By Brian Monroe
bmonroe@acfcs.org
August 4, 2016
In this week’s Financial Crime Wave, the U.S. government has lost trillions of dollars in tax revenue due to criminal evasion and money laundering tied to trade, according to new report, hackers hit Bitcoin exchange for $65 million, bank trustees sue auditor for more than $5 billion in fraud suit, and more.
Trade-based money laundering (TBML)
Trillions of dollars may be missing from U.S. government coffers due to widespread corporate tax evasion and criminal money laundering strategies, according to a new report by a college professor and longtime trade-based money laundering guru. FIU College of Business professor John Zdanowicz conducted an analysis of 12 years’ worth of U.S. Customs data and found that abnormally priced goods imported and exported by U.S. companies are masking complex tax avoidance strategies that have cost the U.S. government more than $2.3 trillion in revenue from 2003 to 2014. Called false invoicing, it is the same kind of scheme used to fund domestic terrorism by moving money into the U.S., and moving proceeds of illegal activities, such as drug profits, out of the United States undetected. “Criminals and tax evaders have discovered that laundering money through the banking system is dangerous, especially with the new financial institution reporting requirements under the Patriot Act and other banking regulations,” Zdanowicz said. “However, moving money through international trade can be virtually undetectable.”
Zdanowicz, found that money moved out of the United States through abnormal pricing in international trade grew from $168.31 billion in 2003 to $230.58 billion in 2014, a more than 30 percent increase. Here’s how it works: A U.S. company or individual imports products from a subsidiary or colluding partner at extremely high prices, thus decreasing its tax obligation, while the money itself moves offshore undetected. Working from the other end of the transaction, a U.S. company or individual can also shift taxable income out of the U.S. by exporting products to a subsidiary or colluding partner at extremely low prices. Examples Zdanowicz cites include:
Prefabricated metal buildings exported to Vietnam for $50.78
Unworked diamonds imported from Botswana for $4,878.33 per carat
Vitamin E imported from Ireland for $30,334.36 per kilogram
Chinese imports of single line telephones for $146.32 each and brooms for $61.37 each
Used bulldozers imported from Japan for $458,571.43 each
Guided missiles exported to Saudi Arabia for $30,247.66
Steel ladders exported to Mexico for fifteen cents each, (via FIU and John Zdanowicz).
Mexico’s Sinaloa cartel is one of, and perhaps the, major player in the US drug trade, which is believed to bring in billions of dollars annually. But the cartel needs to disguise the illicit origins of those profits, and a report from Colombian news outlet Portafolio, first sighted by Insight Crime, indicates that the criminal organization relied on smugglers who looked to Colombia, using the more mundane apparel industry to launder that ill-gotten cash. The scheme relied heavily on free-trade agreements between Colombia and other countries in the region. For those countries, tariffs are waived on imports of clothing and footwear. A group working for the Sinaloa cartel, that Portafolio called one of the largest bands of contraband smugglers in the world, “began to realize that if they brought merchandise from one of those countries to which the [tariff waiver] applied [they] could circumvent the” import tariff, Portafolio reported. “One of the methods they employed was the triangulation of merchandise,” the report continued. “They imported products made in countries with which there was not [free-trade agreement] and they made them pass as if they were made in” a country that did have an agreement. This method allowed the group, acting on behalf of the Sinaloa cartel, to buy legitimate goods with dirty cash and then resell those goods to turn what appeared to be a legal profit — all while avoiding Colombia’s tariffs on imports, (via Business Insider).
Money laundering
Between 2013 and 2015, more than US$ 13 million in dirty money from a giant Russia- centered money laundering scheme, dubbed the Russian Laundromat, flowed back into Moldova to buy shares in the country’s largest bank, Moldova Agroindbank (MAIB). The Russian Laundromat, uncovered by reporters from OCCRP and its partners RISE Romania and RISE Moldova, is one of Eastern Europe’s biggest-ever money-laundering operations. An estimated US$ 20 billion was siphoned out of Russia between 2010 and 2014 with the connivance of corrupt Moldovan judges before disappearing into the European Union through complicit banks in Latvia. Prosecutors around the world have been working to trace the money. Reporters for RISE Moldova found some of it close to home. Moldovan prosecutors, assembling evidence on Laundromat transactions for future trials, concluded that at least US$13 million of the proceeds came back to Moldova through various offshore corporations. Reporters at RISE Moldova looked at several of the transaction chains to better understand how the system worked, (via the Organized Crime and Corruption Reporting Project).
