Africa News on 1st October reported that a consignment of charcoal originating from Somalia has arrived at the Iraqi port of Umm Qasr. Despite conservationists warning about the negative impact of charcoal, it says, Somalia continues to lose its trees to a trade that is illicit in the country – with the UAE, Bahrain, Kuwait and Oman as the key buyers. The shipment is said to have had forged custom documents indicating it originated in Ghana. The charcoal business has become al-Shabab’s most lucrative source of income, according to the UN, and the trade is subject to UN sanctions for this reason.
The US State Department published on 29th September the transcript of evidence given by Dr. Christopher Ashley Ford, Assistant Secretary, Bureau of International Security and Nonproliferation at the Nuclear Security Working Group Workshop on “US Government Coordination to Address Nonproliferation” held at the Wye River Conference Center in Maryland. In it he explains that the Government is also concerned about the security of certain radioactive sources that could be used in a radiological dispersal device (RDD) — the “dirty bomb” threat, as well as terrorists constructing a nuclear device. He says that since the 1990s, countries have reported 18 seizures of weapon-usable nuclear material in various quantities. This included several seizures of highly enriched uranium (HEU) in Georgia and Moldova in the 2000s. On at least a couple of occasions, he says, Chechen groups in Russia have tried to employ “dirty bombs,” though so far unsuccessfully. He then went on to outline US counter-nuclear smuggling programs and policy in the light of the potential radiological/nuclear (or “R/N”) threat(s). This involves international partnerships to provide training and support, for example over the requirements of the International Convention for the Suppression of Acts of Nuclear Terrorism (or ICSANT), with much of the work undertaken by the Office of Weapons of Mass Destruction Terrorism (WMDT).
1st October 2018
POLICE SEIZE HALF TONNE OF COCAINE FROM YACHT ON SOLOMON ISLANDS
Illicit Trade on 30th September reported that a joint operation by police from Australia and the Solomon Islands has resulted in the seizure of 500 kg of cocaine. 2 men from Sydney were arrested on suspicion of plotting to import drugs into Australia after the cocaine was discovered by investigators on the Solomon Islands. It says that the Australia-bound shipment originated from South America, and had been concealed in a professional manner before being shipped.
DANSKE BANK “SHOULD TO SUE MANAGERS OVER €200 BILLION SCANDAL”
The FT on 1st October reported calls by Hermes EOS, a UK adviser behind shareholder actions against Volkswagen, Deutsche Bank and Rio Tinto, said it wanted Danske to emulate German engineering conglomerate Siemens, which sued several senior managers, including former chief executives and chairmen, over a large bribery scandal.
BRITISH COLUMBIA TO LOOK AT PRIVATE LENDERS AS PART OF MONEY LAUNDERING PROBE
The Globe & Mail on Canada on 1st October reported that a new probe into money laundering in British Columbia will look into private lenders’ use of Vancouver-area real estate to hide drug money, a tactic uncovered in a Globe and Mail investigation. It will look at abuse of the builders’ liens system, where a lien is registered against a property for a criminal purpose – to launder money or to enforce a loan-shark transaction. The Globe and Mail revealed that people connected to the deadly fentanyl trade are parking their illicit gains in Vancouver-area real estate market through private lending schemes.
SOMALI OFFICIALS “LINKED TO MONEY LAUNDERING, AND PUBLIC CORRUPTION”
The Suna Times on 1st October claimed that several members of Prime Minister Hassan Ali Kheyre’s cabinet and senior government have been linked to money laundering, graft and corruption, according to sources. Some officials have allegedly been extorting businesses and NGO, receiving illegal kickbacks, and steering inflated contracts to politicians, friends and family members as part of corrupt scheme. Other officials are said to have misused development funds, laundering millions of dollars to private bank accounts in Nairobi, Doha, London and Toronto.
ANGOLA: THE FALL OF THE DOS SANTOS CLAN
The Mail & Guardian in South Africa on 30th September carried a feature originating with Deutsche Welle on the travails of the family of former Angolan President Jose Eduardo dos Santos. His son, Jose Filomeno dos Santos, has been arrested and charges include includes the formation of a criminal organisation, illegal enrichment, money laundering and corruption, according to the Angolan prosecutor. The authorities are also examining whether overseas transfers of $500 million were lawful, as instructed by President dos Santos during his time as Chairman of the Fundo Soberano de Angola (FSDEA), the country’s sovereign wealth fund. The former president’s daughter, Isabel dos Santos, said to be “the richest woman in Africa”, was also head of state oil company, Sonangol, but has been dismissed. She has interests in hundreds of companies in various sectors, including telecommunications, the diamond trade, tourism, real estate — in Angola, Portugal and a number of other countries.
