Money Laundering in the News: Los Angeles Fashion District Raid Puts Trade-Based Money Laundering and Black Market Peso Exchange in Spotlight

Nov 11, 2014   

November 11th, 2014

On September 10, 2014, federal and local law enforcement officials raided the Los Angeles Fashion District in an effort to combat alleged money laundering for Mexican drug cartels which was occurring within the District. The raid, part of “Operation Fashion Police,” focused on the Fashion District due to the high potential for vendors to launder cartel money through a technique known as trade-based money laundering.

Law enforcement and financial institutions have seen an increase in trade-based money laundering since June of 2010 when the Mexican government announced regulations limiting deposits of U.S. cash in Mexican banks. (More information on Mexico’s deposit regulations can be found in the FinCEN Advisory entitled: “Newly Released Mexican Regulations Imposing Restrictions on Mexican Banks for Transactions in U.S. Currency” found here.)

A. Defining Trade-Based Money Laundering and understanding its common techniques.

Generally speaking, trade-based money laundering can be broadly defined as the process of disguising illicit proceeds and moving the value of such proceeds through a series of trade transactions in an attempt to disguise and legitimize their origin.

The basic premise of trade-based money laundering is as follows: Foreign drug traffickers who have an abundance of U.S. currency in the U.S. need a technique to move that money, the source of which is illicit drug profits, overseas. To accomplish this objective, traffickers, with the assistance of conspiring importers/exporters, arrange for the purchase of goods in U.S. dollars. Those goods are then shipped to foreign destinations, usually but not necessarily the home countries of the traffickers. Once these goods arrive, they are sold in the local currency. Thus, the traffickers have now moved their proceeds across the border, converted the U.S. dollars into local currency which traffickers use for day-to-day operations, and legitimized their income as the funds appear to be derived from legitimate trade and business transactions.

Trade-based money laundering can take several forms ranging from the very basic to the incredibly complex. While a complete list of trade-based money laundering techniques is beyond the scope of this article, some of the more common forms of trade-based money laundering include:

  • Over/Under invoicing goods and services: This technique involves the misrepresentation of the price of a good or service in order to transfer additional value between the importer and exporter. By invoicing the goods below fair market value, an exporter can transfer monetary value to an importer because the importer will be paying less for the good than the importer will receive when the good is sold. Alternatively, by invoicing at an amount above fair market value, the exporter receives added value as the goods have been purchased by the importer at a price higher than the value the importer will receive when they sell the goods.
  • Multiple invoicing of goods and services: This technique involves the issuance of more than one invoice for the same transaction. Through the issuance of multiple invoices, a money launderer can make multiple payments for the same goods, thus enabling more money to move in each transaction. Further, unlike over/under invoicing, these multiple payments can be made at fair market value. In order to increase difficulty in detection and avoid possible BSA reporting requirements, parties will often make payments for multiple invoices through different financial institutions.
  • Over/Under shipment of goods and services: This technique involves the misrepresentation of the amount of goods being shipped or services being provided. By shipping a greater quantity of goods than was paid for, an exporter can transfer addition value to an importer who will then sell these extra goods in the local market.
  • Falsely described goods and services: This technique involves the misrepresentation of the type or quality of the good being shipped or the service being provided. The false description creates a discrepancy between the listed invoice value and the actual market value of the good. For example, an exporter ships gold worth $3 per unit but falsely describes the shipment on its invoice as silver worth $2 per unit. The importer would pay the exporter $2 per unit for the goods shipped and then sell the higher valued product on the local market for $3 per unit and obtain the extra money as laundered profits.

The Financial Action Task Force, a 35 member inter-governmental policy-making body of which the U.S. is a member and whose purpose is to establish international standards to combat money laundering, has developed a comprehensive guide regarding the various trade-based money laundering techniques used to launder money. This informative guide can be read here.

B. The Black Market Peso Exchange

One advanced trade-based money laundering technique is known as the “Black Market Peso Exchange.” While the particular details of any Black Market Peso Exchange operation will vary on a case by case basis, the basic operation of any black market peso exchange arrangement usually follows the same steps.