Cybersecurity/Virtual currency
Hackers have stolen bitcoins worth about $65 million after attacking a major digital currency exchange. The exchange, Bitfinex, responded by halting trading, deposits and withdrawals, prompting a plunge in the Bitcoin price. “We are investigating the breach to determine what happened, but we know that some of our users have had their bitcoins stolen,” the company said in a blog post on Wednesday. The hackers made off with 119,756 bitcoins, said Zane Tackett, Bitfinex’s director of community and product development, in an email to CNNMoney. That’s the equivalent of more than $65 million at current prices. The price of Bitcoin tumbled more than 20% following the news, before recovering some of its losses. The security breach brought back memories of Mt.Gox, a leading Bitcoin exchange that stopped investors from withdrawing money in 2014, blaming the disruption on technical issues and cyber attacks. It later filed for bankruptcy. Bitfinex is one of the biggest Bitcoin exchanges in the world. It had the highest volume of dollar-denominated transactions over the past 30 days, according to the website Bitcoin Charts, (via CNN).
Fraud
A civil case with an enormous price tag attempts to answer the question of should, or even could, financial auditing firms be responsible for missing illegal activity at the operation they are auditing. The largest-ever lawsuit against an auditing firm is set to open Monday in a Miami-Dade County Circuit Court, pitting Big Four firm PwC against a trustee of the defunct Taylor, Bean & Whitaker Mortgage Corporation. At stake: $5.5 billion. The lawsuit was filed in 2013 by a trust formed following the bankruptcy of Ocala-based Taylor, Bean & Whitaker, which in the early 2000s was one of the nation’s largest mortgage companies. The firm was raided by federal agents in 2009 for its part in a seven-year, multibillion-dollar fraud scheme with Colonial BancGroup. According to the lawsuit, the fraud went undetected by PwC, the independent public auditor in charge of auditing Colonial, as a result of “gross negligence.” PwC maintains that it, too, was duped. The $5.5 billion action is one of a wave of suits against major auditing firms, including PwC, in the aftermath of the 2009 banking crisis. Most have alleged faulty work, said Jonathan Perlman, equity partner at Miami-based firm Genovese Joblove & Battista, who has prosecuted several cases against auditing firms. A majority of the cases have settled, including a suit brought against PwC for the alleged negligent auditing of failed brokerage MF Global Holdings Ltd. PwC paid $65 million in a settlement. Few of the suits have gone to trial, Perlman said, (via the Miami Herald).
The head of an international criminal network behind thousands of online frauds has been arrested in a joint operation by INTERPOL and the Nigerian Economic and Financial Crime Commission (EFCC). The 40-year-old Nigerian national, known as ‘Mike’, is believed to be behind scams totaling more than $60 million involving hundreds of victims worldwide. In one case a target was conned into paying out $15.4 million. The network compromised email accounts of small to medium businesses around the world including in Australia, Canada, India, Malaysia, Romania, South Africa, Thailand and the US, with the financial victims mainly other companies dealing with these compromised accounts. Heading a network of at least 40 individuals across Nigeria, Malaysia and South Africa which both provided malware and carried out the frauds, the alleged mastermind also had money laundering contacts in China, Europe and the US who provided bank account details for the illicit cash flow. Following his arrest in Port Harcourt in southern Nigeria, a forensic examination of devices seized by the EFCC showed he had been involved in a range of criminal activities including business e-mail compromise (BEC) and romance scams. The main two types of scam run by the 40-year-old targeted businesses were payment diversion fraud – where a supplier’s email would be compromised and fake messages would then be sent to the buyer with instructions for payment to a bank account under the criminal’s control – and “CEO fraud.” In CEO fraud, the email account of a high-level executive is compromised and a request for a wire transfer is sent to another employee who has been identified as responsible for handling these requests. The money is then paid into a designated bank account held by the criminal, (via Interpol).