FINLAND: EXPERTS SPECULATE ON TURKU REAL ESTATE FIRM’S POSSIBLE RUSSIAN INTELLIGENCE LINKS
YLE in Finland on 30th September carried an article on the continuing investigations in the wake of arrests and searches of 17 properties owned by Airiston Helmi, a real estate company. Investigators have reported that some €3 million in cash was seized during the raids and an unknown number of people involved with the firm are suspected of aggravated money laundering and tax evasion.
FORUM NON CONVENIENS – BVI COURT REFUSES JURISDICTION IN ALLEGED FRAUD CASE
On 25th September, Carey Olsen published an article which it says provides a very helpful summary of the issues the BVI Court must take into consideration when determining applications concerning forum non conveniens and the service of proceedings out of the jurisdiction. Amongst other matters it emphasises that the mere existence of a BVI incorporated company as a respondent to a claim which “has nothing to do with this jurisdiction” is not, in itself, a determining factor of whether the BVI Court will accept jurisdiction. The case involved a Russian company called Eurochem and its Swiss affiliate, Eurochem Trading GmbH. Eurochem is described Russia’s largest mineral fertiliser trader with a turnover of approximately $7 billion in annual sales and operations worldwide. The company alleged that in 2014 discovered that certain senior members of its sales team had set up a web of companies in the BVI, Panama, Cyprus and Scotland, for the sole purpose of receiving, concealing and laundering the proceeds of over $45 million in secret commission payments from Eurochem’s trading partners. The BVI court has held that Russia is the correct jurisdiction for the case to be heard, as it involved a Russian company and the sales staff involved were also Russian.
HEIGHTENED SENSITIVITY IN JAPAN OVER VIRTUAL CURRENCIES
On 1st October, Nagashima Ohno & Tsunematsu published an article which seeks to provide a brief summary of the approach taken to date by Japanese regulators with respect to virtual currencies before discussing recent developments and the regulatory outlook for them in Japan. It says that having been receptive to virtual currencies, the regulator has identified material compliance failures by such a large proportion of exchange operators is a cause for concern, with insufficient measures have been established to identify, prevent or protect customers from AML/CFT risks. The article says that, with the 2019 FATF peer review approaching, it is reasonable to expect the regulator to continue to closely monitor all exchange operators to ensure that appropriate AMT/CFT procedures are established, are that they are consistent with global standards.
SALISBURY A GOOD REMINDER OF THE IMPORTANCE OF EU-UK EXTRADITION PROCESSES
A blog from the LSE says that the European Arrest Warrant and the UK’s extradition relations with the EU will be greatly affected by Brexit. The Salisbury poisoning is an especially poignant reminder of the importance of establishing future relations in this regard. In case they would ever set foot on EU territory, the UK Government issued a European Arrest Warrant.
MALTA: VENEZUELA-PROBE FIRM CLEARED MILLIONS FOR CLIENTS TO BYPASS BANKS, SAYS FIAU
Malta Today on 1st October reported that a Maltese wealth management firm suspected of being used in a high-profile money laundering scheme, has been fined €370,000 by the FIAU over its scant due diligence on its PEP. Portmann Capital Management is contesting the fine. A police investigation has now taken control of the company’s computer servers. It is said that the MFSA and FIAU suspect that the company’s core business was carrying out unlicensed payments services for its select clients, of significantly high values not related to investment operations but as a substitute for banking or payment accounts.
IMPRISONED EX-PRESIDENT WINS PRIMARY ELECTION TO PANAMA NATIONAL ASSEMBLY
Kenneth Rijock in his blog on 30th September reported that Panama’s former president, Ricardo Martinelli, now a resident of El Renacer Prison, has just won a primary in the upcoming election for Deputy in the National Assembly, winning 44% of the vote.
THE LUXEMBOURG SPF: A PRIVATE WEALTH MANAGEMENT COMPANY OF CHOICE
Ogier on 28th September published an article about the SPF – société de gestion de patrimoine familial. This includes simplified taxation, and simplified incorporation – with low procedural and initial share capital requirements.
