Money laundering, 21st century-style, part 2 of 2

Businesses "go global" by satisfying needs that unite cultures. However, money launderers do it by exploiting legal and knowledge gaps between jurisdictions. To deter them, governments and industries around the world must collaborate. But persuading busy and cash-strapped clients to pitch in isn't easy. So CFEs advising them must have a comprehensive understanding of international money laundering techniques. The profession's collective intelligence is a rich source of such insight. To that end, here are money laundering reports from CFEs on six continents.

LATIN AMERICA: THE BIGGEST AND NEWEST THREATS

Juan Manuel Portal Martinez, CFE, CIA, CPA, is auditor general of Mexico and president of the Mexico City ACFE Chapter.

"Most money laundering (ML) in Latin America serves the illegal drug trade," Portal says. "But regardless of the source of their illicit income, criminals in this region favor certain techniques. These include schemes that disguise illegitimate funds as surcharges on otherwise lawful commercial transactions or conceal criminal profits in legal payments sent home by Latin Americans working abroad."

Yet even as regional nations grapple with these challenges, Portal says, new frauds emerge. In one, ostensibly genuine religious organizations — acting on behalf of criminal groups — deposit large quantities of cash in their bank accounts, alleging the funds are worshipers' donations. In another scheme, debit and prepaid cards help money launderers move enormous sums — broken into countless small amounts — across international borders without triggering financial controls that monitor larger transactions.

Regional improvements
Criminals launder anywhere from US$100 billion to US$250 billion (2 percent to 5 percent of Latin America's US$5 trillion GDP) each year.

In response, countries have increased their AML efforts. But, Portal says, they can further mitigate risks by: 

• Strengthening AML laws. 
• Training justice system personnel in ML prevention, detection, investigation and prosecution. 
• Heightening awareness among financial and nonfinancial institutions of the need to accurately identify clients and their operations, verify the information they provide and report irregular or suspicious activities. 
• Increasing supervision of institutions that money launderers target. 
• Expanding FIU powers and promoting international agreements that enable them to exchange information and develop joint strategies. 

Progress in Mexico
"Each level of government — federal, state and municipal — has great potential to fight ML more effectively," Portal says. "For example, there are no municipal mechanisms to deter or detect financial entities aiding organized crime groups, even though municipalities maintain real estate purchase and sale records and issue certificates of incorporation."

Likewise, he says, at the state level in Mexico, vehicle ownership transfers, transactions conducted through notaries public and tax payments all generate data useful in detecting and preventing ML. Yet, rarely is this information systematized to identify illegal financial activities. In fact, state officials aren't trained to detect ML or the flow of capital from illegal activities, and there are virtually no specialized financial or asset detection units in the state attorney offices. Criminals therefore engage in ML and corruption without fear of prosecution or sanctions.

"The federal government maintains fiscal databases and financial information," Portal says. "But because states and municipalities provide no such data, the federal government has only a fraction of the information necessary to identify, investigate and prosecute ML cases."

A bill pending in Mexico's Congress would mandate the recording of many transactions by non-financial parties, such as notaries, lawyers, vehicle and jewelry sellers and realtors; it also would require Know Your Customer (KYC) policies and reporting to the FIUs.

"Private industry — mainly the financial sector — follows some federal AML protocols," Portal says. "But because they earn fees from ML, they have little incentive to report suspicious transactions. If the pending legislation passes, that and other things will change."

THE MIDDLE EAST: PUTTING LAWS INTO PRACTICE   

Tania Fabiani, CFE, CAMS, CFA, is president of the United Arab Emirates (UAE) ACFE Chapter and a partner of PricewaterhouseCoopers in Abu Dhabi, where she leads its Middle East Fraud Risk Assurance practice.

"Middle Eastern nations have significantly improved their AML regulatory frameworks," Fabiani says. "But the ultimate measure of their success will be how well they enforce those rules. Meaningful progress will require better-funded FIUs and deeper intra-regional cooperation. It also will depend on private industry's more active participation in AML."

Thus far, increased regional compliance with Financial Action Task Force (FATF) AML guidelines has begun to mitigate risks, Fabiani says. [The Group of Seven (G-7) nations established FATF in 1989 to fight international money laundering.] These measures include, for example, criminalizing money laundering, articulating FIU roles and responsibilities and requiring that financial institutions report suspicious transactions. The initiation of information-sharing arrangements among area FIUs also has reduced risks.

To address an important ML vulnerability, the UAE and other nations are strengthening their oversight of money exchange houses and "hawala" — an alternative remittance system widely used in the Middle East and parts of Africa and Asia.

The next level
"Governments should consider increasing the cooperation they already practice in, for example, the Middle East and North Africa FATF (MENAFATF)," Fabiani says. "Meeting more often would identify additional best-of-breed practices and produce a broader range of actionable intelligence. Also, it would be helpful to establish minimum AML standards for central banks. That's something the Gulf Cooperation Council [a political and economic group whose member nations border the Persian Gulf] could discuss."

