What Is TBML?
TBML is the process of disguising the proceeds of criminal activity and moving value through the use of trade transactions as an attempt to legitimize and therefore mask the illegal origin of the transaction. This begs the question: what types of trade transactions give rise to culpability? Common techniques of TBML include:
1. Underpricing: in this scheme, illicit funds shift from seller to buyer. Seller and buyer are sometimes the same criminal organization, or they can be different criminal organizations doing business with each other.
2. Overpricing: illicit funds shift in the opposite direction, from buyer to seller.
3. Multiple invoices: the single transaction is divided so it looks smaller and flies under the radar, making the scheme more likely to go undetected. Money launderers provide multiple invoices for the same transaction, thereby justifying multiple payments for the same goods. This is easily disguised through multiple payments and the use of different financial institutions.
4. False invoicing: invoicing for products and/or services that were never received or performed.
5. False descriptions: this scheme typically misrepresents the goods being shipped such that the value discrepancy between the real goods and the invoiced goods results in illicit funds being shifted from one party to another.
While TBML has existed for centuries, with the proliferation of the global economy over the last few decades, the number and complexity of TBML schemes has risen dramatically. In today's digitally connected world, fraudulent transactions may be more transparent and require additional efforts to conceal their true nature. Further, the increased monitoring and enforcement of the Bank Secrecy Act, Money Laundering Control Act, and Patriot Act have forced illegal enterprises to become even more sophisticated, making TBML an attractive option. Financial institutions and other nonfinancial businesses are often unwittingly used in these schemes to legitimize and disguise the fraudulent nature of the transactions. Financial institutions in particular can be implicated in TBML schemes when they are used to settle, facilitate, or finance international trade transactions, such as executing wire transfers and providing trade finance or letters of credit, among other activities.
Thus, financial institutions should expect a dramatic increase in government investigations. However, as recent investigations demonstrate, TBML extends well beyond banks and financial intermediaries.
The tip of the spear for TBML enforcement in the United States is the Financial Crimes Enforcement Network, or FinCEN. This is a bureau within the Department of the Treasury charged with safeguarding the financial system through the collection, analysis, and dissemination of financial intelligence to law enforcement agencies like the FBI.
The Bank Secrecy Act requires financial institutions and nonfinancial businesses to (1) maintain anti–money laundering programs and compliance procedures; (2) report transactions of potential interest; and (3) prepare related financial records, such as currency transaction reports, suspicious activity reports, and reports of international transportation of currency or monetary instruments. The criminal penalties for violating the Bank Secrecy Act are severe, particularly in the wake of the Yates Memo: pursuant to 31 U.S.C. section 5322(a), an individual who willfully violates the Bank Secrecy Act or its implementing regulations is subject to a criminal fine of up to $250,000 or five years in prison, or both. And as promulgated in 18 U.S.C. sections 1956–1957, if committed in connection with a violation of other laws or criminal activity, that person could face up to a $500,000 fine and 10 years in prison.
Moreover, punishment is not limited to intentional conduct. Agencies like FinCEN can bring civil penalty actions for violations of the Bank Secrecy Act, and officers may be removed from office for inadvertent or unintentional violations of anti–money laundering laws.
The second pillar of American anti–money laundering measures is the Money Laundering Control Act. The Money Laundering Control Act makes it illegal to facilitate transactions designed to conceal or disguise the source, nature, location, ownership, or control of dirty money, or to facilitate other crimes. Legitimate businesses that allow themselves, even unintentionally, to be used as conduits for TBML may be subject to serious criminal and civil penalties under the Money Laundering Control Act, and therefore should be aware of their obligations and take steps to ensure compliance with such obligations.
Illustrative Schemes and Warning Signs
Statutes like the Bank Secrecy Act and Money Laundering Control Act are forcing offenders to pivot toward global trade and away from financial institutions. Nonfinancial businesses involved in international trade of conventional goods, as well as logistics and transport companies and distributors, should be cognizant of the risks presented by TBML.
