Hanging Global Money Launderers Out to Dry

Global money laundering has ballooned - some estimates range as high as $500 billion a year worldwide. But overt and covert methods can trace the funds, find the evidence, and make the fraudsters pay. 

Phillip, the fraud examiner, knew that "Samuel" was the kingpin in a global bribery case but just needed the evidence. A check of local building permits revealed that Samuel had spent several hundred thousand dollars in a short period of time on additions to his house and a swimming pool. Witness interviews revealed that the subject purchased expensive artwork, a luxury automobile, and took extensive vacations during the same time period.

Phillip's contacts with the contractors, auto dealership, art gallery, and travel agency revealed that Samuel and his wife paid for their possessions in cash ($100 bills), traveler's checks purchased overseas, and checks drawn on seven previously undisclosed bank accounts. Samuel's home contractor suspected fraud so he kept copies of the $100 bills; the other sellers kept copies of the traveler's checks and bank checks.

Phillip studied the serial numbers on the bills and found that they were recently issued (which would rebut a possible cash hoard defense) and discovered that one of Samuel's vendors had purchased the traveler's checks. The bank checks led to proof of bribe deposits. Phillip had the evidence and had caught another money launderer.

Global criminals generate large sums of money through financial fraud, drug trafficking, and arms smuggling. Some estimates range as high as $500 billion a year worldwide. To avoid detection, they wash their euros, yen, deutsche marks, and dollars through elaborate networks with no regard for borders. According to the United Nations Global Programme Against Money Laundering, criminals are taking advantage of the globalization of the world economy by transferring funds quickly across international borders. The rapid developments in financial information, technology, and communication allow money to move anywhere in the world with speed and ease, the U.N. says.

This two-part article explores money laundering schemes, ways to discover evidence, and methods to build cases for trial.

Typical Sources of Illicit Funds
Funds involved in the money laundering process come from corruption; narco-trafficking; tax evasion; bankruptcy fraud; and attempts to avoid collection of judgments, conceal assets from creditors or spouses, and avoid duties and tariffs.

More recently, laundered funds have been used to finance terrorist organizations.

Basic Money Laundering Methods
Traditionally, money laundering involves three stages:

• placement - introducing illicit funds into the financial system;
• layering - transferring the funds through several transactions and institutions to conceal their source, and obscure the trail; and
• integration - mixing the dirty money with clean to provide an apparently legitimate source for the funds.

A typical example of the three stages might be a fraudster or drug trafficker earning substantial illegal income in currency which he can:

• hoard for future expenses;
• spend on entertainment, travel or consumables;
• use to purchase cashier's checks, money orders, or traveler's checks, which in turn he can use to purchase more substantial assets, such as cars, boats or house, either personally or through a nominee; and
• deposit as cash, or financial instruments purchased with cash, in a financial institution, either personally - usually in amounts below $10,000 to avoid financial reporting requirements - or through a nominee or shell company, or co-mingled with funds from a "legitimate" business.

Once deposited, the illicit funds are usually wired to another account, or series of accounts, perhaps in various offshore jurisdictions, and through various front companies, nominees, or trusts until they arrive at their ultimate destination, where they can be personally withdrawn by nominees or agents. The funds are then spent or invested in a "legitimate" business enterprise or real property, stocks and bonds, precious metals, art works, or commodities; or used as collateral for real or fraudulent loans.

Methods to Provide an Apparently Legitimate Source for Illicit Funds
The above steps actually describe "money-hiding" techniques. Money laundering requires an additional step designed to provide the fraudster with an apparently legitimate source of funds to deflect suspicion when he or she spends the money.

There are three primary methods to accomplish this:

• attribute the income to, or co-mingle the illicit funds with, funds from a legitimate business;
• engage in manipulated buy-and-sell transactions, which generate fictitious, large "profits," or
• "borrow" or obtain "investment financing" or income from an offshore enterprise (which the money launderer controls).

Other Current Money Laundering Methods'Private Banking' Services
Many large banks offer customized, confidential "private banking" services to wealthy individuals, typically those with a net worth of $10 million or more. Private banking accounts and services (credit lines, investment opportunities, etc.) can facilitate the concealment of funds and assets and are difficult to penetrate. For example, some private banks actually recommend that their clients set up offshore accounts in secrecy jurisdictions under shell companies, with nominee directors provided by the banks. The banks will handle all the paper work.

Private banking transactions are often so confidential that they are not disclosed to or recorded on the books of the parent bank, which makes it difficult even for the bank's internal security personnel to identify the accounts or suspect activity.

'Hawala' Banking
"Hawala" Banking refers to an international underground banking system, centered primarily in Dubai in the United Arab Emirates which allows money to be quickly and safely transferred around the world in a matter of hours, without leaving a paper trail. The system also avoids wire transfer charges, regulators, account statements, and witnesses willing to produce such records.

