Money-Laundering Techniques and Invoice Fraud

Money-Laundering Techniques and Invoice Fraud

I wanted to re-post this article since I got some valuable feedback to it. Back when I wrote this article I thought about money laundering in the traditional sense but realized that Trade-Based Money Laundering was and is far more dangerous. In traditional form, money-laundering involving transfers of money, criminals seek to wash/launder and legitimize illicit funds, as many of you know, who are reading this article. Just to help you understand how it is done, generally, they (the bad guys) use a variety of techniques first Placing dirty money in financial institutions in ways that do not trigger the financial transparency reporting requirements, which can be pretty elaborate. Next is they Layer the money by frequently moving it between accounts or wiring from bank to bank often through multiple jurisdictions. Finally, criminal organizations Integrate the laundered money back into the economy by purchasing real estate, opening businesses, investing in the stock market and so on. The above three stages of money laundering are designed to make it difficult for us to follow the money trail. This is nothing new and has been happening for quite some time. I will talk about a few ways we can slow it down later in this article.

 In TBML or as we call it (Trade-Based Money Laundering) criminals seek to legitimize funds. They do so by genuinely or fraudulently get involved in buying and selling trade goods using a variety of techniques that very effectively transfer value in ways that sometimes bypass financial intelligence reporting requirements. Trade is also used in placement, layering, and integration as I will demonstrate.

 In 2010, total global merchandise trade was approximately $31 trillion dollars. Now that we are in 2018, 8 years later, the amount has nearly doubled. The enormous size of global commerce increases the probability of TBML. Just like in traditional money-laundering criminals, mix and comingle illicit money with legitimate money via financial institutions and the same holds true in international trade. This large number of international commerce, masks infrequent suspect transfer. It is the sheer magnitude and noise of global trade that presents the primary challenge to law enforcement and customs services around the world in their attempts to detect and counter TBML.

 In addition to the massive trade volume and the mixing of occasional illicit transactions regarding the overwhelming percentage of legitimate trade, there are other factors that combine to make it very difficult for authorities to monitor suspicious trade transactions.

There are innumerable complex types of trade finance deals found in the business world such as:

·                   Tax avoidance and capital flight generally involving the transfer of legitimate funds across borders making it very difficult to distinguish intent.

·                   Underground financial systems that rely heavily on trade or by their very nature operate as non-transparent institutions.

·                   At all levels of industry and governments, there is a limited understanding and resources to detect suspicious trade transactions.

·                   Criminals, fraudsters and tax cheats use a variety of techniques and schemes in their misuse of trade.

Corruption is the great facilitator in many forms of TBML. That is another topic for another time.

TBML is generally considered a complex money-laundering methodology. Its components cut across multiple boundaries and national borders. To distinguish TBML and value transfer from legitimate activities of international trade is sometimes quite difficult. And TBML is often combined with other common money-laundering techniques such as the layering of financial transactions, use of offshore shell companies, the use of bulk cash, and various underground financial systems.

How does TBML work?

 In its primary form, TBML revolves around invoice fraud and associated manipulation of supporting documentation when a buyer and seller work together on the price of goods (or services) which can be whatever the parties want it to be. There is no invoice police. As Raymond Baker one of the world's foremost experts in financial crimes briefly notes, “Anything that can be priced can be mispriced”. False pricing is done every day, in every country, on a large percentage of import and export transactions. This is the most commonly used technique for generating and transferring dirty money.

The primary techniques used for invoicing and for manipulation are:

·       Over- under-invoicing and shipments of goods and services

·       Multiple invoicing of goods and services

 ·       Falsely described goods and services

 Other common techniques related to the above include:

 ·       Short shipping: This occurs when the exporter ships you fewer goods than the invoiced quantity of goods, thus misrepresenting the true value of the goods in the documentation. The effect of this technique is similar to over-invoicing.

 ·       Over-shipping: The exporter ships more goods than what is invoiced, thus misrepresenting the true value of the goods in the documentation. The effect is similar to under-invoicing.

 ·       Phantom shipping: No goods are actually shipped. The fraudulent documentation generated is to justify payment abroad.

