Fighting Money Laundering ‘Pirates’

Global money laundering has been a problem for those navigating international waters with ill-gotten gains since the piracy days of Edward Teach (“Blackbeard”) and John Rachham (“Calico Jack”). Although perhaps not as familiar, British citizen Henry Every (known as “Long Ben” to his crew), was the captain of a pirate ship named Fancy. In 1695, somewhere in the Arabian Sea, Captain Every and his men captured the Indian ship, Ganj-i-Sawai (rough translation: Exceeding Treasure). The stolen loot was indeed an exceedingly large treasure trove of precious metals and jewels, and 500,000 gold and silver pieces. In today’s U.S. dollars, the value of the heist was in the range of $200 million to $400 million.

The heist was successful, but Every and his crew had two problems: 1) The British Privy Council and the East India Company had placed a massive bounty on the heads of Every and his crew. 2) How could they spend the wealth and avoid the hangman’s noose?

Some believe the first problem led to the first worldwide manhunt, and the second conundrum led to the first worldwide money laundering attempt. Every probably made it back to England, but he lost his share of the loot when he transferred it to local merchants who conveniently forgot the transaction.¹ So let’s zoom ahead 400 years and talk about today’s Somalian pirates.

TALK LIKE A PIRATE 

On Aug. 27, an accused pirate from Somalia pleaded guilty in Virginia federal court to criminal charges connected with an April attack on a U.S. Navy ship off the coast of Africa. Pirates in that area have been in the news for seizing ships, demanding ransoms, and receiving cash payments. The Somalian pirates and other rogues of international crimes have the same problem that Captain Every did: how to successfully launder their loot. But what’s changed is the international community’s united efforts to prevent, discourage, and convict perpetrators for piracy, shipping of counterfeit goods, and money laundering.

“Although this is an incredibly murky area, the seed funding for piracy is relatively low,” said Roger Middleton, consultant researcher for the Africa Programme at Chatham House and an expert on Somalia piracy, in an interview with Fraud Magazine.

All they need is cash for “three or four AK47s, an outboard motor and a skiff,” Middleton said. “This money can be raised from relatives or established businesses, and is transferred via the Hawala system. [See "Hanging Global Money Laundering Out to Dry". – ed.] Unlike our pirates of yesteryear, the pirates of today can find their prey in known shipping lanes with some 16,000 ships a year using those lanes in that part of the world.”

Middleton said anecdotal evidence suggests the pirates split the millions of stolen dollars and integrate it into the economy. The pirates use it to pay the wages of foot soldiers, bribe officials, and buy bigger guns and faster boats. They also send some of the money to relatives and friends in established Somalian communities in Nairobi, the Persian Gulf states, the United Kingdom, and Canada, he said.

“The increase in piracy in the last three years is a worrying trend and the influx of criminal funds may contribute to destabilize Puntland, the Northeast region of Somalia, which has been comparatively stable,” Middleton said.

MONEY LAUNDERING RUDIMENTS 

Money laundering is the disguising of the existence, nature, source, ownership, location, and disposition of property derived from criminal activity, according to the ACFE’s Fraud Examiners Manual. For Captain Every, this meant exchanging jewels into the acceptable currency of Merrie Olde England.

Now the laundering process usually involves three steps: 1) Placement: placing the illegal money into the legitimate financial system 2) Layering: moving the money from one international account to another usually by wire transfers 3) Integration: creating a series of business transactions in which the money appears to be “clean” to the unsuspecting public and regulators.

Many believe that successful money laundering can facilitate drug trafficking and cause political chaos and economic disruption. (Mexico might be a good example of all three in one country.)

GROUP OF SEVEN CREATES TASK FORCE 

Money laundering has become a huge global problem. The Group of Seven countries at the July 1989 economic summit in Paris created the Financial Action Task Force (FATF) for the purpose of developing and promoting policies at national and international levels, and combating money laundering and terrorist financing, according to www.fatf-gafi.org.

According to the FATF’s mission statement, the group is a policy-making body that works to generate the necessary political will to bring about national legislative and regulatory reforms.  

In 1990, and with revisions in 1996 and 2003, the FATF provided member nations a complete set (generally referred to as “Forty Recommendations”) of countermeasures against money laundering, covering the criminal justice system and law enforcement, the financial system and its regulation, and international cooperation.

The recommendations are organized in four categorical headings with subsequent subsections:

Section 1, Legal System (recommendations 1 – 3): Countries should criminalize money laundering, the intent and knowledge required for a conviction of money laundering can be inferred from objective factual circumstances, and measures should be adopted to permit confiscation of property when appropriate.