AT A GLANCE GUIDE TO JERSEY’S CHARITY LAW
On 28th September, Ogier produced a brief guide to charity law in Jersey. The Charities (Jersey) Law 2014 (the “Law”) enacted on 1st May allowed entities to finally register as charities under the Law. It says that, whilst registration is voluntary, it is necessary to ensure entitlement to certain Jersey tax reliefs and to the use of the word “charity”. It is further anticipated that from 1st January the remaining provisions of the Law will come into force which amends Jersey taxation legislation in relation to charities.
UK: POLICE SUPER-DATABASE PROMPTS LIBERTY WARNING ON PRIVACY
The Guardian on 1st October reported that a new super-database being built for the police represents a “grave” risk to privacy, a leading human rights group has said. The law enforcement data service (LEDS) will use 2 existing stores of information: the PNC, containing criminal convictions; and the police national database, which holds details such as intelligence. On to these will be added other databases, so the new one will be much more powerful.
DRC: THE KING OF COBALT
On 28th September, GPF Geopolitical Futures published an article saying that the Democratic Republic of Congo has as much cobalt reserves as the rest of the world combined and producing an informative infographic.
2 DUTCH OIL SERVICES EXECUTIVES JAILED FOR BRIBERY IN US
On 28th September, the Wall Street Journal reported that 2 former executives of Dutch oil-services firm SBM Offshore NV have been sent to prison for violating US foreign bribery law. Anthony Mace, the company’s CEO 2008-11, received 3 years and was ordered to pay a $150,000 fine. Robert Zubiate, a former SBM Offshore sales executive, received 30 months in prison and has to pay a $50,000 fine.
FATF PUBLISHED PALAU MUTUAL EVALUATION REPORT
On 1st October, FATF published the mutual evaluation report for Palau (an archipelago of over 500 islands, part of the Micronesia region in the western Pacific), produced by the Asia-Pacific Group on Money Laundering and carried a summary of key findings, ratings and priority actions on its website.
BRAZILIAN STATE-OWNED ENERGY COMPANY PETROBRAS TO PAY US AND BRAZIL A $853 MILLION CORRUPTION FINE
Public Finance International on 1st October reported that the company admitted that it had failed to make and keep records and accounts that “accurately and fairly reflected” how and where money was spent, the US DoJ said in a statement. Petrobras falls under American jurisdiction because of it has US investors and makes regular disclosures to the SEC. Payments were facilitated by executives at the “highest levels” including the firm’s board. 80% of the fine will go to Brazil. The bribery scheme took place between 2004 and 2012 and is estimated at $2 billion, of which more than half went to politicians and political parties.
THE AZERBAIJANI LAUNDROMAT 1 YEAR ON: HAS JUSTICE BEEN SERVED?
Transparency international on 28th September reviewed the position 1 year on from a massive leak of bank records from 2012 to 2014 showed that the ruling elite of Azerbaijan ran a $3 billion slush fund and international money laundering scheme. Part of the money was used to help whitewash Azerbaijan’s poor international image. In May 2018, OCCRP revealed that the Azerbaijani Laundromat was also financing lobbying and work on reputation in the US. Transparency International says that there was sufficient evidence for 18 European countries to launch their own investigations into corrupt activities, including bribery and money laundering. However, in 12 countries, there has been no official follow-up by law enforcement, while investigations are pending in 4, with an ongoing criminal procedure in court on charges in bribery only in Italy. 2 of the countries – Azerbaijan and Hungary – refused to open investigations. It also suggests that the revelations have not seemingly affected Azerbaijan’s relations with other European states.
CHANGES TO GUERNSEY’S CORPORATE INSOLVENCY REGIME
Guernsey Press on 1st October reported on changes expected to come into force by the end of March next year. It says that reforms include the requirement for a liquidator in an insolvent voluntary liquidation to give notice of their appointment to creditors, to hold at least one meeting with creditors and to report to creditors on an ongoing basis. Additional powers will be given to liquidators, whether the liquidation is voluntary or compulsory, to demand the production of information from directors at the earliest opportunity. Liquidators will also be able to apply to the Royal Court for an order requiring other individuals with knowledge of the company’s affairs to be examined and be compelled to provide information.