TBML schemes are set up to avoid the traps of regulatory requirements imposed on the banking industry. Unsurprisingly, the majority of exposed TBML schemes in recent years involved the laundering of illicit drug revenue. TBML schemes have permeated markets ranging from gold and precious stones to wholesale toy distribution. For example, in 2014, a jeweler in Florida was caught accepting drug cash and depositing the funds in the business's bank account as if it had been received over-the-counter from retail customers. The jeweler created false invoices to justify wire payments to Mexican bank accounts as payments for gold, although no gold was actually received, and simultaneously orchestrated a separate tax evasion scheme. The jeweler undervalued legitimate gold shipments from Guatemala, but the scheme was identified by Immigration and Customs Enforcement when agents compared the declared value of the gold with its actual value. See U.S. Dep't of Treasury, National Money Laundering Risk Assessment 31 (2015).
In another TBML scheme, between 2005 and 2011, the owners of Woody Toys Inc., a wholesale toy distributor in Los Angeles, facilitated the conversion of U.S. drug money into pesos using a classic black market peso exchange scheme. The toy company received approximately $3 million in cash from Colombian and Mexican narcotics traffickers. The payments were deposited directly into the Woody Toys bank accounts from numerous locations in amounts below Bank Secrecy Act and regulatory requirements. Woody Toys then used this cash to purchase toys from China, which they then exported to Colombia and Mexico. Retailers in Columbia and Mexico purchased the toys through an intermediary with pesos, which then went to the original drug traffickers.
As these cases illustrate, offenders are resorting to channels outside the financial system to launder money. Nevertheless, financial institutions remain central to combatting TBML and possess the most direct access to customer information involving trade finance. Banks facilitate global trade by offering various financial products, including letters of credit and guarantees, and therefore play a pivotal role in mitigating the risk associated with TBML.
By looking for some of the red flags of TBML, financial institutions can increase the chance that such schemes will be detected. Typical red flags of TBML include:
Transactions that are not consistent with the nature of the exporter's or importer's business; for example, a U.S. exporter of building products applies for an export letter of credit to export wristwatches to a Nigerian home builder.
High-risk jurisdiction of one of the parties; illustrative examples include Iraq, Nigeria, Somalia, and Syria.
Prices charged do not reflect market prices, such as importing high-grade copper from Chile at $4.00 per pound when the market price is $2.50 per pound.
Transaction structures that are unnecessarily complex; for example, transactions with multiple intermediaries, shipping routes, parties, or shipment locations.
Frequent amendments to letters of credit.
Unusual payment point(s) for letter of credit payments.
Discrepancies between actual goods shipped and description on the invoice/bill of lading.
New Front in the War Against Money Laundering
In 2015, four of the five largest banks were subject to public enforcement actions addressing Bank Secrecy Act and anti–money laundering compliance violations. In fact, 22 percent of enforcement actions against financial institutions in 2015 involved Bank Secrecy Act and anti–money laundering compliance issues. Sullivan & Cromwell LLP, "2015 Year-End Review of BSA/AML and Sanctions Developments and Their Importance to Financial Institutions" 2 (Mar. 3, 2016). The clear trend continues to be an intense focus on Bank Secrecy Act/anti–money laundering compliance violations by multiple government agencies. This focus is resulting in increasing regulatory expectations and significant enforcement actions and penalties.
These trends are perhaps most evident in geographic targeting orders (GTOs) issued by FinCEN. A GTO demands that specific financial institutions—or nonfinancial businesses—implement additional and time-limited record-keeping and reporting requirements. The focused geographic scope helps regulators and law enforcement to identify criminal activity. Compliance is mandatory, and violators face stiff civil and criminal penalties.
For example, in April 2015, FinCEN issued a GTO that lowered cash reporting thresholds and triggered additional record-keeping requirements for certain financial transactions for approximately 700 Miami-based electronics exporters. In October 2014, FinCEN issued a GTO that lowered cash reporting to $3,000 and triggered additional record-keeping requirements for businesses in the Los Angeles Fashion District in an effort to impede drug traffickers who had been exploiting fashion industry businesses to engage in black market peso exchange schemes.
Attorneys for financial and nonfinancial entities involved in international trade should remind their clients that they must remain aware of TBML vulnerabilities, assess the risk of their activities and client base, and take appropriate measures to mitigate those risks and remediate any deficiencies. Anti–money laundering authorities are taking an increasingly aggressive stance against Bank Secrecy Act violations, and prosecutions against TBML violations are steadily on the rise. Companies involved in international trade therefore should expect a profound increase in government investigations and prosecutions in the coming years.