Trade-based Money Laundering: New Impetus for an Old Threat

The phrase “money laundering” conjures images of suitcases crammed with $100 bills being snuck across the border by a drug cartel courier, and funds being wired into and out of bank accounts in a dizzying series of globe-circling transactions. Those are apt examples of two of the three main methods of scrubbing clean illicit funds – bulk cash smuggling and laundering through financial institutions – but experts say that the third method, trade-based money laundering, likely far surpasses the other two in volume and is poised to grow in importance in the years ahead.

The Financial Action Task Force (FATF), a Paris-based international agency focused on money laundering and terrorist financing, has defined trade-based money laundering as, “The process of disguising the proceeds of crime and moving value through the use of trade transactions in an attempt to legitimize their illicit origins,” adding, “In practice, this can be achieved through the misrepresentation of the price, quantity or quality of imports or exports.”

Dennis Lormel, former head of the FBI’s terrorist financing section, explains that while trade-based money-laundering, or TBML, is as old as international commerce, it has become a growing problem in recent years in what might be termed a negative side effect of several positive developments. “First, international trade has grown dramatically in recent years, which obviously is a good thing overall, but that increased volume makes it more challenging to identify an individual illicit transaction. Second, the growth of trade has been facilitated by steps which can make it difficult to monitor activity, such as the establishment of free trade zones. Third, the successes we have enjoyed in the years since 9/11 in combating bulk cash smuggling and the use of financial institutions to launder money have pushed criminal and terrorist organizations in new directions, including trade-based laundering.”

Indeed, recent years have seen a number of high-profile prosecutions of trade-based money-laundering cases. In May, a federal judge in Los Angeles sentenced a co-owner of Woody Toys, Inc. to 14 months in custody for participating in a scheme that laundered approximately $3 million for Mexican and Columbian drug traffickers, according to court documents. U.S. Immigration and Customs Enforcement (ICE) noted that, “Foreign toy retailers with Colombian and Mexican pesos would contact currency brokers to buy discounted U.S. dollars, which they used to purchase merchandise from Woody Toys. The dollars being ‘sold’ were allegedly proceeds from illegal drug sales that had been deposited in the toy company’s accounts or delivered to the business. The Columbian or Mexican pesos the currency broker received from the foreign toy retailer were remitted to the drug trafficking organizations.” ICE noted that several Woody Toys employees previously had worked at Angel Toy Company, another Los Angeles-area toy wholesaler whose two owners each were sentenced to three years in prison in January 2012 for partnering with drug cartels in a similar scheme, known as a Black Market Peso Exchange, or BMPE.

The United States Attorney’s Office for the Central District of California charged that Angel Toy Company, or ATC, “manufactured plush toys while developing an international reputation for laundering money generated by drug trafficking.” The U.S. Attorney’s Office explained that a Black Market Peso Exchange “is a complex, money laundering scheme in which drug proceeds enter the legitimate financial system through numerous ‘structured’ cash deposits into accounts held by a legitimate business in the United States. The money is returned to drug traffickers when actual goods – in the case of ATC, stuffed animals such as Teddy bears – are exported to the foreign countries and sold to generate local ‘clean’ money.”

Dennis Lormel, the former FBI agent who now teaches courses on trade-based money laundering for the Association of Certified Anti-Money Laundering Specialists (ACAMS), explains that for all of the complexity of Black Market Peso Exchanges and similar schemes, “In the end, trade-based money laundering comes down to over-invoicing or under-invoicing for goods. To move money out of a country, you can either import goods at overvalued prices and then send payment to your foreign source, or export goods at undervalued prices, in which case the party overseas can sell them at actual market prices, and so extract the real cash value. To move money into a country, you reverse those steps: either importing goods at undervalued prices and obtaining cash by re-selling them domestically for their actual value, or exporting goods at overvalued prices and receiving inflated payments from your co-conspirator overseas.”

Lormel adds that one reason trade-based money laundering is difficult to detect is that customs inspectors and others scrutinizing transactions cannot be expected to know the fair market value of all the goods that enter and leave the country each year, particularly when differences in quality mean that a common item, such as a watch, may be worth anywhere from a few dollars to a few thousand dollars. The sheer volume of merchandise entering the country also constitutes a major challenge. For Fiscal Year 2012, U.S. Customs and Border Protection (CPB) reports that it processed more than $2.3 trillion in trade – up 5% from the previous year – and processed almost 25 million cargo containers through the country’s ports of entry. While CPB does not disclose what percentage of cargo containers it physically inspects, experts put the proportion in the low to mid single digits.

The United States’ susceptibility to trade-based money laundering is all the more troubling because of growing evidence of the involvement of terrorist organizations in addition to – and often in league with – drug cartels. In 2011, the Department of Justice instituted criminal and civil actions against a bank, two Lebanese exchange houses, 30 U.S. used auto brokers, and several individuals allegedly involved in a complex scheme that both funded the Shiite militant group Hezbollah and laundered approximately $480 million in proceeds from the sale of South American cocaine. The trade-based component of the scheme involved used cars purchased in the U.S. and shipped to West Africa, where they were re-sold, with a portion of the proceeds allegedly funneled to Hezbollah.

Lormel, whose firm, DML Associates, LLC, consults with banks and other financial institutions on money laundering and terrorist financing issues, says the Hezbollah-drug cartel collaboration is representative of a worrisome trend. In a July 2013 white paper, he explained that, “Traditional ethnic organized crime groups like the Italians, Russians, and Asians continue to primarily pose a threat to the economy.  In contrast, newer criminal organizations that thrive in areas of conflict like Afghanistan, Pakistan, and Mexico continue to pose a threat to the economy, while also posing a threat to national security.  These groups have openly formed alliances with and have increasing found a financial benefit in collaborating with terrorists. This evolution has been driven by the financial requirements of the disparate groups.  Regardless of the nature of the group, to succeed and sustain operations, they must have ready access to funding.  Traditional organized crime groups have an existing financial infrastructure and long term goals.  This sense of financial stability affords them the opportunity to maintain their customary criminal activities.  Conversely, newer criminal organizations tend not to have the same financial stability and are geared more to short term goals.  They function best in areas of crisis and/or conflict.  This is where they find common ground with terrorists.  Terrorists have lost many legitimate funding streams and therefore have turned to criminal activity as a main source of income.  As a result, newer criminal organizations and terrorists have realized they have much in common and have formed very profitable partnerships.  This trend is one that will continue to grow.”

In response to this threat, the Department of Homeland Security’s Immigration and Customs Enforcement (ICE) in 2004 established a Trade Transparency Unit, which employs sophisticated software and other investigative techniques to analyze trade data to identify patterns and potential specific instances of trade-based money laundering. ICE has since helped several Latin American countries establish similar units, and exchanges data with them. Law-enforcement officials and financial-industry executives charged with combating trade-based money laundering also are drawing upon a growing body of research, including extensive pricing databases, developed by academicians such as John S. Zdanowicz, PhD, a professor of finance at Florida International University.

Recent prosecutions highlight the value of these and other counter measures. However, experts emphasize that as law enforcement makes greater inroads against bulk cash smuggling and the use of financial institutions to wash clean illicit funds, criminal enterprises and terrorist organizations are likely to place even greater reliance on hiding their money-laundering activities within the ever-growing volume of international trade transactions.