For example, "Hakeem," originally from the Middle East but now living in the New York City area, might give $5,000 in cash to a local Hawala banker who operates out of a small ethnic retail shop in Brooklyn to send to his brother in the Middle East. The New York Hawala banker would contact a Hawala counterpart in the city where the brother resides, with instructions to deliver $5,000 to the brother. The two "Hawaladers" would settle their accounts later. Few if any records identifying specific transactions would be generated.

How to Detect and Prove Illicit Financial Transactions
Basic Investigative Methods
There are four basic methods to identify and trace illicit funds:

• identify and trace the funds out from the point of origin, i.e., from where the funds are generated, earned, stolen, paid as bribes, or otherwise begin their journey;
• identify and trace the funds back from the point of receipt, i.e., from where the illicit funds are deposited, spent, or invested;
• turn an inside witness, who can provide direct evidence or leads; and
• conduct a proactive or undercover operation, to infiltrate the illegal enterprise, or to surreptitiously obtain evidence from the subjects.

Proof from the Point of Origin
Obtain copies of the suspected launderer's financial accounts, accounting records and supporting documents, by subpoena, the exercise of audit rights, or by demanding them as a condition of further business. Make sure that you have records reflecting all the revenue and disbursements for the suspect business. Then try to determine if an "on-book" or "off-book" scheme" was utilized.

'On-book' and 'Off-book' Schemes
"On-book" schemes involve transactions that occur in the disclosed accounts of the payer, and are recorded, in disguised fashion, on its disclosed books and records.

Such transactions will usually be disguised as some type of legitimate expense, fee, commission or payment to a subcontractor. They may be made from an affiliate or subsidiary, and go through several intermediaries.

"Off-book" transactions refer to those that are not recorded on the disclosed books of the payer and are not paid from disclosed accounts. These payments typically are in cash, drawn from slush funds that are funded by unrecorded sales or other off-book income.

If on-book payments are suspected, the task is to identify them on the books of the payer and trace them to the destination. If off-book payments are suspected, the challenge is to first find the off-book funds and accounts. These are usually found by contacting the suspect payer's current or former accountants, bookkeepers, or customers. Here's an example of off-book payments:

A small manufacturing company, suspected of paying commercial bribes, denied making any payments and volunteered to produce its business and bank accounts records. The records showed that all income was accounted for in legitimate business expenses and salaries, and no bribes.

The fraud examiners still had reason to suspect that bribes were paid, however, and asked the owner for the location of the former bookkeeper. She was asked if the company had any revenue or customers other than those reflected in its regular accounts. The bookkeeper replied that every weekend the company sold lesser quality merchandise to local merchants from its loading dock for which it was paid in cash. The cash sales were not recorded and were used to make the corrupt payments.

Proof from the Point of Receipt
This is the most commonly used method to identify and trace illicit funds. Begin by assembling a "financial profile" of the subject, which reflects his income, expenses, assets and liabilities. From this basic information, illicit income can often be proven directly, or circumstantially, as described below.

Sources of Information for the Financial Profile
On-line Databases
Access on-line databases to do background and asset checks on the suspect individual and businesses. For U.S. cases, be sure to comply with the Fair Credit Reporting Act. Be sure to check with the strong EU privacy laws.

Checklist for Individuals
Check online subscription services, such as:

• www.autotrackXP.com and www.accurint.com - for public records; and
• www.lexis-nexis.com - for court and media records.

Confirm database information with official records, which you collect on site.

Checklist for Businesses
Check public records and online subscription services, such as:

• www.dnb.com - Dun & Bradstreet reports;
• www.autotrackXP.com - business filings;
• www.lexis-nexis.com - business filings and business media records;
• www.sec.gov - access SEC public filings through the EDGAR system;
• business directories; and
• company Internet sites.

When using these services, particularly note the business' ownership, affiliates and subsidiaries, customers, sales volumes, and litigation history. Affiliates and subsidiaries might be used to hide payments. Customer records might reveal payments to hidden bank accounts or other affiliates of the contractor.

Business Records for the Individual Subject
Look though the subject's:

• email messages (comply with proper access procedures; look at "deleted" items);
• computer drives and disks;
• telephone records;
• fax logs, transmission and receipt records; and
• mail logs, including private delivery services (Fed Ex, DHL, etc.).

Employment Applications
These contain potentially useful information that can be used to identify a subject for on-line background checks and identify hidden assets including:

• date and place of birth;
• U.S. Social Security or other national identifying numbers;
• current and prior residence addresses; and
• name of spouses and other dependents.

The first three digits of a Social Security number identifies the place of issue and the other digits identify the time period the card was issued. This information, plus the place of birth, and places of education and prior employment, can show where the subject and family members have lived and help focus public record searches and other background checks. Hidden assets might be in the names of the spouse or dependents; ex-spouses could be potential
witnesses.