Law firms
Law firms continue to resist anti-money laundering (AML) obligations. Two weeks ago, the U.S. Department of Justice shone an unwelcome spotlight on five law firms that were connected to transactions involving hundreds of millions of dollars of allegedly laundered foreign money, some of it tied to the funding of the film “The Wolf of Wall Street.” Some of the firms served as conduits for the money, while others were more peripherally involved. Thanks at least in part to lobbying by the American Bar Association, U.S. law firms—unlike those in the U.K. and the European Union—do not have to report suspicious money transfers. Would different reporting requirements have allowed the DOJ to step in earlier, and possibly saved the firms some public scrutiny in the process? The government’s civil asset forfeiture case alleges that more than $3.5 billion was looted from an investment company owned by the Malaysian government, with a good chunk of it used to bankroll lavish spending sprees for a 29-year-old Malaysian man named Low Taek Jho and his family and friends. Roughly $368 million went through client accounts held by Shearman & Sterling. The government doesn’t accuse the firms—which also include Sullivan & Cromwell; DLA Piper; Greenberg Traurig; and Akin Gump Strauss Hauer & Feld—of wrongdoing. Still, this case raises anew the disturbing question of how often lawyers are being used, unwittingly or not, to help launder money. The government’s case, for example, outlines how from 2009 to 2010, a client trust account held by Shearman & Sterling received 11 wire transfers totaling roughly $368 million from the bank account of a company called Good Star Limited. Good Star’s bank account was fraudulently set up under the name of a private Saudi oil company, when in fact it was controlled by Low, according to the complaint, (via American Lawyer).
Corporate transparency
Who made the United States into a refuge for secretive shell companies? Look toward Congress to find politicians who helped turn Nevada into a major home for shell companies, which can be used to evade taxes and hide illegal assets from around the world. Sen. Dean Heller, R-Nev., now a member of the Senate Finance Committee, was a strong advocate while Nevada’s secretary of state for a 2001 state law that broadened legal protections for shell companies, allowing owners to remain secret. The change made incorporating a company easier than getting a library card and helped spur the registration of thousands of shell companies in Nevada. Rep. Dina Titus, who in 2001 was the Democratic leader in the Nevada state Senate and voted for the change, is now a member of Congress. So is Rep. Mark Amodei of Nevada, a key Republican proponent of the 2001 bill. Heller and Titus now acknowledge that the Nevada legislation created unwelcome business practices; Titus even predicted in 2001 that it would attract “sleazeballs.” And indeed, foreigners have long employed Nevada shell companies, sometimes for corrupt purposes. Will Capitol Hill tighten the laws around shell company practices? Don’t bet on it. Neither state nor federal lawmakers seem eager to pursue proposed changes, shuttling back and forth the onus on who should act. Some Nevada politicians look to Washington to take action, while those on Capitol Hill often say it is up to the states to monitor and regulate corporations, (via McClatchyDC).
A new report highlights that murky ownership structures can hide the illicit figures tied to illegal opioid sales and related money laundering. Opioid deaths now exceed those from motor vehicle accidents. It’s clear we need to do more. Fair Share Education Fund’s latest report, “Anonymity Overdose,” connects opioid trafficking and the subsequent crisis with the activities of anonymous shell companies – companies formed with no way of knowing who is actually in charge. Because they shield the owners from accountability, anonymous shell companies are a common tool for disguising criminal activity and laundering money, and are also at heart of the Panama Papers. “Anonymity Overdose” found 10 case studies that show the connection between the use of anonymous shell companies and opioid trafficking and related money laundering. In one such example, Kingsley Iyare Osemwengie and his associates were found to use call girls and couriers to transport oxycodone, and then move profits through an anonymous shell company aptly named High Profit Investments LLC. According to the Centers for Disease Control (CDC) , in 2014 there were approximately one and a half times more drug overdose deaths in the United States than deaths from motor vehicle crashes. Since 2000, the rate of deaths from opioid related overdoses has increased 200 percent. The CDC refers to the opioid crisis as an epidemic, (via Fair Share).
