Money Laundering Techniques - August 2023

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

Brought to you this month by Dotfile, the modern operating system for Compliance teams. Dotfile helps you verify your individual or business customers anywhere in the world in less than 10 seconds! ????

On today's menu we have:?

• Real Estate Money Laundering in 2023 by Robert L. Williams III, CAMS,CCI,CRFCC ??
• Geopolitics and organised crime from Geopolitical Dispatch ??
• The infamous Adnan Khashoggi ??
• FATF Recommendation - Confiscation and Provisional Measures (4/40) ??
• Podcast of the month -? Camélia Gardot , From M&A lawyer to compliance partner ??

If you are inspired by a topic related to AML and wish to contribute to the newsletter, do not hesitate to contact me! ??

Enjoy your reading! ???

Real Estate Money Laundering in 2023 by Robert L. Williams III, CAMS,CCI,CRFCC ??

?In March of 2023, according to the Secretary of the U.S. Treasury Janet Yellen? have for decades criminals have? anonymously hidden ill-gotten gains in real estate, adding that as much as $2.3 billion was laundered through U.S. real estate between 2015 and 2020. I don’t know about you but that is a pretty astounding statistic!

So to combat this horrendous statistic the U.S. Treasury Department will soon propose a rule that would effectively end anonymous luxury-home purchases, closing a loophole that the agency says allows corrupt oligarchs, terrorists and other criminals to hide ill-gotten gains.

The long-awaited rule is expected to require that real estate professionals such as title insurers report the identities of the beneficial owners of companies buying real estate in cash to the Treasury's Financial Crimes Enforcement Network (FinCEN).

FinCEN is slated to propose the rule sometime this month, according to its regulatory agenda, though the timeline could slip, said two people briefed on the developments. Anti-corruption advocates and lawmakers have been pushing for the rule, which will replace the current patchwork reporting system.

So what exactly is Real Estate Money Laundering and how is it carried out?

Well that’s what I will outline in this paper. And I will also provide a case study as an example.

Typologies/Risks of Real Estate Money Laundering

Individuals who would be the highest risk to carry out money laundering in the Real Estate sector are known under the category named DNFBPs? (Designated Non-Financial Businesses and Professions ) such as Lawyers, notaries, other independent legal professionals and accountants. ?

Below I have listed some of the methods utilized for Money laundering in Real Estate

• Use of Third Parties Criminals often rely on individuals they know, typically family members with clean records, to purchase real estate on their behalf. By conducting the transaction through the third party's account, the criminal's name is kept out of the purchase documents, making it harder to trace the illicit funds.
• Utilizing Credit and Mortgage ?Credit and mortgage can serve as collateral for laundering criminal proceeds. Criminals may secure loans against the property, and the resulting funds are mixed with legitimate funds, making it difficult to distinguish between legal and illegal funds.
• Manipulation of Property Values ?By collaborating with real estate agents or appraisers, criminals manipulate property valuations. This can involve either undervaluing or overvaluing the property. Undervaluation allows criminals to acquire loans while overvaluation maximizes the amount that can be laundered by obtaining larger loans based on inflated property values.
• Structuring Cash Deposits ?Criminals may deposit cash across multiple banks to avoid triggering the reporting threshold, which would require the bank to report the transaction. These funds are then used to obtain bank checks or other legitimate forms of payment to purchase real estate.
• Rental Income as Legitimization?Criminals generate rental income from their properties and use illicit funds to cover the rent payments. Alternatively, they may purchase properties on behalf of third parties, rent them out themselves, and utilize illegal funds to meet the rental obligations, thereby legitimizing the origin of the money.
• Real Estate Transactions as Facilitators Criminals purchase properties, invest black money in renovations, and subsequently sell the properties at higher prices.?

This process allows them to legitimize their illegal funds and create the appearance of legitimate transactions while laundering money in the process.

Below I have listed some red flags that are essential to detect potential money laundering activities.?

