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Anti-money laundering

Threat finance has become big business

Jesse Spiro  Head of Threat Finance & Emerging Risks, Thomson Reuters

Jesse Spiro  Head of Threat Finance & Emerging Risks, Thomson Reuters

… and so has the fight to stop it.

What is threat finance?

According to the UN Office on Drugs and Crime, in 2012 illicit cash flows were estimated to account for 2%-5% of the global GDP, amounting to $800 billion to $2 trillion per year. This significant cash flow represents what is referred to as “threat finance,” the means and methods used by organizations to finance illicit operations and activities that pose a threat to US national security and global financial security.

Money laundering is the underlying method of all threat finance practiced in one form or another by a broad array of actors around the world. This process creates the appearance that large amounts of money obtained from serious crimes, such as drug trafficking or terrorist activity, originated from a legitimate source – and when employed successfully, allows criminals to fund their activities and threaten the US and global security.

Some of the key players involved in money laundering are:

  • International terrorist organizations
  • Drug cartels/narcotics traffickers
  • Transnational organized crime groups
  • Arms traffickers
  • Wildlife traffickers
  • Cybercriminals
  • Identity-related criminals
  • Organ traffickers
  • Illegal mining operations
  • Pirates
  • Counterfeiters

The US government has been vigorously working to counter threat finance, protecting the financial system from money laundering by enhancing transparency and by requiring financial services providers to collect, maintain and report information that supports law enforcement investigations and helps to deter illicit financing.

Threat finance has grown exponentially alongside the increasing integration of the global financial system due to the lower barriers to trade and movement of capital. Technological innovations make it easier to launder money while at the same time increasing the difficulty of detecting and stopping illicit operations by law enforcement and federal agencies.

With significant costs to national security, threat finance:

  • Undermines good governance by allowing the systematic bribery of public officials, which fosters corruption
  • Weakens state stability and sovereignty by allowing powerful organized criminal groups to grow in power and dominance
  • Degrades legal systems and the rule of law
  • Distorts markets at the local, national and international level, primarily through trade-based money laundering (TBML) and the counterfeiting of goods and currency

How threat finance works

Organized Crime Groups (OCGs) enter markets through seemingly legitimate businesses, especially traditionally high-risk markets such as precious metals, commodities, energy and more. They abuse the international banking system and correspondent banking relationships. This is accomplished through TBML networks.

TBML involves the exploitation of the international trade system for the purpose of transferring value and obscuring the true origins of illicit wealth. TBML schemes vary in complexity but typically involve misrepresentation of the price, quantity or quality of imports or exports.

Hundreds of billions (a conservative estimate) were laundered through TBML in 2010, and the scale will increase as the global market in trade increases.

According to the US Department of State’s 2016 annual report on money laundering and financial crimes, TBML concerns have surfaced in countries or jurisdictions including Afghanistan, Australia, Belize, Brazil, Cambodia, Canada, China, Colombia, Greece, Guatemala, Hong Kong, India, Iran, Iraq, Japan, Kenya, Lebanon, Mexico, Pakistan, Panama, Paraguay, the Philippines, Saint Maarten, Singapore, Switzerland, Taiwan, the United Arab Emirates (UAE), Uruguay, Venezuela, and the West Bank and Gaza.

Black Market Peso Exchange (BMPE): An illustration

Although Latin America and the United States are used in the example below, similar arrangements have been widely used in many countries to repatriate the proceeds of various types of crimes. These transactions combine legal and illegal activities and multiple actors across international jurisdictions that wittingly or unwittingly facilitate TBML.

Infographic illustrates threat finance steps in a black market peso exchange
Source: Financial Action Task Force, Trade Based Money Laundering, June 23, 2006, p.8

Steps in a Black Market Peso Exchange

  1. Drug traffickers smuggle illegal drugs into the United States and sell them for US dollars (“narco dollars”).
  2. Drug traffickers sell the narco dollars at a discount to a peso broker.
  3. The peso broker consolidates the narco dollars into a US bank account, and
  4. Pays the drug traffickers with pesos from a Latin American bank account.
  5. The peso broker uses narco dollars to pay a US exporter for legitimate goods on behalf of a Latin American importer.
  6. The Latin American importer receives the legitimate goods and
  7. Sells them in Latin America for pesos.
  8. The Latin American importer repays the peso broker with pesos.