To demonstrate, let’s use a hypothetical involving a Mexican drug cartel and apply their activities to the outline of trade-based money laundering provided by the Financial Action Task Force in its guide. In such a case, the black market exchange would operate as follows:

1) Drug traffickers smuggle drugs into the United States which are sold for U.S. dollars;

2) The drug cartel arranges to sell the U.S. dollars at a discount (i.e. a rate cheaper than that paid on the forex) in exchange for currency of the trafficker’s home country (in this example Mexican pesos) to a third party known as a “peso broker;”

3) The peso broker pays the cartel in pesos from his account located in Mexico;

4) The peso broker will then structure deposits of the U.S. dollars into the broker’s U.S. bank accounts, known to as “funnel accounts” in an effort to avoid triggering BSA reporting requirements;

5) The peso broker then locates Mexican importers who import goods from the U.S. and need to pay for these goods with U.S. Dollars;

6) Once located, the broker will arrange to pay the U.S. exporter on behalf of the Mexican importer in U.S. dollars from the broker’s U.S. bank account;

7) Goods are then shipped to the Mexican importer; and finally,

8) The importer sells the goods in Mexico, pays the broker his arranged discounted exchange fee in pesos deposited in the broker’s Mexican bank account, and thus replenishes the broker’s account with the pesos the broker needs to begin the cycle again with a new laundering transaction.

C. Trade-Based Money Laundering and Black Market Exchange Red Flags and Financial Institution Reporting Obligations

Pursuant to the Bank Secrecy Act (“BSA”), financial institutions are required to create reports and records in order to combat fraud, money laundering, and protect against criminal and terrorist activity. More specifically, federal law requires that financial institutions file Suspicious Activity Reports (“SARs”) if the financial institution “knows, suspects, or has reason to suspect” that an attempted or fully conducted transaction: 1) involves funds derived from illegal activities or is an attempt to disguise or hide such funds; 2) is designed to evade the requirements of the BSA and its implementing regulations; or 3) lacks an apparent lawful or business purpose. See 31 C.F.R. § 1020.320see also 12 C.F.R. § 21.11; (more information on BSA requirements can be found on the Office of the Comptroller of the Currency’s website here).

Due to the complexity of many black market peso exchange arrangements, FinCEN has issued several Advisories regarding potential “red flag” indicators of trade-based money laundering or black market peso exchange activities that financial institutions must be aware of. Such red flags include in part:

  • Third party payments for goods and services made by an intermediary apparently unrelated to the seller or purchaser of good;
  • Wires where no apparent business relationship appears to exist between the originator and the beneficiary;
  • Funds transferred into U.S. domestic accounts that are subsequently transferred out of the account in the same or nearly the same amounts, especially those originating from or destined to high risk jurisdictions;
  • A foreign import business with U.S. accounts receiving payments from locations outside the areas of their customer base;
  • In the case of a business account, the deposits take place in a different geographic region from where the business operates. For example, an account for a company operating locally in Florida receives numerous small deposits, all below the threshold reporting requirement, at bank branches in Texas, Virginia, and Tennessee;
  • In the case of a business account receiving out-of-state deposits, the debits do not appear to be related to the stated business activity of the account holder;
  • If questioned, the individuals opening or depositing funds into these “business accounts” have no detailed knowledge about the state business activity of the account holder or the source of the cash deposited.

Should any of the above red flags be spotted, FinCEN urges financial institutions to submit a Suspicious Activity Report indicating possible trade-based money laundering or black market peso exchange activity. A more complete list of trade-based money laundering red flags can be found in FinCEN’s Advisory FIN-2010-A001, entitled: “Advisory to Financial Institutions on Filing Suspicious Activity Reports regarding Trade-Based Money Laundering” found here. More detailed information regarding funnel account specific red flags can be read in FinCEN’s more recent Advisory, FIN-2014-A005, issued on May 28, 2014 here.

The attorneys at Fuerst Ittleman David & Joseph, PL have extensive experience in the areas of administrative law, anti-money laundering, regulatory compliance, customs, import and trade law, white collar criminal defense and litigating against the U.S. Department of Justice. If you are a financial institution, or if you seek further information regarding the steps which your business must take to remain compliant, you can reach an attorney by emailing us at contact@fidjlaw.com or by calling us at 305.350.5690.