• Red Flag 1:?Unusual Cash Offers or Third-Party Financing: If someone offers you a significant amount of cash to purchase a property or suggests third-party financing without a legitimate explanation, it could be a sign of money laundering. Criminals may use cash transactions to obscure the origin of funds or involve third parties to distance themselves from the illicit activity.
• Red Flag 2:?Rapid Flipping of Properties: Multiple property transactions involving the same individuals or entities within a short period, often at inflated prices, may indicate money laundering. Criminals may artificially inflate property values through coordinated sales to legitimize their illicit funds.
• Red Flag 3:?Complex Ownership Structures: Transactions involving complex ownership structures, such as offshore companies or trusts, can be an indication of money laundering. These structures may be used to obscure the true ownership and control of assets, making it challenging to trace the funds' origin.
• Red Flag 4:?Unjustified Over- or Under-Valuation: Suspicion arises when a property is significantly over- or undervalued without a valid explanation. Overvaluation may indicate an attempt to obtain larger loans or inflate the purchase price to launder money. Conversely, undervaluation could be a method to transfer assets or avoid tax liabilities.
• Red Flag 5:?Unusual Rental Arrangements: Unusual rental agreements, such as excessive rent payments or the use of rental income to cover unrelated expenses, may be indicative of money laundering. Criminals may use rental properties to generate "clean" funds by receiving excessive rents or disguising illicit funds through rental payments.
• Red Flag 6:?Inconsistent or Suspicious Documentation: Incomplete, inconsistent, or forged documentation within a real estate transaction can be a sign of money laundering. Pay attention to discrepancies in identities, addresses, or financial information of the parties involved, as well as missing or altered documents.
• Red Flag 7:?Lack of Personal or Business Justification: If there is no plausible reason for a person or business entity to engage in a particular real estate transaction, it could raise suspicion.?
• For instance, an individual with no prior real estate experience suddenly engaging in high-value transactions without a legitimate explanation may indicate illicit activity.
• Red Flag 8:?Involvement of High-Risk Jurisdictions: Transactions involving properties located in high-risk jurisdictions known for money laundering or weak regulatory oversight should be closely scrutinized. Criminals often exploit these jurisdictions to facilitate their illicit activities and hide the true origin of funds.?

Finally and most importantly the last section of the article I will now describe how to detect money laundering in the Real Estate sector, in addition to providing a case study.

How To Detect Money Laundering Through Real Estate?

• Asset Declaration

Implement a stringent system where public officials, particularly senior officials and their close associates, are required to declare their assets both before and after their term of service.

?These declarations should be publicly accessible, allowing independent officials to verify the accuracy of the statements. By closely examining these declarations, any unexplained or suspicious wealth can be identified, potentially indicating money laundering.

• Regulation Gatekeepers

Professionals involved in real estate transactions, such as real estate agents, lawyers, and financial institutions, should act as gatekeepers to prevent money laundering. They should have access to a comprehensive beneficial ownership list, enabling them to verify the true identities of individuals behind corporate entities involved in transactions.?

Conducting thorough due diligence and monitoring for any suspicious transactions can help identify potential money laundering activities. Gatekeepers should promptly report any suspicions to the relevant authorities or beneficial owners. Additionally, independent officials should periodically review compliance with sanction bans and other regulatory requirements.

• Land Registers

Establishing a centralized and online land registry system can enhance detection of money laundering in real estate. This system would maintain transparent and publicly accessible records of property ownership.?

By having a comprehensive database that reveals property ownership details, it becomes easier to track the origin of funds and identify any suspicious transactions or patterns of ownership. Greater transparency in land registers discourages criminals from using real estate for money laundering.

Case study example of Real Estate Money Laundering

?Ponzi schemes have been helping the corrupt line their pockets for nearly a century — the name dates back to the 1920s when Charles Ponzi set up get-rich-quick investment schemes in which he paid early investors out of the money provided by later investors. But what wasn’t so common in its nascent stage was a prominent role for real estate, shell companies, and an opaque financial system.

A hedge fund manager?Jonathan D. Davey was convicted in 2013 by a grand jury for helping to collect over US$11 million of a US$40 million Ponzi scheme that robbed would-be investors from North Carolina, Virginia, and Ohio.(More information below) ?

After the first scheme began to collapse, Davey and his co-defendants set up a Ponzi scheme that went on to collect a further US$5 million that was used to pay investors of the first scheme as well as themselves.

Davey and his co-defendants even created a website that claimed to show investors their returns. Towards the end of their heist, the website showed nearly US$120 million, when the actual value was less than US$1 million.

However, the shell company in Belize was just one piece of the puzzle.

According to the indictment, Davey then created a Delaware-based corporation to be the owner of the mansion. This Delaware corporation was in turn owned by the Belize-based company, creating a web of ownership that hid Davey’s identity from the property’s records.?

But once Davey had secured his own profits, he needed somewhere to hide it.

He set up a network of shell companies, which helped him to evade taxes and launder the proceeds of the Ponzi scheme. As is seen in many other high profile money laundering cases, one of the most foolproof ways to clean your money for safekeeping is to put it into real estate, and this is exactly what Davey attempted to do.