 INVOICE FRAUD

Money-laundering and value transfer through the over and under-invoicing of goods and services is a common practice around the world. The key element of this technique is the misrepresentation of trade goods to transfer value between the importer and exporter for the settling of debts or balancing of accounts between the trading parties. The shipment (real or fictitious) of goods and the accompanying documentation provide cover for the transfer of money.

 First by under-invoicing goods below their fair market price, an exporter is able to transfer value to an importer while avoiding the scrutiny associated with more direct forms of money transfer. The value the importer receives when selling (directly or indirectly) the goods on the open market is considerably greater than the amounts he or she paid the exporter.

 For example: Company A. located in the United States ships 1 million widgets worth $2 dollars each to company B based in Mexico. On the invoice however, company A lists the widgets at a price of only a $1 each and the Mexican importer pays the U.S. exporter only 1 million for them. Thus extra value has been transferred to Mexico, where the importer can sell directly or indirectly the widgets on the open market for a total of 2 million. The Mexican company then has several options; it can keep the profits; transfer some of them to a bank account outside the country where the proceeds can be further laundered via layering and integration; share the proceeds with the US importer (depending on the nature of the relationship); or even transfer them to criminal organizations that may be the power behind the business transactions. To transfer value in the opposite direction, an exporter can over- invoice goods above their fair market price. In this manner, the exporter receives value from the importer because the latter’s payment is higher than the goods’ actual value on the open market.

INVOICE MANIPULATION

FALSE, INFLATED OR DUPLICATE INVOICES

Suppliers or contractors can intentionally submit false (meaning that no services were provided), duplicate or inflated invoices. The scheme can involve a contractor acting alone or in collusion with an employee of the victim organization who shares in the profits.

The major red flags of false, inflated or duplicate invoices

General red flags

Weak or un-enforced controls in the receipt of goods and payment of invoices

Inadequate, copied or apparently altered supporting documents

Red flags of false invoices

Invoiced goods or services cannot be in inventory or accounted for

No receiving report for invoiced goods or services

Questionable or no purchase order for invoiced goods or services

Red flags of inflated invoices

Invoice prices, amounts, item descriptions or terms exceed or do not match:

Contract terms

Purchase order

Receiving records

Inventory or usage records, discrepancies between invoice and supporting documents.

Red flags of duplicate invoices

Multiple invoices:

In the same or similar amount to the same or related vendors

On the same invoice or purchase order

For the same or similar goods or services

Multiple invoices with the same description of goods or services

Amount

Invoice number

Purchase order number

Total payments to vendor exceed total purchase order or contract amounts

A TALE OF TWO INVOICES

According to some of the research I have completed through a law enforcement contact of mine, there was a story about a person by the name of Bheki Khumato, a money-laundering officer with the Financial Intelligence Unit of the Central Bank of Swaziland, a sovereign state in Southern Africa which is neighbored by Mozambique…..most of the invoices that are presented to customs officials do not reflect the true value of goods presented. How many times have we seen people buying goods in South Africa and asking for two invoices one is for their accounts and the other one is for the tax man.

Another technique used to transfer money under the guise of trade is to issue multiple invoices for the same international trade transaction. This is done to justify multiple payments for the same shipment of goods. Although fictitious pricing can be invoiced, unlike the over- and under-invoicing, there is no need for the importer or the exporter to misrepresent the price of the goods on the commercial invoice. And to add further complexity to the scheme, sometimes the fraudsters use different financial institutions to make payments.

 For example, as part of the analysis into the laundering of a massive amount of proceeds from narcotics sales in the United States as part of "Operation Polar Cap", a well-known Customers Officer that I know, investigated gold dealers in Europe and the Middle East. They issued multiple invoices for the same shipment of gold. The invoices facilitated the international payment of laundered drug money from accounts in the United States.

 Helping you understand how the investigation took place.