HOMEMADE EXPLOSIVES FILM FROM INTERPOL WINS PRIZE AT CANNES
On 1st October, Interpol published a news release saying that a film developed by INTERPOL to help first responders recognise potential homemade explosives has won a gold prize at the Cannes Corporate Media and TV Awards. The awareness-raising video highlights the importance of educating law enforcement, fire and ambulance services, and public health officials to identify early warning indicators of attacks in preparation, and how best to report such cases. It also says that high-profile explosive attacks using some ingredients found in common household products have affected communities worldwide, and INTERPOL supports the efforts of member countries to deter, detect and disrupt the use of chemicals in terrorist incidents by preventing criminals from diverting, smuggling and using chemical warfare agents, toxic industrial chemicals and explosive precursor chemicals (and EU and UK law includes such provisions).
55% OF FTSE 100 CURRENTLY FAIL TO PUBLICLY MENTION TAX EVASION IN THEIR PUBLIC DOCUMENTS
On 1st October, Out-Law reported that 55% of FTSE100 companies do not mention how they are managing the risks of tax evasion in their published documents, according to research by Pinsent Masons. It reminds one that, under the Criminal Finances Act 2017 which came into force on 30th September 2017, businesses are criminally liable if any of their employees, agents or other third parties facilitate tax evasion whilst providing services on their behalf.
ARREST OF SYNDICATE KINGPIN LIKELY TO REDUCE CASH-IN-TRANSIT HEISTS IN SOUTH AFRICA
Janes.com on 1st October reported that a series of arrests over June and July targeting 23 alleged gang members and their purported leader – Wellington ‘Bibi’ Cenenda. Statistics for the year to March showed a 56.6% rise in cash-in-transit heists from the same period a year earlier, and a 74% increase over the past 3 years. Of 238 heists, 34% took place in Gauteng Province where Cenenda’s gang operated.
4 PUPPIES SEIZED AT DUBLIN PORT
On 1st October, the Irish Revenue Commissioners issued a news release saying that Revenue officers at Dublin Port seized 4 puppies when they stopped and questioned 2 men, in routine operations. The UK nationals, who were travelling to Holyhead, did not have pet passports for the puppies, nor were they microchipped as required under the Animal Health and Welfare Act 2013.
GERMAN FAR-RIGHT TERROR SUSPECTS DETAINED IN OVERNIGHT RAIDS
Deutsche Welle on 1st October reported that Germany’s state prosecutor has ordered the arrest of 6 men charged with forming a far-right terror group known as “Revolution Chemnitz”, and around 100 police officers raided several properties in the German states of Saxony and Bavaria. The men are accused of planning attacks on migrants in eastern Germany.
On 1st October, HM Treasury published a Notice advising that IRAQI FAIRS ADMINISTRATION, the STATE ENTERPRISE FOR SHOPPING CENTRES, and the STATE TRADING COMPANY FOR CONSTRUCTION MATERIALS had been removed from the Iraq sanctions lists following the decision of the relevant UN sanctions committee and EU Regulation 2018/1302/EU of 28th September.
The Isle of Man followed suit –
Radio New Zealand on 1st October reported that travellers who refuse to hand over their phone or laptop passwords to Customs officials can now be slapped with a $5,000 fine. It says that the new Customs and Excise Act 2018 sets guidelines around how Customs can carry out “digital strip-searches”. Previously, Customs could stop anyone at the border and demand to see their electronic devices. However, the law did not specify that people had to also provide a password.
Accountancy Daily on 1st October reported that the European Commission is planning to tighten up the rules on supervision of EU financial institutions to combat money laundering amid criticism some Member States are failing to enforce the rules effectively. It says that the Commission will amend the 5th AML Directive to give the European Banking Authority (EBA) more powers to reinforce the AML supervision of the financial sector. It will also require different supervisory bodies to co-operate and exchange information, so that AML rules are enforced effectively across EU countries. The EBA will also be given the powers to instigate investigations into alleged breaches of the rules.
TRANSACTION LAUNDERING AND HIGH-RISK PAYMENT PROCESSORS – UPDATED
1st October 2018
Transaction laundering is one of those terms you may have come across, or should have come across, and it may be one of the most important means of laundering the proceeds of criminal activity.
However, as with other types of trade-based financial crime that are often grouped under the somewhat misleading term “trade-based money laundering”. It is one relatively difficult to detect and thus more likely to elude the types of routine check undertaken by compliance staff. It is not a new phenomenon, and as far back as 2001 the expected growth in online transactions was predicted to lead inevitably to e-laundering as well.