After collecting his ill-gotten gains, Davey opened an offshore anonymous company in Belize to ultimately move the money into the U.S. to build a mansion in Ohio. With money stolen from his “clients”, Davey purchased 48 acres of land and ordered US$3.3 million of construction costs — including an opulent driveway that could heat and melt snow.

In February 2013, a federal jury convicted Davey of securities fraud conspiracy, wire fraud conspiracy, money laundering conspiracy and tax evasion.?

Subsequently a few years hence on January 15, 2015, U.S. District Judge Robert J. Conrad, Jr. sentenced Jonathan D. Davey, 50, of Newark, Ohio to 252 months in prison in addition to ordering the defendant to spend three years under court supervision upon his release from prison and to pay $21,815,407.44 as restitution.

Reference used for this article: sanctionscanner com/blog/money-laundering-through-real-estate-318

Geopolitics and organised crime from Geopolitical Dispatch ??

We founded Geopolitical Dispatch to analyse geopolitical developments for business readers. We hope most of our readers work for legitimate firms. But even if not, here is an offer you can’t refuse: a look at the intersection of geopolitics and organised crime.

The business of organised crime

An organised crime group, per an oft-cited definition, is a “continuing criminal enterprise that rationally works to profit from illicit activities often in great public demand.”

Such groups are vast and varied: the mafia from southern Italy; the yakuza of Japan; the cartels in Latin America; the triads out of China but especially Hong Kong; and the more ragtag, but no less organised, biker gangs of North?America, Canada, and Australia.

Their modes of operation – let alone their modes of transport – may differ. Still, these disparate groups share core characteristics: continuous engagement in illegal activities, close coordination of these operations, and a focus on trading prohibited goods and services.

Despite the state

Aside from the illegal nature of their activities and products, many large organised crime groups closely resemble conventional international businesses. They demonstrate comparable sophistication, employ significant numbers of people, and operate globally. This hints at the primary way organised crime groups impact geopolitics: contributing to the global economy but via the black market.

Accurate data is necessarily elusive but there are strong indications that certain organised crime groups ‘contribute’ more to the global economy than many small countries and multinational corporations.

For example, the 'Ndrangheta, perhaps the world’s largest organised crime group, with tentacles spread across Europe and stretching as far as Australia, is almost certainly one of Italy’s most profitable businesses. It has an estimated annual revenue of approximately $60 billion. By comparison, a highly successful legitimate business from Italy’s north, Prada, generates annual revenue of just $4.4 billion.

Zooming out from the so-called OG (original gangster) home of organised crime to the world at large, the United?Nations estimated in 2009 that transnational organised crime generated approximately $870 billion, about 1.5% of the world’s GDP, which is only 0.2% less than Russia’s current global contribution in nominal (but not purchasing power) terms.

Furthermore, many analysts suggest there has been exponential growth in the profitability of organised crime since 2009, mainly because of the after-effects of the 2008 global financial crisis. When conventional markets waiver, underground markets often thrive.

Against the state

Organised crime groups do not impact geopolitics just by operating as businesses seeking to extract profits on the margins of state power. They also often directly confront states and seek to direct government authority in their favour. This helps them expand the areas where they can do business and enables them to pursue non-business objectives, including obtaining political power for its own sake.

At the extreme end of the spectrum, some organised crime groups function as terrorist organisations and vice versa. In Africa, for example, groups like Boko Haram in Nigeria and Al-Shabaab in Somalia, as well as various factions in the Sahel, engage in elaborate criminal activities to underwrite their war efforts and their various other attempts to wrest government control.

Often organised crime groups appear friendlier than those operating on the margins of global security. Nevertheless, they are still actively engaged in efforts to oust the state. For instance, in various Latin American countries, the cartels that feed the developed world’s drug habit also offer services their host states fail to provide. Such services range from subsidised medical care to alternative dispute resolution mechanisms.

There’s a similar but much more nuanced story about the yakuza. In many ways, Japanese organised crime groups function as a second police force, left to monitor and impose strict behavioural codes in the parts of society where the national police will not go. Whether for the cartels or the yakuza, the provision of such services supplants the state’s authority, casting the organised criminals as protectors and undermining the rule of law.

For the state

Organised crime groups are not just in the business of making money or directly confronting the state. Governments also call on them occasionally to act in the ‘national interest’ – a helpfully vague concept, especially in this context. This may be at times of war, during peacetime, and, perhaps most profitably, when ambiguity prevails.