Another approach, she added, would be for area states — perhaps through the MENAFATF — to devise a comprehensive regional AML strategy and declare their commitment to it. A formal statement of this kind could include an action plan to enhance FIUs' purview, establish clear operational links between regulators and law enforcement and develop the political capacity and will to achieve the plan's objectives by a certain date.

Fabiani believes the private sector's AML compliance also would improve if it better understood the regulatory framework and increased its anti-fraud resources.

"Industry could solve these problems by embracing preventive AML," Fabiani says. "Adopting international best practices would reduce both costs and losses, and it would boost corporate reputations regionally and internationally."

Emerging technology risks
Use of so-called new payment methods, including online banking and purchasing systems such as PayPal, is soaring in the Middle East.

"The money laundering risk in these channels is high," Fabiani says. "It's still permissible to execute a wide range of online transactions anonymously. We need much-tighter controls."

ASIA: ITS BIGGEST PLAYER

Peter Humphrey, CFE, is founding president of the Shanghai ACFE chapter and founder of the risk management consultancy ChinaWhys.

"The greatest money laundering risk in Asia today is Chinese government corruption," Humphrey says. (See "Avoiding trouble in China," by Humphrey.)

With decades of experience in Asia, he's seen firsthand how easily multinational companies can get embroiled in schemes to launder kickback and bribery money through shadowy offshore companies and international banks.

"This is a major headache for them," Humphrey says. "It affects everything that involves state-owned enterprises and government officials — from mergers and acquisitions' transactions to business operations and sales and procurement."

Off-shore whitewash
Asia's casinos are another favored channel for money laundering, Humphrey says.

Macau, the region's casino capital, is 40 miles across the Pearl River delta from Hong Kong. Both former European colonies are now relatively autonomous "special administrative regions" of China.

"With the help of local mafias," Humphrey explains, "many corrupt individuals and organizations from China wash their bribery and kickback money in Macau's casinos."

AML lite
In 2006, as thousands of corrupt Chinese officials began fleeing abroad with billions of dollars in illegitimate gains, China introduced an AML law based on international standards. Since then, other fraudsters still in China commit all kinds of ML abuses.

"I helped advise the law's drafters," Humphrey says. "But it seems to have had only limited effect, because entrenched interests in China don't want it to really bite."

Survival skills
"Corporations — especially unprepared multinationals — need to proactively defend themselves," Humphrey says. "To guard against being dragged into criminal activity, they should implement a full suite of risk management policies, including preventive measures against bribery, tax evasion and money laundering, KYC policies, due diligence with an anti-bribery and anti-money laundering perspective as well as strong internal controls, checks and balances and surprise audits."

OCEANIA: INTERNAL AND EXTERNAL HAZARDS

David Harley, CFE, CAMS, is vice president of the Brisbane, Australia, ACFE Chapter and director of forensic services at PricewaterhouseCoopers Brisbane.

"Oceania faces two key money laundering risks," Harley says. "One is transnational organized crime; the other is the entrenched corruption that plagues certain states here."

As its name implies, the region spans a large part of the vast Pacific Ocean. Approximately 90 percent of its 36 million inhabitants live in New Zealand, Papua New Guinea or in Australia. The population of Australia is 22 million.

Serious threats
"Unlike lawful entities, transnational organized criminal groups don't have risk and audit committees whose approval they need before acting," Harley says. "But their business models rival those of the best-run corporations. And that has enabled them to swiftly co-opt legitimate companies here and disguise the true sources of their own illegal income."

Also problematic are the high levels of corruption that persist in some of Oceania's less-developed states, undermining fraud fighters' enforcement efforts.

"Because of the global financial crisis and other factors, these nations are easy targets for organized crime," Harley says. "Even with support from the World Bank, the United Nations and others, they still don't have enough regulatory and law enforcement resources to deter criminals, who use these locations as operations centers or transit points for laundered funds and other contraband."

That's bad for those nations, of course. But it also heightens the ML risk in more secure countries like Australia and New Zealand, which, consequently, have had more success in passing AML legislation than they have in fully enforcing it.

Industry responses
"Financial services firms in Australia and some mining companies here are quite good at mitigating the risk of money laundering related to corruption," Harley says. "But other industries are far less savvy and correspondingly less committed to fighting it, especially during the financial downturn. In fact, many in business view today's increased regulations as a burden, not a cure."

Even so, Harley believes governments should further enhance bribery and corruption legislation and augment enforcement resources, while educating businesses about their AML roles and responsibilities.

"For its part," he added, "industry needs to acknowledge the seriousness and pervasiveness of fraud risks and train employees to proactively prevent and detect money laundering and other financial crimes, instead of reacting after they occur."

An emerging challenge
"The biggest new money laundering risk in Oceania is mobile payment technology for which there are no commensurate controls," Harley says. "In Papua New Guinea and other less-developed areas, villages with no power or sanitation have mobile access to Internet payment systems. Such services are critical, especially where there are no alternatives. But we have to understand the risks inherent in this technology and monitor mobile transactions accordingly."

