Money Laundering Techniques #2 - Black market peso exchange, Correspondent banking & The importance of local funding availability for terrorists

Once a week, let's discover new money laundering, terrorist financing and fraud techniques as well as ancestral methods. ??

On today's menu we have:

?? Black Market Peso Exchange, an ingenious scheme mostly used by Mexican and Colombian drug cartels to repatriate money from the United States ???? ?? ????

?? Correspondent banking, a service offered by some banks that can facilitate the opacity of transactions ?????

?? The importance of local funding availability for terrorist organizations, an interesting phenomenon highlighted by a recent study ??

I hope you will like it and do not hesitate to contact me ?? if you have any suggestions for changes in the format or topics to cover. Enjoy your reading! ??

Black Market Peso Exchange ??

?? This technique was initially motivated by Colombia's ???? restrictive currency exchange policies that limit the ability of legitimate businesses to purchase goods from US ???? suppliers.

To circumvent them, Colombian companies avoided government taxes by dealing with peso brokers who operated on the black market or in a parallel financial market.

Colombian and Mexican ???? drug traffickers, particularly active in the United States, quickly appropriated it.

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?? Their criminal operations, among the most lucrative in the world, generate tens of millions of dollars, if not more, each year.

However, they have difficulty moving the illegally acquired currencies south of the U.S. border. ??

Indeed, despite the ingenuity of cartels to introduce illicit cash into the financial system, the volumes to be laundered are so large that they still partially rely on this method today.

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?? The successive stages of the scheme are as follows:

1?? The broker receives dollars from a network of accomplices belonging to the cartel and uses them to pay various U.S. suppliers.

2?? Depending on the complexity of the scheme, the broker may pay the suppliers directly or he may deposit the cash into several bank accounts through structured deposits ??, and then transfer these funds to the suppliers.

3?? The U.S. suppliers export the goods to companies located in South or Central American countries ??, often unaware of their participation in the laundering scheme, who transfer in exchange local currency to the local broker.?

4?? The broker then transfers local currency to the drug cartel, minus his commission. ??

5?? Finally, laundered funds can be partially reused to finance the production and shipping of drugs to the United States. ??

This ensures that no cash is moved between countries, where it could be identified and intercepted by the authorities. ??

??Great illustration found on insightcrime.org ??

Correspondent banking ??

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?? For domestic banks, providing financial services in a foreign country can be a challenge.

For example, if their clients want to access a foreign financial market, they must open a branch in that country.

Fortunately, it is possible to avoid this constraint by entering into a correspondent banking agreement with another bank located in the target country. ??

It involves a financial institution (the correspondent) providing banking services to another financial institution (the respondent) in another country. ??

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?? Correspondent banking is an essential part of the global payment system and international trade depends largely on it.?

However, these facilities are often abused to enable money laundering and terrorist financing.

This is mainly due to the fact that correspondent banks carrying out transactions on behalf of foreign banks have to rely on their AML framework.

Often, these are insufficient and do not allow to correctly:

?? Identify customers

?? Determine the beneficial owners

?? Monitor transactions

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?? Many banks have withdrawn from this scheme because of its high risk of money laundering.

Nevertheless, this is not a good solution because it penalizes certain regions of the world and, paradoxically, makes them even more vulnerable to this risk.

Instead, FATF has drafted a list of measures to maintain this type of relationship without compromising their safety:

?? Conducting advanced due diligence between correspondent banks (AML framework, high risk clients, business model,..) ??

?? Closely monitoring the relationship (Ongoing due diligence on the correspondent institution, adjusting the mitigation measures to the evolution of risks, reviewing client transactions & requesting information if needed) ??

?? Maintaining good communication channels (Clear terms governing the correspondent banking relationship & open dialogue between the institutions) ??

?Great illustration found on austrac.gov.au also including the definitions of nested and payable-through accounts! ??

The importance of local funding availability for terrorist organizations ??

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?? Terrorists attacks have been increasing in number in the past decade.

Most experts think that it is linked to their ability to secure funding and recruit new members.

In response, various counter-measures, such as following the money and freezing bank accounts ?? have been launched.

However, they have been criticized because of their cost and inefficiency, explained by the fact that terrorists can easily move their funds to various locations and use them at their convenience.

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?? New findings, based on a pioneering quantitative assessment of terrorism, recruitment and financing, actually show that terrorist attacks are sensitive to local funding.

Terrorist organizations launch attacks where and when they receive funds.

Thus, financial counter-terrorism can be effective insofar as it limits the ability of terrorist organizations to access funds.

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???? The study was mainly conducted in Pakistan with a focus on the Zakat, a practice whereby Muslims make a charitable donation to the poor during the period of the Ramadan.

At the same time, the Pakistani government collects a Zakat levy, in order to support vulnerable populations, equal to 2.5% of individual bank deposits above a certain threshold.

It depends on the price of silver ??, the higher it is, the more people can make significant donations.

Unfortunately, it is also known that some of these funds fall into the hands of terrorists as they operate many “legal” charity branches.

Thus, an increase in the price of silver ?? leads to more funding for local terrorist groups.

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?? Statistics also show that if a terrorist group receives more funds in a given city, it will increase attacks in this city.

This correlation is observed only with expensive terrorist activities, such as bombs or heavy weapons, and not with inexpensive actions.

Moreover, AI based analysis ?? seem to prove that heavy periods of online terrorist recruiting tend to increase the effect of additional funding on attacks.

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?? These findings are encouraging because they confirm that terrorist organizations are having difficulty channelling funds raised locally.

It means that financial counter-terrorism can be very effective to prevent them. ??

As the author of the study mentions: “showing the existence of financial frictions through data is crucial to understand the behavior of terrorist groups and study the most effective policies to empower financial counter-terror to lower attacks and casualties”.

Nicola Limodio, “Terrorism Financing, Recruitment and Attacks,” Econometrica, Forthcoming Papers.