Movies like “Scarface” and TV shows such as “Narco” glamorize drug lords for using banks to funnel their money into legitimate accounts and businesses. But money laundering is a serious crime, and CPAs must remain vigilant to avoid being used as unwitting intermediaries, according to panelists at the Foundation for Accounting Education's recent Anti–Money Laundering Conference in Manhattan.
Money laundering is big business for criminals. The International Monetary Fund estimated in 1998 that the amount of money being laundered worldwide was between 2 percent and 5 percent of the global gross domestic product—figures that are still widely cited to this day. Based on the combined gross domestic product (GDP) of countries around the world for 2015, that ranged from $1.47 trillion to $3.68 trillion.
Steven Schrank, assistant special agent-in-charge with the Department of Homeland Security, said at the recent forum that he has seen legitimate U.S. entities—including those that move legitimate products and conduct lawful business with counterparties seeking to import their goods overseas—finding themselves unknowingly attached to illegitimate ventures.
It is incumbent on an accountant or auditor looking at these businesses to recognize how things like changes in payment models may be indicators of trade-based money laundering, he said.
Above all, Schrank advised, CPAs should ask themselves whether a particular transaction actually makes sense. He brought up the example of a U.S. entity exporting computers to Colombia. It would be very odd, he said, if the ultimate recipient of these computers paid for the goods with a cash counterdeposit in the United States. Similarly, he added, it would be unusual if the payment for goods were made via multiple cash deposits, particularly if these deposits were always made in different jurisdictions in sums less than $10,000, which avoids triggering bank reporting requirements.
Another thing to monitor, he said, is the origin of funds. For instance, that afore- mentioned U.S. exporter may be paid by wire transfer from an entity other than the one that made the agreement, or from a U.S. financial institution, as opposed to a transfer from the country where the products were purchased. These things by themselves might not seem suspicious, but if these paying entities change frequently, it might be time to look a little more deeply into a particular customer.
The United Nations Office on Drugs and Crime estimated in 2009 that the illicit drug trade was the most profitable criminal activity in the world, noting that gross profits from the cocaine business alone amounted to around $84 billion. The U.N. agency said that two-thirds of that was probably laundered, with most of the profits sifted through North America and Europe—money that is essentially taken from the legal economy for less productive ventures. Still, it found that less than 1 percent of the illicit money flow was being seized and frozen.
Jake Jacobson, a principal and anti–money laundering compliance and enterprise risk management specialist at Ernst & Young, said one of the ways in which CPAs can identify money laundering activities is to think logically about how goods are being shipped or stored.
“If there’s $30 million worth of grain or corn, but only three container numbers listed, obviously that much corn won’t fit in three containers,” he said.
Marcy Forman, managing director of the global investigations section of Citigroup’s anti–money laundering compliance unit, took the example further, adding that there might be no container at all, and that someone just produced dummy documents to make it appear that a legitimate transaction had been processed.
Another way is to look at price: Is the price of the goods significantly over or under the market rate? If so, someone might be trying to piggyback some illicit money onto the transaction.
Clark S. Abrams, the session’s moderator and head of New York City’s Money Laundering and Financial Investigations Unit, noted that beyond the risk of money launderers using legitimate businesses to move their funds, there’s also the risk of inadvertently breaking money laundering rules through transactions that, while having no criminal intent, nonetheless trigger some part of the statute or another. He used as an example the U.S. exporter, mentioned earlier, as always having paid its international importer in the same way each time—say, a wire transfer in its own currency. In that time, however, the economy shifts gears, and the supply of U.S. dollars in that country shrinks.
“Your customer is likely having difficulty getting its hands on dollars—legitimate dollars—and your customer may say to you, ‘Look, can you help a colleague of mine? Can you please [send U.S.] dollars [instead]?’ You may be thinking that you’re doing something good, and in some sense, you may be, but you may be acting as an unlicensed bank,” he pointed out. This is a violation of New York criminal law, of federal banking law, and of the general money laundering statute.
“You need to be concerned,” warned Abrams.
The federal resources dedicated toward fighting money laundering are miniscule compared to the amount of illicit activity those resources aim to curb, but that’s changing. The Financial Action Task Force (FATF), an intergovernmental body that counts the United States among its 37 members, increased its budget for its fiscal year 2015 by 15 percent to 4 million euros—around $4.2 million—from the previous year, but almost double from 2007.
The FATF has a set of guidelines with which accountants can monitor their clients’ money laundering activity, including real estate transactions and managing bank accounts. Still, it concedes that “assessing money laundering and terrorist financing risks requires judgment and is not an exact science.”
Jacobson said that macroeconomic trends, combined with the state of the trade bank sector, have made fighting money laundering more difficult. Businesses in general, he said, are looking to be more efficient, which for trade banks has meant outsourcing processes that the banks used to do in-house, to global hubs where the bank is two or three steps removed from the actual customer. is, he said, reduces transparency and makes it more difficult to actually know your customer. However, he also said that the industry itself is highly fragmented, with the top 20 trade banks having only 40 percent of total market share.
“So, the major institutions can only do so much. It’s a good place to start, but it still remains a fragmented business across many smaller institutions covering the globe,” he admitted.
Money—after being laundered and reaching the global financial markets—is virtually impossible to trace to its origin of illicit activity, requiring accountants and auditors to remain vigilant in monitoring suspicious and odd transactions, and to report any illegal activity to relevant authorities.
Sean M. O’Malley, vice president and deputy chief inspector for enforcement at the Federal Reserve Bank of New York, bemoaned what he felt was a trend of moving away from the transparency needed to effectively fight money laundering, at least in terms of interbank communication. He said that while there are protocols in the SWIFT (Society for Worldwide Interbank Financial Telecommunication) system—a payment system that banks use to pay each other—that allow for extensive information disclosure, many institutions don’t use them.
“We are not seeing any indication of who the real buyer and seller is. ... We’ve got a huge, gaping hole right now in our system,” he said.
Forman, who has a law enforcement background, emphasized, however, that the many partnerships between banks and law enforcement have been largely successful in rooting out money laundering schemes.
cgaetano@nysscpa.org