“The Black Market Peso Exchange system is the primary money laundering conduit used by Colombian narcotics traffickers in repatriating revenues to Colombia and is the single most efficient and extensive money laundering scheme in the Western Hemisphere…between $3 billion and $6 billion is laundered annually”
Prior to the notable money laundering scandals involving major financial institutions, many in the Multinational Corporation community did not take money laundering seriously or even associated the problem to their operations. Recent incidents and regulations have forced a major shift in perception about how money laundering can present serious risk to their operations and reputations.
The methods used by money launderers go as far as their imagination can drive them. There is really nothing they’re not willing to try to achieve their aims. According to Michael D. Shepard “MNCs, as well as any export companies are exposed to the risk of money-laundering schemes. Criminally derived funds may already be in the financial system, but that does not make them “clean.” Purchasing goods from a multinational corporation — or any company for that matter — can be considered money laundering if the ultimate source of funds is illegal activity and the requisite intent is present.” In other words companies must be aware of the sophisticated schemes devised by money launderers disguised as clients in an clever attempt to funnel dirty money from illicit activities.
One such money laundering system targeting manufacturers and distributors is the Black Market Peso Exchange (BMPE). According to Bonnie Tishchler from the US Customs Service, “The BMPE process starts with a peso broker. For a fee, these brokers arrange the financial transactions necessary to launder the drug cartels’ money. Broker activities include receiving and coordinating orders for money, locating sources of U.S. dollars, arranging pickups and directing placement of funds. Within the broker’s network are others who perform various services for a percentage of the broker’s earnings. Those working for the brokers pick up cash, buy money orders and checks, open checking accounts, transport and smuggle money, among other things.”
The primary market in Colombia for large blocks of U.S. dollars is Colombian importers. The Colombian government has strict currency controls and the only way to get US dollars in Colombia was to buy them from government banks. These government banks also asked lots of questions about what was being bought with the dollars and whether import tariffs would be paid. So a nascent black market economy flourished with importers eager to get cheap goods circumventing the heavily regulated foreign exchange market, as well as the customs tariffs, and drug traffickers, not the ones to give up an opportunity to turn their dirty dollars into clean pesos.
Together a motley crew of characters has turned some of the most well known MNCs into unwilling participants of their schemes. The authorities first became aware of the elaborate system by studying trade patterns in the Tobacco Industry, but anti-money laundering (AML) authorities soon began to track drug money to the bank accounts of many of the Largest US MNCs. Companies in the global trade of appliances, cigarettes, liquor and other products are exposed to this mode of money laundering. A common thread among the products and industries targeted is an apparent appetite for high end products which would normally pay high tariffs in Colombia.
The most likely scenario in which MNCs can fall victims (willing or unwilling) to money laundering is through the payments for goods made with illegitimate funds: The corporation and/or its products may be used by criminals in the process known as “layering” — distancing the ill-gotten gains from the criminal activity by moving it further from the illegitimate source.
For their part the MNCs have argued in court that they were innocent owners of the drug funds and the government gave the money back. The US Justice Department has taken the tactic that it is better to seize the money, educate companies and try to get their cooperation to fight the black market peso exchange. In some cases, the Justice Department asked companies to sign a “Consent Decree” saying that the company now understood this problem and would never be able to claim innocence if it happened again.
Thereafter MNCs could be charged with and convicted of money laundering under federal statutes that make it a crime to engage, or attempt to engage, in a financial transaction knowing that the property used in the transaction represents the proceeds of some form of unlawful activity. Furthermore; according to former IRS investigator Michael McDonald, “there’s a legal principle called Willful Blindness, which means if you totally disregard all the facts and circumstances that would lead you to believe and know that this is illegal money, that’s the same as knowing it’s illegal money.”
The costs of a money-laundering conviction can be significant. Penalties can include a fine of $500,000 or up to twice the amount of the criminally derived property involved in the transaction (whichever is greater), and/or imprisonment of up to 20 years. Legal and post-event remediation costs can be staggering. Reputational damage can be incalculable.
Like financial institutions, MNCs should adopt AML programs that include policies and procedures, training and compliance protocols in their mitigation strategies. More importantly under the Federal Organizational Sentencing Guidelines, implementation of corporate compliance and training programs can help avoid or minimize prosecution and civil money penalties when employees commit wrongdoing in violation of those policies.
One of the most effective risk mitigation factors in an AML program, especially for MNCs in light of the trade-based schemes often used by money launderers, is a comprehensive and risk-based “Know Your Customer” due diligence program. When evaluating the risk for money laundering, MNCs should consider at least the following factors when dealing with potential customers, clients, vendors, business partners and even outside sales representatives:
- Who are the owners of the entity?
- Is there any negative news about them or the entity?
- What is the entity’s source of funds?
- Is the entity located or operating in a high-risk area for fraud, corruption, drug trafficking and/or money laundering?
- How long has the entity been in business?
- Does the entity have a physical address?
- What are the entity’s business model, sales volume and revenue?
- Who are the entities customers?
- What is the entity’s level of transparency and willingness to provide information?
- What is the entity’s legal structure?
- Can the entity’s existence be verified through searches of publicly available documentation and databases?
As far as reporting is concern Once KYC due diligence has been performed and documented, monitoring transactional activity will help detect unusual patterns of customer behavior. Questions to consider:
- Is this transaction unusual in and of itself?
- Is this transaction, when aggregated with the customer’s other transactions, unusual or suspicious?
- Is this transaction comparable to transactions for other customers in the same geography?
- Is this transaction comparable to transactions for other customers of the same size/business model?
As for financial institutions, MNCs may be able to use existing systems, create risk-based rules against which to evaluate transactions, generate alert reports showing patterns of activity that should be of interest and develop investigative protocols to determine if the activity is indeed suspicious and possibly tied to money laundering or other illegal activity.
AML programs require a multi-discipline approach, which means a that subject matter experts from legal, finance, security/investigations, compliance as well as sales should be part of a team working under the direction of the executive board. The working team should have long term objectives, as the risk of money laundering to MNCs don’t simply go away with the stated countermeasures, but morphed into different M.O.’s as organized crime has been notoriously able to do.
In closing, MNCs may have been caught by surprise by clever money laundering schemes, which are indeed very subtle in their execution. But once the veil has been lifted, MNCs can no longer claim ignorance and would instead face hefty fines and even criminal prosecution under AML laws, if such regulations are in place in their home countries. To avoid the eventual damage to their reputation that may result from prosecution MNCs must gain superior knowledge of their organization’s transactions through due diligence and know your customers program.