In essence, one might consider that, despite the apparent high-tech and “modern” paraphernalia and terms involved, transaction laundering is no different from “old fashioned” money laundering, where a seemingly cash-rich front, such as a takeaway or launderette was used, but with online payments substituted for real cash.
The continued rapid growth in e-commerce makes transaction laundering more prevalent, easier to hide, and much easier to make an integral component of a larger fraud. Estimates of the value of transaction laundering have suggested figures of $200 billion a year in the US alone.
In recent months, for example, AirbnB has been identified as another route for transaction laundering – a scheme involving more than 3,000,000 lodging listings in 65,000 cities across 191 countries would seem to have obvious appeal to launderers. There have also been reports of “sales” of non-existent goods via Amazon, eBay etc.
The proliferation of so-called micro merchants and instant onboarding by payment providers etc, as well as the explosion of different payment methods contribute to data overload and difficulty in monitoring merchant portfolios.
Thomson Reuters, owners of the World-Check compliance tools, has said that about 50%-70% of online sales for illicit drugs, counterfeit goods, and unlawful adult content involve some form of transaction laundering, quoting the Electronic Transactions Association (ETA), a trade association for the payments industry. It goes on to say that unlicensed online gambling is even more dependent on this type of money laundering, with more than 90% of illegal gambling sites said to be making use of transaction laundering to move their credit card receipts into the payment system.
WHAT IS IT?
Transaction laundering may also be described as “credit card laundering” (or “prepaid gift card smurfing”), “undisclosed aggregation,” or “factoring”, such terms having, or capable of being given, legitimate connotations. Another term used is merchant-based money laundering (MBML), of which it is said that transaction laundering is just one form. Indeed, factoring in itself is a large and wholly licit activity allowing a creditor to sell on debts owed to it to a third party, the third party charging a percentage commission for the right to collect the debt as its own – paying the creditor, for example, 90% of the original debt. The third party gets a new asset and the original creditor gets most of its money immediately, and without the concern of potential bad debts etc.
However, cases involving activity identified as transactions laundering, and using the term to flag up the importance of the methods involved, remain relatively rare. There was a prominent US case in 2013, involving an estimated $6 million – but it was the Federal Trade Commission and not the FBI that undertook the case. Another important case dates from 2016, when US authorities took action against Canadian-based PacNet, described by the US Treasury as an “international payments processor and money services business, [and] has a lengthy history of money laundering by knowingly processing payments on behalf of a wide range of mail fraud schemes that target victims in the United States and throughout the world”.
There are three basic forms of transaction laundering –
- Use of a front company – this is set up and passes any due diligence checks made by a bank or financial institution. However, rather than just selling goods, the company also (or instead) launders criminals’ money – for example, by use of wholly fictitious “sales” (aka “phantom shipments”) to cover movements of cash, or sells illegal products masquerading as legitimate goods.
- Use of a “pass through company” – this is where an otherwise genuine company with a legitimate account takes on a “silent partner” and –
- allows (or has to allow) an that partner (or another) to use its account;
- embeds a payment link on the web page of another’s company, to route payments (e.g. for illegal goods sold using that site) through its own, apparently legitimate account; or
- enters the sales from the partner business into its system manually, making the laundering more difficult to detect.
The company whose account is being used may received an inducement, such as a percentage commission, even if not itself directly implicated in the illegal sales or activity generated the additional “income”. The “partner” may be described as an “affiliate partner” or as part of an “affiliate network”, in either case seeking to route payments for illegal or non-existent product via the legitimate account.
- Operating a “funnel account” – this is where, again, an otherwise legitimate business accepts credit card charges from companies that do not have merchant processing accounts, entering the charges as legitimate transactions in its own card payment processing system. For example, in locations where online gambling is illegal this might occur with transactions instead being tagged with the Merchant Category Code for online clothing or electronics sales.
In each of the above, it may well be that the account involved is legitimate and/or intended to continue operating. However, there are the so-called “bust out frauds” – where a merchant applies for a merchant account with a payment provider without any intention of actually operating a legitimate business. Instead the account is used for fraudulent or illegal transactions, with the aim of processing as many transactions as possible within a short amount of time, and before being caught, simply abandon the account.