Payroll Records
These are useful to compute a salary history (to prepare net worth analyses and determine legitimate levels of expenditures) and identify the subject's banks from canceled paychecks and direct deposit records.

Travel and Expense Reports
In addition to tracking the movements of a subject, travel and expense reimbursement records can identify credit cards or bank accounts used by the subject. Hotel receipts might include telephone numbers called by the subject, which could reveal undisclosed banking relationships, leads to hidden assets, associates, or new witnesses.

• Gaps in travel records or reimbursement requests might indicate that contractors are paying for upgraded travel arrangements (a common tactic), or travel to sites the subject does not want known.

Public Records
Search business filings first to avoid having to repeat the search of real property or other records for property held in business names.

Business Filings
Search local and county fictitious name indices, sole proprietors, and business licenses and permits; state or province business incorporations, limited partnership filings and U.S. Securities and Exchange Commission filings and reports.

Court Records
Search criminal, civil, domestic relations, probate, and national bankruptcy records. Contact the attorneys favorable to your side to request information and access to the discovery records.

Real Property Records (county)
Search ownership and tax records, neighborhood demographic records (median home values and family incomes); and building permits. When searching building permits, it is very important to contact the contractor and request copies of invoices and payment records.

Uniform Commercial Code Filings
Search state, province, and county records of liens on business equipment, etc. that could identify side businesses or investments.

Other Public Records
Search motor vehicle registration records, regulatory licenses and permits, voter registration records, and vital statistic records.

Trash Searching
Removing and examining trash that has been left out for collection is legal in most U.S. jurisdictions and might reveal envelopes identifying banks, notes, etc. It could be particularly useful if done early in the year when businesses and banks are mailing tax forms reflecting commission, interest and other income payments. Check the legal status of such searches in your area.

Sources of Personal Financial Information Regarding the Subject 

Collect as much of the following information as possible from the subject, financial institutions, accountant, tax preparer, ex-spouse, ex-business partners, real estate agents and sellers, contractors, and others.

Financial Accounts
Ask for checking, savings, trust, brokerage and investment, retirement and "private banking" accounts (for high net worth individuals), certificates of deposit and safe deposit boxes. You can get these records by consent from the subject (which can be compelled if the subject is employed by the investigating organization) or perhaps his spouse, some third parties (such as businesses, but not banks), or by using subpoenas.

Request account applications, monthly statements, deposit items, checks (front and back) - checks for even small amounts can identify hidden assets or other accounts - and safe deposit access logs for all accounts opened and closed during the relevant time period.

Real Property Records
Look for the names of sellers and agents and contact them directly to request their files and interviews. For example, mortgages (including applications and supporting documents, such as financial statements and tax returns), liens and property tax records, settlement sheets, source for down payment, and payment records.

Ask for records for the subject's residence(s), rental and vacation properties and properties occupied by other third parties (children, mistress) acquired or sold during the relevant time period. Include in the request all properties in other countries.

Loans
Ask for applications, financial statements, credit checks, and payment records.

Credit Cards
Request names of cards and account numbers and cards issued by offshore banks.

Investments
Request stocks and bonds, mutual funds, closely held businesses, rental or investment property, real estate investment trusts, limited partnership interests, etc.

Ask for all records including bank accounts and tax returns. Ask for and try to identify the name of the subject's partners, accountant or financial advisor.

Insurance
Request whole-life policies, which have substantial cash value that can be prepaid, and property insurance, which can have riders that identify valuable personal property, such as expensive jewelry.

Tax Returns
Request not only returns but supporting schedules and documents. In the U.S., ask for IRS 1099 forms showing commission income. Look for the name of the subject's accountant and tax preparer, and a consent to obtain information and documents.

Consumer Credit Reports
Ask for a consent to access the subject's credit reports but be sure to comply with the provisions of the Fair Credit Reporting Act.

Litigation Records
If you receive them, look for the names of the adverse parties and counsel, which might reveal discovery or judgments leading to hidden assets.

Telephone Records
Request residential and cell phone bills for the relevant time period or consents to access them from the telephone companies.

Other Records
Ask for travel agency bookings and correspondence, credit card, and travel receipts. Request home computer emails, hard drives, floppy disks, laptops, PDAs, and electronic organizer records, and ask for consents to access email provider records. Request private delivery account records or consents for Fed Ex, DHL, and other companies. Ask for telephone/ address directories, business diaries, and Rolodex™ cards to identify dates, travels, and contact names.

In the Jan./Feb. issue, W. Michael Kramer describes how to use evidence to make the money laundering case.

W. Michael Kramer, J.D., CFE, is an attorney and consultant in the Washington, D.C., area. He specializes in the investigation and civil prosecution of corporate fraud. Kramer was an advisory member of the ACFE Board of Regents and a contributing author to the Fraud Examiners Manual, and is a member of the ACFE faculty.