Another example is the Guangzhou Enterprise OCG, a group led by Colombian nationals that laundered money through bank accounts in Hong Kong and China on behalf of drug trafficking organizations in Mexico and Colombia. The money was used to fund purchases of counterfeit goods in China, which were then shipped to Colombia and elsewhere for resale. The group laundered over $5 billion for drug cartels in Colombia and Mexico before arrest in 2016.

Lifestyles of the rich and famous

Real estate offers another classic method of laundering money. Through a complex series of offshore accounts and shell companies, real estate is a popular way for many criminals to hide in plain sight. According to the Miami Herald, The US Treasury Department is so concerned about criminals laundering dirty money through Miami-Dade County real estate that in March it started tracking the kind of transactions most vulnerable to manipulation: shell companies buying homes for at least $1 million using cash. In addition, the same decision was made for homes purchased in Manhattan for more than $3 million using cash.

More than a roll of the dice

Gambling junkets are a complex and formal gambling system involving significant amounts of cash – a high- stakes system of gambling that has become the perfect vehicle for money laundering. Junkets are used in Macao, Las Vegas, Singapore, Cambodia/Laos, Australia and more to satisfy VIP high rollers – in Macao, 70% of revenue comes from junkets. Junket operators and their “sub-junkets” work to bring in VIPs to participate and earn a commission off the amount gambled. The casino pays junket operators a monthly fee for meeting a monthly minimum income. The system rewards volume for the organizers and participants.

For example, Peter Tan Hoang ran as much as $1 billion in black cash through Australia’s largest casino between 2000 and 2012 before being murdered. He gambled under four different names and was enticed with an array of perks, including overseas holidays, cash gifts of as much as $100,000, and gambling “commissions” in the hundreds of thousands of dollars. At the time of his death, the Australian Crime Commission estimated that at least $15 billion a year was laundered in and through Australia each year.

Taking the shine off gold

Due to the location and nature of mining operations, the industry tends to have complex supply chains with operations and third parties (including vendors, agents, suppliers and contractors) situated across multiple jurisdictions that make the chain difficult to manage and compliance even more challenging.

Because of this, the industry has become rife with bribery, corruption, environmental crimes, conflict minerals, human rights violations and illegal mining. A recent Thomson Reuters white paper, “Illegal Mining in South America and Financial Risk – Taking the Shine Off Gold,” looks at how mining has become a boon for money laundering.

The illegal mining of gold is overtaking cocaine’s preeminence for the most profitable organized crime activity in parts of South America, especially within the traditional coca-producing nations of Peru and Colombia. The rise in gold prices, the belief that it is a relatively low-risk venture compared to the drug trade, and a lack of enforcement and government standards make illegal mining an appealing option. In Peru, “dirty gold” now outstrips cocaine as the country’s most lucrative export. And for narcotics dealers, illegal mining and the export of “dirty gold” is now considered to be the simplest and most profitable way to launder money in Colombia.

As a result, this illicitly gained commodity has made its way into legal international gold markets such as jewelry, electronics, investments and more.

How deals are done

Panama-based law firm Mossack Fonseca partners with a cottage industry in Miami to help foreigners navigate the world’s shadow economy and buy South Florida luxury homes. Offshore companies are legal, as long as their owners pay taxes and declare assets. But regulators scorn them as tools for tax evasion and stashing secret funds.

Map illustration shows how Mossack Fonseca laundered money through UBO loopholes and real estate
Kara Dapena, Miami Herald


Brazilian investor (1) wants to buy a condo in Miami (2) through an offshore company because it offers estate-tax advantages and secrecy. Investor goes to Miami law firm for help. Miami firm asks Mossack Fonseca (3) to set up offshore company in British Virgin Islands (4), where the company owners don’t have to reveal their names. Miami firm sets up Florida-based company (5) owned by the offshore company to buy the Miami condo with cash. The investor now owns a condo in Miami through an offshore company that owns a Florida company.

