In addition to structuring, depositors can engage in “smurfing”: using runners to make the deposits for them, in case the bank demands identification and also so the criminal’s face does not appear on closed-circuit video surveillance. These runners are referred to as “smurfs,” like the little blue cartoon people.
The second step has a number of names: “layering,” “dispersion,” “stacking,” or “conversion.” The goal is to move money around (by wiring or transferring it through numerous accounts) to create confusion as to its origin and owner. It gets separated from its source by using anonymous shell companies and multiplying their financial transactions. The use of false invoices is a growing trend in what is known as trade-based money laundering (known affectionately as “TBML” to the security wonks), because trade-based money laundering is harder to capture in suspicious-activities reports. (Since 1996, the Banking Secrecy Act has required banks and other financial institutions to report transactions they suspect may be laundering money or financing terrorism within 30 days of the transaction to FinCEN. Other countries have similar requirements for reporting to their financial intelligence units.)
Another classic move is to secure loans equivalent to the amount in the bank’s coffers: loan repayments do not trigger currency transaction reports—and if you’re really clever, you use the loan as a tax deduction on other income.
Finally, the money is integrated into the financial system through additional transactions until the “dirty money” appears “clean” and is returned to the criminal from a legitimate-looking source. This is also known as “recycling,” and it completes the money-laundering process: the money is reinvested in the legal economy. To maximize efficiency, “bundlers” will take money from several different criminal groups for joint laundering operations, such as buying buildings and other large property developments. It is so prevalent that in February 2017, FinCEN renewed Geographical Targeting Orders46 requiring heightened due diligence and reporting of large cash purchases of real estate in six US cities: New York, Miami, Los Angeles, San Francisco, San Antonio, and San Diego. Bundling money will increase the rate of return on investments, buy more corrupt complicity, and make the beneficial owners harder to identify.
Nearly all the major banks are in on it: the money is too big for them not to be. HSBC admitted to violating the Bank Secrecy Act by failing to monitor more than $670 billion in wire transfers and more than $9.4 billion in purchases of US currency from HSBC Mexico,47 thereby allowing money laundering, prosecutors said. The bank also violated US economic sanctions against Iran, Libya, Sudan, Burma, and Cuba, according to criminal information filed in the case. US federal and state authorities secured a $1.92 billion payment from HSBC (the self-proclaimed “world’s local bank”) in December 2012 to settle charges that the banking giant transferred billions of dollars for nations under US sanctions, enabled Mexican drug cartels to launder tainted money through the American financial system, and worked closely with Saudi Arabian banks linked to terrorist organizations. HSBC was also forced to pay the US Office of the Comptroller of the Currency $500 million and the Federal Reserve $165 million in civil penalties.
Speaking on the case, Manhattan district attorney Cyrus R. Vance said, “New York is a center of international finance, and those who use our banks as a vehicle for international crime will not be tolerated.”48 While $1.92 billion may be a hefty penalty for one bank, it is a tiny penalty when compared with the entirety of the illicit banking system. Recent anti-money-laundering settlements indicate that the practice is widespread and tremendously valuable—otherwise the banks would not be so quick to settle with such enormous sums in order to prevent further investigations of their accounts.
It is not hard: money-laundering services are available to anyone with a few million dollars to stash. Guatemalan banks offer excellent money-laundering services to drug traffickers: for 17 percent of deposits of $3 million and above, the banks will provide not just money management and safeguarding, but will also provide all the requisite documentation to evade law enforcement prosecution: business registries, receipts, and falsified tax returns for three previous years.49
Two more recent US law enforcement cases illustrate the extent to which dirty money enters global financial and capital markets. In March 2010, Wachovia Bank, which was one of the largest banks in the United States, entered into a deferred prosecution agreement with the Department of Justice. Wachovia was charged with willfully failing to maintain an anti-money-laundering program from May 2003 through June 2008, in violation of the Bank Secrecy Act. During this time, it failed to effectively monitor for potential money-laundering activity involving more than $420 billion in cross-border transactions with high-risk Mexican currency exchange houses, including millions of dollars used to purchase airplanes for drug cartels.
As part of the agreement, Wachovia agreed to forfeit to the United States $110 million, representing some of the proceeds of illegal narcotics sales that were laundered through the bank. FinCEN also assessed a $110 million civil penalty. In another recent case, MoneyGram International Inc.—a global money services business—entered into a deferred prosecution agreement with the Justice Department and consented to forfeit $100 million. MoneyGram admitted to criminally aiding and abetting wire fraud and failing to maintain an effective anti-money-laundering program.
The French bank BNP Paribas SA is so far the largest known offender: in late June 2014, US prosecutors reached a deal in which the bank would pay $8.9 billion as punishment for hiding $30 billion of financial transactions that violated US sanctions. The transactions were conducted on behalf of Sudanese and Iranian officials and companies. They are known to have involved oil deals, and are suspected to have involved weapons trafficking—at a time when Sudan was committing full-blown genocide.50
The bankers knew they had blood on their hands. To avoid detection by the “OFAC filter” (the Office of Foreign Asset Control is the body within the Treasury Department that publishes and enforces the list of sanctioned entities), BNP Paribas used a network of banks in East Africa, the Middle East, and Europe, while “stripping” such red-flag information as the codes that identify the sender or recipient of the funds as being in a sanctioned country. The process was simple enough for any lackey to do it: information fields were simply left blank, or filled in with a single period or an internal code that indicated the transaction involved a bank branch somewhere else, such as London or Paris.