The National Merchants Association in the US have also categorised transaction laundering as follows –
- Benign laundering – where two legitimate businesses are sharing the same gateway;
- Malicious laundering – where an illicit business sends its transactions through a legitimate account, using it as cover for its own illicit proceeds; and
- Affiliate laundering – where an illicit business highjacks customer payment information, creates an affiliate account at a third-party merchant site, and then purchases goods using the highjacked funds to collect affiliate commission from the site through fictitious purchases.
In 2017, a Reuters investigation revealed a network of dummy online stores offering household goods that was actually a front for internet gambling payments. In that case, seven sites operated out of Europe and appeared to sell innocuous items including fabric, DVD cases, maps, gift wrap, mechanical tape, pin badges and flags. In fact, they were wholly fake outlets, part of a multinational system to disguise payments for the $40 billion global online gambling industry, which is illegal in many countries and some US states.
It is not just criminals that can, and do, use transaction laundering methods. In 2017, the FBI in an affidavit said that it had uncovered a global financial network run by a senior Islamic State official that funnelled money to an alleged ISIS operative in the US through fake eBay transactions. The terrorist attacks in Paris in 2015 are also said to have been funded through online sales of counterfeit goods and illegal drugs.
In September 2017, the Financial Times published a guest article calling for transaction laundering to be a top priority for regulators. The author said that the principle behind transaction laundering is simple: an unknown business uses an approved merchant’s payment credentials to process credit card payments for unknown products and services. He also said that online marketplaces and the like lacked the tools to vet each merchant, let alone each payment or customer. The article made the point that traditional forensic tools used can result in lengthy, clumsy and unproductive investigations, and AML efforts are often wrongly focussed on high-risk, high-volume merchants – whereas payments can be routed through smaller players, and smurfed into smaller amounts (see also the comments about the use of algorithms by High-Risk Payment Processors below).
HOW CAN YOU TO DETECT IT?
Amongst the possible ways to detect transaction laundering are –
- close examination of the “merchant’s” website – how are goods or services offered, does it look appealing to the consumer, would you be tempted to use it? Do the types (sizes, colours etc) of goods or services make sense?
- comparing the content of the website to its claimed volume of business – does it make sense; does it seem realistic?
- by taking into account how long the website has been active – typically, new sites do not generate large-scale business when first launched (unless they are from already large and reputable businesses)
- comparing the products offered and the average sales price and the Merchant Category Code being used – are there unexplained spikes in sales values, does the average individual sale value make sense for the type of product being offered?
- where the Code(s) being used by the website do not match the type of products that is supposedly selling
EverCompliant, a leading provider of cyber risk intelligence and transaction laundering detection and prevention, has said that the top 10 Merchant Category Codes used by transaction launderers are as follows –
- Book Stores
- Food Stores
- Convenience Stores
- Household Appliance Stores
- Men’s and Boy’s Clothing
- Accessories Stores
- Variety Stores
- Cosmetic Stores
- Gift, Card, Novelty, and Souvenir Shops
In 2017, the Association of Financial crime Specialists (ACFCS) in the US ran a 3-part series of guest articles on MBML – part 1 on “phantom shipments”, part 2 on “prepaid gift card smurfing” and part 3 on “transaction laundering” in general, including examination of the the payments ecosystem, the electronics and largely automated systems, used to process payments. They are strongly recommended as a lead-in to the subjects.
For the TCSP community, one of the chief risks is that they are used by new or existing clients to create the fake businesses, the front companies or to create the structure through which proceeds are seemingly legitimised and/or routed to or through jurisdictions on their way to benefit the criminals at the heart of the fraud. Not just client onboarding, but ongoing compliance checks, would be required – what might have sounded like a perfectly plausible proposition might, when revisited at a later date and when one is able to examine what has actually taken place, not ring true.
“Continuous Merchant Portfolio Monitoring” is a fancy term coined for what should be standard, ongoing risk assessment. The problems encountered are likely to include the fact that such ongoing sampling/monitoring is likely to be resource-intensive, involving potentially large amounts of data, requiring the ability to understand the terms used, and understanding the products and markets involved.
There are automated systems offered, where software analyses large amounts of data to detect anomalies, irregularities or other triggers. Such software might also help in detecting high-risk payment processing abuses (see below), particularly where automated systems and algorithms are being used by the other side. Such software can take advantage of emerging technologies like AI and machine-learning solutions. These solutions are generally aimed at the merchants, payment providers and financial institutions.