Transpacific trade deals impact criminal behavior

While US participation in the TPP has recently been eliminated, the criminal cross-border relationships developed from preexisting transpacific commercial relationships have already been solidified. As the US increased trade with China and Latin America as a result of NAFTA there was an unintended consequence. These new relationships inadvertently gave rise to some of the most powerful transnational organized crime groups in the world: “The negotiators should understand that increased legal trade automatically increases the illicit trade. For example, trade liberalization and deregulation of the trucking and shipping industry increase the licit trade as well as the illicit trade; privatization of companies and financial liberalization increase money-laundering and illicit-investment opportunities; increased legal trade creates additional concealment for illicit trade; and agricultural reform can lead to increased drug crop cultivation.”

Innovations in money laundering

While the old standards continue to serve as profitable means to launder money, there are several emerging risks that are gaining momentum:

  • Digital currencies: Bitcoin, Monero, Dash, Litecoin and more. These digital currencies can be used to facilitate many forms of illicit financial activity online, such as online gambling, dark markets and ransomware.
  • Phishing: OCGs are operating internationally. They use phishing tactics to install malicious software on mobile phones to then steal bank log-in credentials; then they monitor for receipt of transaction authorization numbers (TANs), which grant access to user banking
  • Online gambling: Italian crime families are using bitcoin casinos to launder money. There are over 100 online bitcoin casinos with no minimum deposits and instant payouts. They provide a layer of anonymity if done correctly: The funds are easily transferred anywhere instantly no matter the value; bots can be used to make bets and transfer winnings; and the odds are better than traditional casinos. More anonymous cryptocurrencies (e.g., Monero/Dash) will replace bitcoin as the cryptocurrency of choice for online gambling.
  • Dark markets: Silk Road is the first major “dark market.” AlphaBay is currently the largest with over 200,000 users, recently adding Monero as a buying option in 2016. Decentralized dark markets (e.g., OpenBazaar) can’t be shut down or “seized” the way Silk Road and other centralized dark markets have been. Some see decentralized dark markets as the future of this kind of illicit activity.
  • Ransomware: One billion dollars was lost to this increasingly popular form of cybercrime in 2016. Ransomware is often operated by sophisticated OCGs, with Eastern Europe and Asia being hot spots.
  • Online advertisement fraud: Methbot creators brought in an estimated $3 million a day through fraudulent advertisements online by creating and registering false IP addresses and simulating online impressions.

A multitier approach

Threat finance/illicit financial methods are normally multitiered, and they typically employ a variety of techniques in order to launder illicit proceeds into the legitimate financial system – so it’s not one size fits all. It becomes a mix-and- match system to achieve the best results.

The cases above illustrate this at length. For the Guangzhou Enterprise case, the global banking system was used to transfer illicit proceeds from narcotics sales in Latin America to Chinese banks and casinos, where the money was laundered either through resale of counterfeit products (TBML) or through junkets in casinos.

In conclusion

As complex as the subjects of threat finance and money laundering are, Thomson Reuters has been working with government and private sector clients to develop and evolve a number of solutions to assist in combating these significant issues.

For over 15 years, Thomson Reuters has provided innovative solutions in this space, combining technology and human expertise for our federal clients. The World-Check database has been used globally by governments and law enforcement to assist in investigations, targeting and intelligence work for the last 17 years. Enhanced Due Diligence is the industry standard in vendor/merger/ partner enhanced due diligence and investigations providing a powerful vetting solution. Thomson Reuters Special Services (TRSS) has assisted the national security community for the last nine years in the mission to combat threat finance through their work on supply chain threats, counterfeiting, diversion and smuggling, fraud network investigations, and identity verification and support.

With the right tools and a cooperative, worldwide approach, threat finance can be addressed on a global scale.

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