For a particularly evocative example of governments leaning on organised crime groups while at war, recall ‘Operation Husky’, the Allied taking of Sicily during World War Two. The US Infantry’s targets were selected by military planners with help from certain mercenary mafiosi, recently domiciled in New York City and shrewdly prioritising good relations with nearby Washington over faraway Rome.

There are countless examples of such coordination between organised crime and governments during peacetime too. After the end of the Cold War, the Kremlin leaned heavily on organised crime groups to prop up its fledgling state and to enrich Russia’s new oligarch class (you could argue they still do with criminal-linked groups like Wagner). Similarly, in Afghanistan, up until the 2001 US invasion, the Taliban maintained deep ties with drug traffickers, using the opium trade to finance its operations.

And then there are states stuck in limbo between peace and war, like North Korea, which has little choice but to turn to the underworld. Pyongyang frequently engages in organised criminal activity, squeezed as it is out of global financial markets by onerous sanctions. For example, it is alleged to traffic vast quantities of drugs via its diplomatic network to bolster its economy and sustain its regime. The trade offers a dual advantage: solid revenue streams and, for the more conspiratorial, a method to destabilise enemies, particularly if the trafficked drugs wreak havoc among target populations.

As the state

Ultimately, certain organised crime groups become so powerful that they supplant the state. They cease acting within the margins or even in cooperation with the state but become fully-fledged geopolitical actors in their own right. The organised crime group becomes the state and vice versa – a ‘Mafia state’ is born. This phenomenon is not merely about controlling certain regions; it may involve significant swathes of national territory and even influence foreign policy settings.

To wit, the 15 or so Mexican drug cartels. These ruthless operators dominate the Mexican political landscape, such that, per Le Monde, in several regions, “there is talk of co-governance between the state and the cartels." Cue President Andrés Manuel López Obrador and his increasingly militarised programme.

Somalia offers another stark illustration. Though it may now be slowly recovering, the once-failed state was long gripped by political instability. Without a robust central government, organised crime groups were free to wrest whole territories, commit piracy on the high seas, establish trade relationships, levy tariffs, and engage in diplomatic interactions with neighbouring states.

Organised crime groups linger on the peripheries, nestle in the fissures, and pass through the webs – beyond, between, and among their host states. Yet they are surprisingly pivotal actors in today’s world. Wherever they operate, and for whatever purpose, criminal organisations consistently reveal the distance between the ideals of a good and purposeful world order and the realities of a chaotic and rudderless global mess.

This week, we have seen this vividly expressed, whether through the cartel assassination of an Ecuadorian presidential candidate, the role of people smugglers in growing tensions between Belarus and Poland, the use of mafia-related laws in alleged preparations for a fourth Trump indictment, the gangster-like behaviour of political factions in Lebanon, or the criminal-military nexus in Myanmar. Once you start noticing how central organised crime is in geopolitics, you will notice it everywhere.

Despite the grim nature of this edition, we hope you are enjoying?these Not in Dispatches and our Daily Assessments as much as we are. We would be most grateful if you could refer Geopolitical Dispatch to a friend or colleague.

Best,

Michael Feller , Cameron Grant , and Damien Bruckard ckard, co-founders

Geopolitical Dispatch , written by former diplomats and based on the President’s Daily Brief, gives asset managers, boardrooms and executives timely and concise analysis of the geopolitical issues that matter to business.

With the brevity of a media digest, but the depth of an intelligence assessment, Geopolitical Dispatch is emailed each weekday at 5am US Eastern (9am GMT). You can check it out and subscribe here: https://www.geopoliticaldispatch.com

The infamous Adnan Khashoggi ??

???? Born in Mecca in 1935, Khashoggi was a Saudi Arabian businessman who made a fortune in arms dealing.

He was once considered one of the richest men in the world, with an estimated net worth of $4 billion.

He had close relationships with several high-profile individuals, including members of the Saudi royal family.

Probably thanks to his father who was the personal physician to King Abdulaziz Al Saud, the founder of Saudi Arabia. ??

He was also known for his extravagant lifestyle, owning several homes, yachts, and private jets, including one decorated with gold leaf.

He passed away in 2017, his fortune greatly diminished by a series of political and financial scandals.

???? In the 1980s, Khashoggi was involved in several arms deals, including the Iran-Contra affair.

He allegedly facilitated the sale of weapons to Iran in exchange for the release of American hostages.