Section 2, Measures to be Taken by Financial Institutions and Non-Financial Businesses and Professions to Prevent Money Laundering and Terrorist Financing (recommendations 4 – 25): Countries should ensure secrecy laws don’t impede the acceptance of FATF recommendations. Financial institutions should conduct due diligence of customers, implement appropriate risk management systems, increase cross-border monitoring, maintain an awareness of any new emerging technologies that permit anonymity to banking transactions, review all third-party transactions, maintain records for five years, and pay special attention to complex transactions. Due diligence should be conducted with other nonfinancial businesses such as casinos, real estate agents, dealers in precious metals and stones (that one must be for Captain Every), and others.

Section 3, Institutional and Other Measures Necessary in Systems for Combating Money Laundering and Terrorist Financing (recommendations 26 – 34): Countries should establish a financial intelligence unit for gathering information, which should include suspicious transaction reports and should ensure certain law enforcement authorities have responsibility for money laundering and terrorist financial investigations.

Section 4, International Cooperation (recommendations 35 – 40): Countries should provide the widest possible range of mutual legal assistance in relation to money laundering and terrorist financing, permit the ability to freeze and seize certain assets pursuant to requests by foreign governments, and should recognize money laundering as an extraditable offense.

FATF’s recent publication, “Detecting and Preventing the Illicit Cross-border Transportation of Cash and Bearer Negotiable Instruments,” identifies three methods of physically transferring cash and bearer negotiable instruments: cash courier, post, and containerized cargo. (Bearer negotiable instruments include travelers’ checks, cashier’s checks, promissory notes, and money orders, among others.) This FATF publication also identifies red flags to assist customs and border control agencies.

ANTI-MONEY LAUNDERING NETWORK 

Nine years after FATF’s inception, the United Nations created the International Money Laundering Information Network (IMoLIN) on behalf of anti-money laundering international organizations as a resource for information. IMoLIN’s key feature is its Anti-Money Laundering International Database.

The Global Programme against Money Laundering, Proceeds of Crime and the Financing of Terrorism (GPML) of the United Nations Office on Drugs and Crime (UNODC) now administers and maintains IMoLIN on behalf of 11 international partner organizations.²

According to the IMoLIN website, the network is a compendium of anti-money laundering laws and regulations, a good source of national contacts and authorities, a multilingual database, and an important reference tool for law enforcement involved in multinational jurisdictional investigations. The site provides a calendar of national, regional, and international anti-money laundering seminars and conferences.

Beyond the IMoLIN educational events, the ACFE is offering the perennial seminar, “Money Laundering: Tracing Illicit Funds,” Jan. 31 through Feb. 1, in Phoenix, Ariz. Also check out the archived webinar on the ACFE site, “AML/OFAC Risk Assessment – The Cornerstone of an Effective Compliance Shop,” plus past Fraud Magazine articles and annual conference breakout session notes.

The European Commission’s anti-fraud office, OLAF (Office Euopéen de Lutte Anti-Fraude) operates the Anti-Fraud Communicators Network (OAFCN). The OAFCN highlights the investigations in individual member states and the global community’s fight against fraud.

Prior to the establishment of FATF, international cooperation on money laundering, even within Europe, was haphazard and unpredictable. The slow processes allowed criminals to escape. However, the establishment of the FATF rules has engendered timely, global cooperation, which has resulted in some outstanding success stories.

For example, in 2007, all 27 member states of the European Union, Interpol, Europol, and 13 Asian countries cooperated in Operation Diablo by searching cargo ships. Officials seized many millions of pounds of counterfeit tobacco, textiles, electronics, and footwear in the United Kingdom, Germany, Slovenia, Slovakia, France, Spain, the Netherlands, Bulgaria, Malta, Cyprus, and Portugal.

The OLAF website details countless case studies of international cooperation.

AT THE END OF A ROPE 

We wonder if the results would have been the same if Captain Every and crew were to pull off their raid in today’s waters. Many of his crew members met the hangman’s noose after trying to launder their loot, and Every was rumored to have died a pauper. Money launderers now aren’t paying for their crimes at the end of ropes, but many more are being apprehended and tried because of unified global efforts.

Richard Hurley, Ph.D., J.D., CFE, CPA, is a professor in the University of Connecticut (Stamford) School of Business.  

Tim Harvey, CFE, is director of the ACFE’s UK Operations.  

1 Thanks to William Mosher, senior investigator for the New York State Police, for providing the story of Captain Every during his presentation of “Internet Gambling and Money Laundering” at the August 2010 meeting of the ACFE’s Albany Chapter. Attending a local ACFE meeting can be a “piratical” experience.

2 The 11 international partners of IMoLIN include: the Asia Pacific Group on Money Laundering, the Caribbean Financial Action Task Force, the Commonwealth Secretariat, the Council of Europe – MONEYVAL, the Eastern and Southern Africa Anti-Money Laundering Group, the EuroAsian Group, the Financial Action Task Force, the Financial Action Task Force on Money Laundering in South America, the Inter-Governmental Action Group Against Money Laundering and Terrorist Financing in West Africa, Interpol, and the Organization of American States.  

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