One Step Ahead of Trade-Based Money Laundering

December 22nd, 2011

To effectively respond to criminal and terrorist threats, law enforcement officials pursue evolving technologies. Take the Transportation Security Administration, which since September 11th, regularly unrolls new procedures, technologies, and rules. Sometimes, as with the 2001 Shoe Bomb Plot after which passengers must remove their shoes for screening, these adaptations come as a response to a specific terrorist attack or attempt. Other times, TSA unveils new technologies to keep ahead of those threats that are still unknown.

The same is true with money laundering. Governments and law enforcement officials are continually seeking new methods of detection, new financial rules, and new procedures in hopes of staying one step ahead of the criminals.

Mexico, which has a particular problem with money laundering, also has crafted some particularly innovative anti-money laundering responses. Mexican President Felipe Calderon, who has called illicit money “vital for criminals,” has crafted a variety of money-laundering laws to help stem the flow of dirty money. For example, some reforms bar cash purchases of real estate and limit cash purchases of items like cars and planes with a price tag that exceeds $10,000.  In June, Mexico announced it would on cash deposits and withdrawals made in American dollars. Under the new rules “Mexicans with bank accounts can deposit as much as $4,000 in cash per month, but Mexicans without accounts can exchange only $300 a day up to $1,500 a month.”

Mexico has even tried some very radical programs, including financial incentives for people who report suspected money laundering. Under the program, whistle blowers would get up to one-quarter of any illicit funds or property seized and reporting is easy and painless—reports are accepted in person, by telephone, and even by e-mail. Although the exact percentage of each individual’s reward is determined on case by case basis.

While these programs show promise, money launderers continue to stay one step ahead. While many criminals traditionally launder illicit funds by stashing plastic-wrapped bundles of $100 bills in car tires or paying cash for luxury cars and boats, as Mexican AML rules have become more restrictive, criminals have evolved.

Criminals, particularly in Mexico and Colombia where financial rules are tight, are increasingly laundering money through trade-based mechanisms—either by trade mispricing or legitimate exports. In the first method, a Mexican front company can ship, say, computers to the United States and, by over-invoicing the goods, can include in the invoice enough for both the merchandise and the extra laundered funds. The buyer on the other side, whose holding the illicit cash, remits the payment for the computers and sends the funds, which are in the banking system as a formal, legal transaction, to the Mexican company’s account. This method skirts the warning flags provided by most laws and regulations.

In the second form of trade-based money laundering, criminals in the United States buy actual goods with dollars, export them to Mexico or Colombia, and then sell them for pesos. Often this method requires a complicit legitimate business, which earns a cut of the proceeds. This accomplishes two goals at once: criminals are able to transfer illicit funds between boarders and convert dollars to pesos without raising any of the normal red flags.

As TSA does for terrorism, if we wish to stay ahead of these new forms of money laundering, we must continue to evolve our rules and procedures. Fortunately the Task Force recommendation on trade mispricing would do a great deal to stem this practice. According to the Task Force, the parties conducting a sale of goods or services in a cross-border transaction should sign a statement in the commercial invoice certifying that no trade mispricing has taken place and that the transaction is priced using the OECD arms-length principle. As we are learning, this recommendation would do a great deal to not only stem tax evasion, but also to curb new forms of money laundering.

Written by Ann Hollingshead

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