Corruption
France’s finance minister Michel Sapin presented a proposal for a new law on transparency, anti-corruption measures and the modernization of the economy to the Council of Ministers on 30 March 2016. The proposal includes innovations in various fields (transparency of public decisions, effectiveness of financial regulation, greater protection for consumers), including new rules on corruption and ethics violations. At the heart of these new anti-corruption rules lies an obligation for businesses of a certain size to be proactive in terms of preventing corruption. Compliance with this obligation would be monitored by a new agency for the prevention and detection of corruption, the “Service Chargé de la Prévention et de l’Aide à la Détection de la Corruption” (SCPADC). The SCPADC would report to the justice and budget ministers and would be responsible for issuing recommendations to help businesses and government departments meet the new obligations, for monitoring compliance and for imposing fines on both individuals and legal entities for any breaches of the compliance procedures implemented. It would also take over the duties of the current agency, the Service Central de Prévention de la Corruption, with more substantial resources at its disposal. The other key points of the reform concern the enforcement component of the anti-corruption machine:
an additional penalty for non-compliance under the control of the SCPADC and the public prosecutor may be imposed on businesses for corruption or influence peddling;
the conditions under which the French authorities can prosecute businesses for actions undertaken outside France to corrupt foreign public officials would be relaxed;
a new offence of influence peddling with foreign public officials would be introduced, (via Lexology).
One of London’s leading sets of fraud barristers has been unwittingly renting its building from a businessman who admits laundering millions of dollars in bribes. Due to a much-criticized law that allows landlords to hold property via shell companies without having to declare their identity, 9-12 Bell Yard Chambers had no idea who was behind the British Virgin Islands incorporated outfit that bought its offices from Scottish Widows in 2015. But leaked documents have revealed that PDB Properties Limited — which paid £6,225,000 for the freehold of 9-12 Bell Yard last year — to have been established by Expedito Machado. He is the son of Sérgio Machado, a former Brazilian senator implicated in the Petrobras corruption scandal over kickbacks paid by contractors bidding for work. Machado junior has admitted to laundering millions of dollars in bribes on behalf of his father, with the pair currently sending shockwaves through the Brazilian establishment after agreeing plea bargains to cooperate with prosecutors. While this is not 9-12 Bell Yard Chambers’ fault, it looks really bad for the UK establishment that a set of barristers who are renowned for their work in the field of major fraud and organized crime — and have acted in cases including the Blue Arrow fraud, Maxwell brothers fraud and Jubilee line fraud — has been paying many thousands of pounds in rent to Machado. Indeed, this could be a new low for London’s mad property market, (via Legal Cheek).
Marijuana
Bad News for Marijuana Supporters: The DEA just delayed a critical decision, to take the plant off the list of the country’s most serious drugs that come with some of the longest sentences. The DEA’s decision on cannabis’ scheduling now has no timetable. The steady growth of the cannabis industry has been overshadowed by an even more exciting event: the potential rescheduling of medical marijuana by the U.S. Drug Enforcement Agency (DEA). Currently, the marijuana plant is defined as a schedule 1 substance. This means it has no federally recognized medical benefits and is considered to be an illicit drug. As long as marijuana remains an illicit drug, businesses that sell marijuana face two very big disadvantages, seizure of assets and harsh sentences. That would be a setback for a growing marijuana industry that has added states and billions of dollars in revenue. Overall, it’s been a pretty exceptional two decades for the marijuana industry. Sure, there have been a few bumps in the road, like the failure of a medical marijuana amendment in Florida in 2014. But as a whole, the increasing acceptance of cannabis has been almost constant since 1996, (via the Motley Fool).
Legislation
On July 18, 2016, Mexican President Enrique Peña Nieto approved the laws of Mexico’s new National Anti-Corruption System, declaring that he is “more than committed to combating corruption, hence the importance of the system.” The objective of the National Anti-Corruption System is to coordinate the efforts of all Mexican governmental bodies―at the federal, state, and municipal levels―that are involved in anticorruption enforcement. These laws apply to both public officials and private parties, including companies and their directors, officers, and employees. The new measures, which consist of newly enacted laws as well as amendments to existing laws, establish the most far-reaching anticorruption enforcement system to date in Mexico. These measures stem from a May 27, 2015 amendment to the Mexican Constitution and were published this month in Mexico’s Federal Official Gazette. A company can be sanctioned for acts carried out by persons who acted on behalf of the company in order to obtain benefits for the company. Penalties for violations of the General Law on Administrative Accountability include a fine of up to two times the benefits obtained, debarment, suspension of activities, liquidation of the company, and a requirement that the company indemnify government agencies. Under the General Law on Administrative Accountability, a company can avoid liability if the relevant authority determines that the company had in place an adequate “integrity policy” (i.e., an adequate anticorruption and compliance policy)., (via Jones Day).