He also took part in the infamous Al Yamamah arms deal between Saudi Arabia and the UK.

?? Despite his involvement in these affairs, Khashoggi was never convicted of any wrongdoing related to them.

However, he was implicated in several money laundering schemes.

In the 1990s, he was associated with a scandal involving the Bank of Credit and Commerce International (BCCI).

BCCI was a global bank that was shut down in 1991 after it was revealed to be involved in money laundering, bribery, and other illegal activities.

?? Khashoggi allegedly used BCCI to launder millions of dollars.

The money was transferred through a complex network of offshore accounts and shell companies. ???

In 1991, he was indicted by a US federal grand jury on charges of racketeering, fraud, and obstruction of justice related to his involvement in the scandal.

He was also indicted on charges of paying bribes to a Saudi Arabian official in exchange for contracts.

???? The businessman fled the United States and never faced trial on these charges.

However, he was later arrested in Switzerland on charges of fraud and money laundering related to the BCCI scandal.

He was held in custody for several months before being released on bail.

In 1988, he allegedly used the bank to transfer $20 million to Switzerland in order to conceal the funds from his wife during their divorce proceedings.

????????? Despite all this, Khashoggi was never convicted of any related charges in the United States.

His close friendship with U.S. former President Ronald Reagan probably did not hurt.

In total, it is estimated that he laundered billions of dollars through his various operations.

His story has been the subject of several books, including "The Richest Man in the World" by R. Kessler. ??

FATF Recommendations - Confiscation and Provisional Measures (4/40) ??

?? Money laundering and terrorism financing pose significant threats to the global financial system.?

To tackle these illicit activities, the Financial Action Task Force (FATF), has established 40 recommendations as a framework for countries to adopt effective measures.?

The fourth one aims to enable competent authorities to freeze, seize and confiscate illicit proceeds and assets (without jeopardizing the rights of bona fide third parties).

???? Countries are encouraged to adopt measures similar to those outlined in the Vienna and the Palermo Convention.?

They provide a legal framework for identifying, tracing, evaluating, and confiscating various types of property involved in money laundering or terrorism financing.

Countries should empower their competent authorities to freeze, seize, and confiscate the following types of assets:

?? Property laundered

?? Proceeds from money laundering or predicate offenses

?? Property derived from financing terrorism

?? To implement the provisions effectively, countries are encouraged to grant authorities the necessary powers.?

These measures should encompass the authority to:

?? Identify, trace, and evaluate property subject to confiscation

?? Implement provisional measures such as freezing and seizing to prevent any further transactions

?? Take steps to prevent or invalidate actions that hinder the freezing of subject property

?? Undertake appropriate investigative measures ??

???? To go further, countries may also consider adopting measures that allow for non-conviction based confiscation.?

This means that assets can be confiscated without requiring a criminal conviction.?

Alternatively, countries may introduce measures that place the burden of demonstrating the lawful origin of alleged property on the offender.

?? The adoption of these measures empowers competent authorities to swiftly seize and confiscate illicit proceeds and assets.?

This helps disrupt criminal networks, dismantle money laundering operations, and curtail the financing of terrorism.?

By depriving criminals of their ill-gotten gains, countries can send a strong message, while also ensuring that the rights of innocent parties are safeguarded.

?? International cooperation is vital in combating money laundering and terrorism financing.?

Countries should strive to collaborate in order to facilitate the freezing, seizure, and confiscation of illicit assets across borders.?

Through coordinated efforts, the global community can create a unified front against these illicit activities, safeguarding the integrity of the international financial system. ??

?? To go further on this topic: Best practices paper from the FATF

Podcast of the month - Camélia Gardot , From M&A lawyer to compliance partner ??

Camélia Gardot, a business-oriented lawyer, with two decades of experience in advising international clients/companies for large projects, strategic partnerships, M&A and Ethics and Compliance matters. ????

Currently working at Airbus Defense & Space, she is skilled in supporting complex contract negotiations, coordinating expert teams and interacting with management stakeholders.?

?? Just to give you a quick teaser, we talk about:?

?? Her very diverse and stimulating missions at Airbus Defense & Space ??

?? Key take-aways from her past as an M&A consultant?

?? How her lawyer's skills help with her role in compliance ??

?? The work she did in the US

?? To listen to the episode, just follow this link ??

?? If you’re looking for the one-stop platform to run your KYC and KYB, look no further than Dotfile! Their platform provides your compliance team with all the verification superpowers they need in a single dashboard and API. ??