In the Isle of Man, a jurisdiction with a large and generally well-respected and regulated TCSP community, in 2017 guidance issued on trade-based money laundering was amended in February 2017 to make specific mention of transaction laundering the definition given was that transaction laundering was “A form of online fraud where legitimate merchants process payments (usually involving credit or debit cards) on behalf of another merchant. Using [transaction laundering], a merchant sets up an online store and receives the approval of a bank or payments provider to process orders, he or she then sets up additional, unregistered websites to sell other, illegal goods with payments being routed via the legitimate online store.”. This is a useful, concise definition but the scope of transaction laundering in its various forms is really far wider – and the definition does not directly address the High-Risk Payment Provider risk (see below).
On the other hand, the term “transactions laundering” does not occur at all in the latest editions of the AML/CFT handbook published by the Island’s Financial Services Authority (FSA), though the Handbook does contain comprehensive and detailed guidance on risk assessment, ongoing monitoring etc. In the sector-specific guidance provided by the FSA, whilst again comprehensive and detailed, there appears to be no direct reference to transaction laundering, nor of the risks posed to TCSP in unknowingly becoming involved in it.
HIGH-RISK PAYMENT PROCESSING
A good starting point when trying to think about High-Risk Payment Processing (HRPP) is to listen to a podcast interview of Simona Weinglass, the reporter from the Times of Israel who broke the story of the scandal of the $10 billion binary options trading operating from Israel. The fraudsters involved there used HRPP to realise their ill-gotten gains. Ms Weinglass claims that when trying to investigate HRPP she could find little or no literature on this aspect of the case.
Put simply, HRPP set out to facilitate “high-risk” businesses by arranging to filter their proceeds into the financial system. This may be to assist businesses with which traditional (or, as they would probably describe them, conservative) financial institutions are reluctant to deal, and/or manipulate merchant codes to disguise or misrepresent the nature of the business generating the funds – so as to prevent difficulties or unwanted scrutiny or delay in payment processing.
Of course, the high-risk businesses they serve are not necessarily involved in anything illegal – they may, for example, simply have a poor, or insufficient, credit history, have suffered excessive chargebacks in the past, or operate in a business or territory with a history of high chargeback risk. However, as long ago as 2012, FinCEN issued an Advisory that warned financial institutions in the US of AML risks associated with third-party payment processors.
Whilst a large number of businesses offer services as HRPP, and would be operating legitimately, there will be others who would target those generating illegal proceeds. These would aim to integrate the funds through the legitimate (or not) payment processing system and legitimate (or not) banks. Hence, they may use reputable US or European banks, using subterfuge including breaking down payments into micro payments and spreading over numerous accounts or locations to fall below levels that might attract attention. This system may be highly automated, with the use of algorithms to handle the arrangements. They may alternatively, or also, use banks or other entry points in jurisdictions where less (or no) questions are asked about the source or legitimacy of funds.
Even if an account is identified and terminated by an acquirer, research undertaken in the US by G2 Web Service in 2016 appeared to show that around 25% of terminated accounts keep the rest of their operations mostly intact, seeking new paths into the payment system. Others rename and reform their operations but continue to sell illicit goods. Only a minority disappear completely.
FATF GUIDANCE ON “PROFESSIONAL MONEY LAUNDERERS” AND HRPP
The recent FATF guidance on professional money launderers, which can include what is terms a “professional money laundering organisation” or ““professional money laundering network”. The guidance included reference to various ways by which ill-gotten gains can be laundered and/or transferred across borders. These included –
- account settlement mechanisms – where criminals have cash and want to send funds to bank accounts in other countries, or criminals have money in their bank accounts but need cash (e.g. to pay their networks and workers). By making use of real or fake company accounts, the funds are received and transferred as if genuine transactions, including “payments” made to accounts in other countries – it may involve corrupt or corrupted members of staff within the company or companies involved, and/or similarly complicit personnel in financial institutions.
- underground banking – perhaps most well-known as hawala banking, bypassing the regulated financial sector and creating a parallel system of moving and keeping records of transactions and accountancy. By reciprocal credits and debits on the books of the participating partners – who may have ethnic or family connections that provide a high degree of trust – the virtual movement of the funds is facilitated, allowing funds to be accessed elsewhere.
- alternative banking platforms (ABP) – like underground banking, this operates outside the regulated financial system. However, it may use the facilities of the formal banking system, while creating a parallel accountancy and settlement system. They are described by FATF as form of shadow banking that make use of bespoke online software to provide banking services, without the regulated and audited customer due diligence checks. It is said to supported with special software that can encrypt traffic, manage transactions between accounts within the same platform, apply fees and assist with interaction with the outside financial system.