AFRICA: WORK IN PROGRESS

Marius Smit, CFE, is president of the South Africa ACFE Chapter and head of group forensic services for Discovery Holdings, a multinational financial services firm headquartered in Johannesburg.

Smit prefaces his remarks — aside from citing FATF actions — by noting that they're based not on formal research but on his experience and that of other members of the chapter.

"Most African nations are committed to implementing AML and countering the financing of terrorism (CFT) programs," Smit says. "In fact, some have already done so and are well on their way to complying with the FATF's minimum standards. Nevertheless, several others are on the FATF's watch list of nations with deficient programs."

Since 2007, the FATF has offered such high-risk jurisdictions specific recommendations on how to mitigate their vulnerability to money laundering and terrorist financing. (See "High-Risk and Non-Cooperative Jurisdictions.")

"Some of these nations have agreed with the FATF on plans to address their deficiencies," Smit says. "Others, however, have not."

Beyond compliance
In Africa, as elsewhere, the financial sector faces greater ML risks than do other industries.

Its mitigation measures therefore must be extraordinary if it hopes to attract business partners from other sectors and regions.

"That's one reason financial institutions should independently assess their AML/CFT programs," Smit says. "It's not enough to know whether your program meets regulatory requirements. You also need to determine, for example, how well your program will stand up to scrutiny by potential business partners from abroad."

Smit therefore recommends that financial institutions perform due diligence not only on their customers, but also on their employees, business partners and intermediaries.

"It helps reduce the risk you'll inadvertently engage with high-risk customers and organizations," he says.

Two faces of technology
Like other regions, Africa faces additional money-laundering risks in the form of new technologies, such as stored value cards and mobile devices used to execute financial transactions, Smit says.

"But banks with automated monitoring systems can identify transactions that might indicate money laundering or terrorist financing — through new or traditional channels."

EUROPE: SEEING THE BIG PICTURE

Jean-Jacques Baudet, CFE, CIA, is a board member of the Brussels, Belgium, ACFE Chapter and chief compliance officer of Record Bank, N.V., a division of ING Group.

The international war against money laundering is intensifying. But in some cases, help is coming from a once-unexpected source — government efforts to reduce tax evasion. Nations eager to counter the financial crisis' effect on their revenues will gladly accept forfeitures or belated tax payments and penalties from anyone convicted of either offense.

"For example," Baudet says, "Europe and the U.S. are increasingly focused on preventing their citizens from evading personal and corporate taxes by moving assets into accounts with foreign financial institutions (FFIs)."

Some time ago, however, indications had emerged that someone who evades taxes might also launder money.

Double threat
A recent article by tax and AML specialists with KPMG LLP, "Foreign Account Tax Compliance Act" recounts how in the 1990s a Cayman Islands bank president arrested in the U.S. provided the U.S. Department of Justice with testimony and depositor account records as part of a deal through which he escaped prosecution for helping U.S. citizens evade taxes and launder money. The bank president also testified before the U.S. Senate on the role of U.S. correspondent banking in international money laundering.

These investigative results were perhaps unprecedented in U.S. law enforcement history, according to the article. Such intelligence, gleaned during this and later investigations, put a spotlight on the potential relationships among tax evaders, money launderers and the often huge sums they illegally conceal.

International cooperation
Ultimately, both Europe and the U.S. passed laws designed to capture badly needed revenue illegally withheld by tax evaders.

"Greece's government has issued new regulations that mandate better identification and prosecution of tax payers who fail to declare all their income," Baudet says, "and other European nations have taken similar measures."

Meanwhile, in a move that affects Europe, the U.S. has passed the Foreign Account Tax Compliance Act (FATCA). When it takes effect in 2013, FATCA will require FFIs to report to the U.S. Internal Revenue Service information about financial accounts held by U.S. taxpayers or by foreign entities in which U.S. taxpayers hold a substantial ownership interest.

To increase the effectiveness of their cross-border regulatory regimes, the U.S., France, Germany, Italy, Spain and the U.K. in February issued a joint statement expressing their intent to forge a reciprocal agreement under which they would share with each other information enabling them to prosecute tax evasion. Some of that data will likely help detect and prevent international money laundering.

All the way
"To help mitigate money laundering and tax evasion, corporate legal and compliance departments must fully meet their responsibilities," Baudet says. "No exceptions! If they're unsure whether something should be reported to the authorities, then they should just report it."

UNITED WE STAND

Helping clients understand and mitigate ML vulnerabilities is among the best services a CFE can provide. When enlightened by such awareness, industry strengthens government-led AML activities. However, to show clients the way forward, CFEs first must share their latest insights with each other, as the practitioners above have done. Those who understand the global dimensions of 21st-century money laundering are best equipped to help their clients fight it effectively.

Robert Tie, CFE, CFP, is a contributing editor with Fraud Magazine and a New York business writer. 

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