drug cartels, terrorist networks and crime syndicates used to move their ill-gotten dollars, euros and pesos in cash by using couriers in cross-border travel. When law enforcement largely shut down those traditional systems, these criminals turned to a more potent option: trade-based money laundering (TBML). Through export (and import) transactions, criminals can move and launder incredibly large sums of money just by buying and selling merchandise in international markets.
According to the Financial Action Task Force (FATF), an intergovernmental body formed in the late 1980s to combat money laundering and other financial crimes, anywhere from $590 billion to $1.5 trillion in illegally obtained money was laundered world-wide in 2012 through TBML. There are four basic techniques for laundering money through trade:
- over- and under-invoicing of goods and services;
- multiple invoicing of goods and services;
- over- and under-shipments of goods and services; and
- falsely described goods and services.
To bring “clean” money into a country, a company need only undervalue its imports or overvalue its exports. To move money out of a country, the opposite would occur. For example, a U.S. company could sell $2 million in products to a cartel-linked company or customer in Latin America. The U.S. company then invoices these products upon export for only $1 million. The foreign customer obtains the products – for which they paid only $1 million – and resells them in country for the full $2 million. This creates $1 million in laundered money. The problem of import-export invoice discrepancy is so large, that the Global Financial Integrity and the International Monetary Fund estimate that the difference between the declared value of Mexican exports to the United States in 2013 was almost $40 billion higher than the declared value of those same imports into the U.S.
The company in this scenario may have unwittingly triggered several “red flags” that would indicate an involvement in TBML. According to U.S. Immigration and Customs Enforcement (ICE), indictors of TBML include:
- Payments to vendors by unrelated third parties;
- False reporting, such as commodity misclassification, commodity over- or under-valuation;
- Commodities being traded that do not match the business involved;
- Unusual shipping routes or transshipment points;
- Packaging inconsistent with the commodity or shipping method;
and many more. The Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) have identified other “red flags” that you can read about here.
In this case, the “significant discounts” to customers could appear as undervaluations, depending on how invoices are prepared. Additional factors may also contribute to exports being labeled as trade-based money laundering transactions; for example, accepting payments in cash, receiving wire transfers from unrelated parties and customer orders for products or in quantities that law enforcement officials may believe are unreasonable, given the customer.
When enforcement comes in money laundering cases, it can take several forms and come from several fronts. Enforcement measures include seizure and forfeiture of merchandise, seizure of funds that can be traced to the money laundering activity, civil penalties and/or criminal charges. These measures are being used by the federal government, state governments and even local governments which take part in multi-jurisdictional task forces (which are often funded by the seizures they make). In addition, banks and credit card companies may suspend accounts to avoid being seen by law enforcement as being complicit in money laundering activities. In 2013, banking giant HSBC agreed to pay $1.92 billion to U.S. authorities in fines for its complacency in laundering drug money for Mexican cartels; no bank wants that to happen to them.
Now understanding what the situation may be, the challenge is responding quickly and appropriately to the seizures. “Red flags” which otherwise could indicate money laundering may also have completely legal business rationales. For example, is the South American company that is buying the large quantities of mobile phones the largest reseller of mobile phones in that country? If so, such sales volume may be reasonable. Did you perform due diligence on the customer to ensure they are who they say they are? Are the discounts properly noted on invoices and in keeping with discounts offered by other industry leaders? Do the funds represented by the seized bank deposits line up perfectly with invoices for shipments? These are the types of arguments that must be made in negotiations with law enforcement and in petitions seeking return of seized property. The real key is assembling and presenting strong documentary evidence demonstrating that money laundering is not taking place; merely professing innocence usually will not result in mitigation of the seizures.
Money laundering charges are notoriously difficult to fight; however, a company’s best practice to keep itself from unwittingly participating in a money laundering violation is to have a strong anti-money laundering (AML) program. An AML program is a set of procedures designed to guard against someone using your company to launder money. It derives from requirements for financial institutions under the Bank Secrecy Act and the USA PATRIOT ACT (Title 31 of the United States Code), and includes such features as a customer identification or “know your customer” (KYC) program. [These requirements are akin to verifying the consignee and end-user of an export against denied party lists and understanding the intended end use of merchandise before export.] Though not technically required for most exporters, any company selling products into high-risk regions or receiving payments from third parties would be advised to have an AML program in place.
Assuming you have vigilantly and rigorously implemented and maintained your AML program (and your export compliance program), your company should be able to identify and avoid those situations which may result in your company inadvertently becoming involved in a money laundering transaction. If your company exports its products from the United States and does not have an effective AML compliance program, your company faces an enhanced risk of enforcement measures that could put it out of business for good.