The shame of it is that these penalties are a pittance compared with the amount of money these financial institutions made processing the vast sums of dirty money they probably really laundered. While BNP Paribas’s settlement is a record penalty for a sanctions violation, it is literally pennies on the dollar for Paribas: the penalties represent 27 to 30 cents for every dollar in illegal financial transactions. According to US law, the bank could have been liable for $2 for every dollar in illegal financial transactions—in other words, $60 billion. But even the US authorities (the Treasury and Justice departments) agree that such a staggering sum would have been “unreasonable and uncollectable.”
“Unreasonable” by whose measure? Authorities found $100 billion in suspicious financial transactions, but could only prove malfeasance for $30 billion. By this standard, Royal Bank of Scotland got a bad deal: in 2013, it paid $100 million in penalties on $32 million of illegal transactions; that is $3.13 in penalty for every $1 of alleged violations. So the outer limit of what BNP Paribas could have faced is $313 billion in penalties. No wonder it settled for $8.9 billion! For BNP Paribas, it is the cost of doing business. What would really hurt the bank in the settlement? A one-year ban on transacting in US dollars that started in January 2015.
Had any of these financial enterprises abided by anti-money-laundering and know-your-customer legislation (or simply not been corrupt), those criminals and terrorist networks would have been significantly hampered in their efforts to move billions globally to finance their crimes, including genocide.
&
nbsp; Corruption is a key entry point in the strategy to capture the state and make it a more hospitable environment for criminal operations, and money laundering hampers clean business. The dark, hidden money of corruption and illicit trade always ends up in jurisdictions with banking secrecy and a strong rule of law protecting property—precisely because criminals and terrorists want their assets protected from the hands of those who might overthrow or kill them. As corrupt officials steal the money and stash it overseas, physical infrastructure and political institutions crumble. Some theorists consider capital flight to be a bigger problem than corruption: if the corrupt officials reinvested in housing, energy, and farms, the country would end up with a true oligarchy—where the political power is held by those with economic power—but at least there would be development.
Too many countries trap their citizens between violence and corruption. What almost no one offers is what we as rational citizens want, the third option: a clean government that is not corrupt, where rule of law is strong and violence is low—a system where everyone has equal access to an education and economic participation, the tools to lead a life they have reason to value. But once the downward spiral of corruption and violence and fear sets in, it is phenomenally difficult to eradicate.
STARVING THE BEAST
The global threat of crime-terror pipelines grows at the pace of global business. While the multilayered complexity and rapid adaptability present challenges to traditional single-approach interdiction, the cross-border activities and their role in threat finance can also be used to build a multipronged approach that has a proven record of success: a counterterrorism tactic commonly referred to as a “multiagency swarm.”
This means that if the network is properly mapped and its vulnerabilities are properly identified, you can tackle it in various ways at once: customs and tax agencies can seize the smuggled consumer goods while drug enforcement agencies pursue the drug trafficking element, local law enforcement liberates the slaves, and bank accounts are frozen and assets seized. Closing in with these multiple prongs at once is a far more effective strategy to bring down a transnational criminal enterprise than just tackling one criminal activity with one enforcement authority at a time, which allows the networks to move and reconstitute, as we have seen them do. As the criminals and terrorists collude and share activities, so must military and law enforcement, ever more.
These are multibillion-dollar transnational businesses and should be treated as such. We have to understand their supply chains and examine the networks for vulnerabilities that we can attack to degrade, disrupt, and destroy these hybrid threat networks. Some of this has already been occurring: since 9/11, US Code Title 10 and Title 50 authorities have synchronized in the counterterrorism environment, forcing the US Department of Defense to interact with the broader intelligence community.51 The coordinated initiatives can be everything from kinetic military operations to combating the manufacture of counterfeit goods and intellectual property theft, which is a great source of income for criminals and, increasingly, for terrorists. The goal is to “starve the beast,” thereby reducing the need for and boosting the effectiveness of targeted kinetic operations—in other words, takedowns and killings.
The good news is that the corrupted entities that are the principal facilitators of the illicit financial flows that produce these multiple harms are also the greatest threat to the criminals themselves. They can become the key strategic nodes for disrupting, dismantling, and destroying the networks. Some of the more effective solutions are not complicated: businesses can increase their compliance, strengthen internal controls, and undertake due diligence to verify beneficial owners when establishing a business relationship with their customers. By expanding its corporate social responsibility to protect against illicit actors that abuse its services and damage the integrity of the global financial system, the private sector can significantly restrict the operational environment for the criminals and terrorists. It is therefore highly effective to focus law enforcement efforts on these fixers and facilitators.