It is this last-named, i.e. ABP, that might seem to most closely described the HRPP model. However, the guidance goes on to then deal with Money Value Transfer Services (MVTS) providers, saying that evidence shows that that MVTS providers have knowingly facilitated the activities of professional money launderers, including currency conversions (i.e. foreign exchange), cash-based transactions, and/or electronic funds transfers. Complicit MVTS providers can play an important role in the placement stage of the laundering process.
FATF says that such complicit MVTS providers may continue to file SAR, so not as to arouse undue suspicion, but at the same time use separate records (i.e. shadow accountancy) so as to have one set that are apparently clean; or they may file SAR but use fictitious transaction details.
Any or all of the foregoing might seem to have a function for a HRPP. However, it is when the guidance moves on to what it terms “proxy networks” that one finally comes to something that describes the systems of HRPP that the Times of Israel is said to have detected in the binary options scandal, and about which little or no information could be found. It does appear, therefore, that FATF and the internal compliance community has at last caught up and provided some of the necessary, but missing, assistance.
FATF says that the main task of these proxy networks is to move client funds to the final, pre-determined destination and to obfuscate the trail of the financial flows (surely the aim of all of the above). It describes them as using bank accounts with multiple layers of shell companies in different jurisdictions, which have been established purely to redistribute and mix funds from various sources. These shell companies, it says, could be located in the country where the predicate offence occurred, transit countries or countries where the final investment of funds is conducted. This scheme is designed to make the portion of funds that belong to a client untraceable. The guidance describes a 5-stage process funds are received, moved and end up finally at the intended destination.
Crucially, the guidance makes the point that bank accounts are chosen to make the activity appear
legitimate, and to avoid SAR reporting and/or where the transaction may be blocked by financial institutions. For example, they use accounts of various characteristics (i.e. accounts where the activity volume was small, medium or large), in accordance with the sums laundered. The Times of Israel reporter herself had also noted that the HRPP may use multiple routings, and adopt a flexible approach, routing and re-routing funds (or portions of the funds) when any resistance was encountered, or to prevent or minimise potential suspicions.
Despite the useful information and case studies contained in the FATF guidance, it makes no direct mention of HRPP as a distinct, identified type. As outlined above, HRPP may be both legitimate and not, or combine both legitimate and illicit activity – or at the very least not be too particular about source and destination of the funds handled. As well as there being an obvious need for those in the financial sectors to be aware of the risks, and to be alert to the existence and use of HRPP, it appears to me that TCSP need also to be aware, and alert to the possibility that companies and other vehicles and structures they are asked to help create or administer are not for use as HRPP or as part of a structure or framework intended to be used by or for a HRPP. It is just one more of the many risks that the TCSP needs to have in mind when carrying out their due diligence.
17th September 2018
Updated 1st October 2018
 The Law Enforcement Implications of New Technology (Commonwealth of Australia report, August 2001): https://www.aph.gov.au/Parliamentary_Business/Committees/Joint/Former_Committees/acc/completed_inquiries/1999-02/itlaw/report/index
 This might be described as an “identity swap”.
 Involving “smurfing” or (in the context of money laundering and cash smuggling) the breaking down of larger amounts into smaller sums, to avoid detection or to avoid triggering transaction threshold alerts etc.
 Trusts and corporate services providers.
 Chargebacks are where the credit card company cancels a payment after the customer has claimed that the transaction involved was unauthorised. The funds are debited from the business’s account and credited back to the customer. Here too, chargebacks need not indicate any illicit activity on the part of the business, hospitality industry, hotels and travel agencies are may also be flagged as high-risk because they can suffer high levels of chargebacks initiated by unsatisfied customers.
 Such as a credit card company.
 Hawala comes from the Arabic for “transfer” and is largely seen now as a generic term that also covers a range of similar systems and which are common in the Middle and far East and Asia – fei-ch’ien (China), hui kuan (Hong Kong), hundi (India), hawala (Middle East), padala (Philippines) and phei kwan (Thailand). It involves the movement of the value of funds without physical movement of those funds, as a parallel or alternative remittance system outside of the normal banking channels, involving trust and the extensive use of connections such as family relationships or regional affiliations