Public and private actors can partner together to improve the overall governance climate, shut down the illegal economy and crime-terror pipelines, and build tomorrow’s new markets and investment frontiers, in which communities in the US, Europe, Latin America, Africa, and Asia can improve their futures, anchored in the rule of law, democratic governance, and integrity in markets and public institutions. Failure is not an option, for failure is a world set ablaze with kidnapped schoolgirls, modern slaves, spreading caliphates, and perpetual war coming to your hometown—with no one to run to for redress.
Ultimately, we must accept that our personal choices as consumers have global impact with serious repercussions. Drug cartels exist because people consume drugs. Slavery exists because people want cheap clothes and cheap handbags and cheap labor in mines or in their homes, and because they want cheap prostitutes. The illicit trade in tobacco products exists because people want to smoke and either do not want to or cannot pay full price for the taxes on legal cigarettes. So much of the deepest suffering and so many of the greatest harms are a consequence of our avaricious or intemperate desires. We could easily ameliorate global tragedies with only moderate adjustments to our choices as consumers. If we fail to act on this moral duty and continue to profit from the suffering of our fellow men and women, their blood will not easily wash from our hands.
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Crime and Terror Converge
There are some individuals who are the very convergent threat we have considered. Dawood Ibrahim, the Indian crime lord based in Pakistan, built up a smuggling network in Southeast Asia and the Middle East, but he began his empire by stealing Bollywood film copyrights and selling bootlegged movies on the streets of India. From selling pirated DVDs in Mumbai, Ibrahim moved into narcotics, and his organization started controlling an informal money transfer system popular in the Muslim world: hawala. His organization became known as “D-Company.”
After becoming one of India’s most notorious crime bosses, Ibrahim also became a supporter and financial facilitator for the Lashkar-e-Taiba (LeT) and Al Qaeda terrorist groups, and had direct ties to Osama bin Laden. D-Company ordered and organized the twelve simultaneous bombings that racked Bombay (as Mumbai was then known) on March 12, 1993, following which Ibrahim became a US Treasury–designated terrorist. When the dramatic attacks in Mumbai occurred in November 2008, Ibrahim’s name headed the Indian government’s request for extradition by the Pakistanis.1 He is suspected of dividing his time between Pakistan (a well-known harbor for Islamist terrorists, including Osama bin Laden, who was found and killed there) and the United Arab Emirates (a well-known hub of illicit trade): an unsurprising combination for a man of his background. D-Company epitomizes the modern crime-terror pipeline in which major terrorists start as salesmen of pirated movies.
How and why did this convergent threat of illicit trade in consumer goods and terrorism emerge? There are two main causes: globalization and the collapse of the Soviet Union. Since the fall of the Berlin Wall, international smuggling has exploded, deepening and accelerating the collaboration of transnational organized crime and terrorist groups, for several reasons.
The first reason is that the financial support of governments driven by the ideological Cold War agenda of East-versus-West, communism-versus-capitalism has shrunk (though by no means been eliminated) for the shadow wars carried out by proxies, such as the American-backed mujahideen in Afghanistan or Russian-backed Marxist guerrillas in Latin America or Africa. With their Cold War–related support drying up, these groups had to go into business to support themselves, usually with narcotics smuggling, kidnapping, or extortion.
Second, the borders of the Iron Curtain collapsed, opening up a whole new world to the reach of trade, in both directions: from the former Soviet Union out into the rest of the world, and from the rest of the world into Russia, Central Asia, and Eastern Europe. Furthermore, free trade zones were specifically set up to be a bulwark agai
nst a return to socialism or fascism, on the premise that countries behave like people and their interest in economic stability and growth would trump belligerence: the European Economic Area (EEA) is a prime example of this thinking.
Third, most of the former Soviet Union’s scientists and intelligence agents (who know a thing or two about moving things covertly), and goods and service providers to the USSR, were suddenly left with no steady income, but terrific skill sets. So they found illicit sources of income.
Fourth, giant regional trade pacts established huge lagoons where goods would move swiftly and freely, and also created new borders around those vast new free trade zones, where penetrating those borders becomes a profitable opportunity for arbitrage: exploiting the price differentials on the same goods in different markets. The borders around the EEA and NAFTA are prime examples. Penetrate those outer borders and you have a variety of profitable markets from which to choose, with little hassle or additional cost.
Fifth, digital and information technology stunningly accelerated access to know-how, money, goods, and services—both legal and not.
Studies by the UN Office on Drugs and Crime and the Organisation for Economic Cooperation and Development estimate the illicit economy at around 10 percent of the global economy. Higher estimates2 likely double-count criminal revenues and their laundering, and also include income from legitimate businesses owned by bad guys. The illicit goods and money flow the same way the goods and money of the rest of the global trade economy do: transnationally. Criminology professor Jay Albanese parses “transnational crime”—“violations of law that involve more than one country in their planning, execution or impact”3—into three broad categories: the provision of illicit goods (drug trafficking, stolen property, counterfeiting), illicit services (human trafficking, cyber-crime and fraud, commercial vices such as prostitution and pornography), and the infiltration of business or government (extortion and racketeering, money laundering, corruption).4
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