 Although operation Polar Cap came to fruition in 1989, it remains one of the most extensive international money-laundering investigations in history. Many arrangements were used in this complex scheme, including forms of TBML. Some of the techniques still are in use today. The drug money belonging to the Medellin cartel, called “La Mina” used laundering schemes which processed nearly 1.2 billion in drug money. Operation polar cap conducted jointly by the DEA, FBI, IRS, customs, and state and local law enforcement led to the first conviction of a foreign financial institution, Banco de Occidente/Panama, for violating US money-laundering laws. More than 100 arrests were made, and some 105 million in assets were seized, including currency, bank accounts, real estate, jewelry, gold, and watches. “La Mina” was involved in the buying and selling of gold both real and fictitious. The multi-agency investigation uncovered multiple laundering schemes. The earliest phase of criminal operation involved the delivery of bulk drug money to collaborating gold dealers in Los Angeles, Houston, and New York. Elsewhere, gold-plated lead bars, mis-invoiced and declared as solid gold, were shipped from Uruguay to manufacturers and United States, giving the appearance of legitimate gold import (even though Uruguay did not mine or manufacture goal). RED FLAG, right? This is a perfect example of how invoice manipulation can be utilized.

Meanwhile, the drug money was packed into boxes that were declared as gold and shipped to a cartel-controlled jewelry retailer in Los Angeles. The cash was then deposited into banks as the proceeds of legitimate jewelry sales. The “placed” funds were then layered via wire transfer to cartel-controlled bank accounts in New York. The laundering continued as the funds were then transferred to Panama and other overseas accounts, including many in Europe. That simple!!!

 Questions to ask if a shipment of goods looks suspicious

 Questions and observations will vary greatly, depending on the position of the questioner, that is, whether the interviewer works in a financial institution and is involved in trade finance, or perhaps has a position in customs, law enforcement, and so on. I obtained this comprehensive list of 20 questions from my US Customs agent friend and is included below, here are some of them.

 1.    What are the items being shipped?

2.    Where are they manufactured or produced?

3.    What is the ultimate destination?

4.    Is the routing logical?

5.   Is the origin and destination logical or suspect?

6.    Who is the buyer and who is the seller?

7.    Who benefits most from the transaction as it appears on paper? (Investors should direct most of their attention at this party.)

8. If one of the parties is obviously losing money on the transaction, they should question how they are still in the business.

9. Who is the shipper, broker, and or freight forwarder?

10. What is the relationship of the buyer/seller?

11. Is this a regularly scheduled shipment of goods?

12. Does the content of the shipment match the business of the parties involved transaction?

13. Are the accompanying documents available? If so, what kind? If possible, request copies of all documents.

14. Does the content and cost of the shipment match the description of the accompanying documents?

15. Is the price of the goods in question standard market value?

16. Are the size, weight, and packaging consistent with the contents?

17. What kind of payment is involved (e.g., cash, letter of credit, direct wire transfer, barter, etc.)?

18. Is there an extraordinary business relationship with the parties involved (buyer, seller, freight forwarder, brokers, etc.)? Are the partners and identifiable groups, networked, or are they, family?

19. Are the parties involved reputable? Have they been engaged in previous verifiable business?

20. If applicable, is there any law enforcement, financial intelligence, internal, or publicly available derogatory information on any of the parties involved?

I hope whoever reads this article finds this information helpful. I have many connections in the law enforcement community who, from time to time provide me with helpful information that I relay to all of you. If you have any questions or are interested in meeting any of my connections, please feel free to give me a call at any time.

About the Author

At this time, I am working with an organization dedicated to helping Law Enforcement investigate stolen credit and debit cards. A widespread problem across multiple industries. I developed a multi-state fraud investigation SaaS roll out for federal and state LE agencies and provide awareness of the various methods and use of technology to detect, deter and prevent financial crime. I have lectured banks and law enforcement on the various methods used by criminals to launder money via plastic and what can be done about it.

Currently, I am exploring other opportunities to partner with an organization who is looking for additional talent. Over many years, I have contributed directly to the financial growth of various enterprise solution companies by developing revenue opportunities with large banking entities, financial institutions, money service providers, brokerage agencies, government regulators and law enforcement agencies. I am success driven with an entrepreneurial focus and possess strong interpersonal skills and vision. I bring over 30 years of experience in sales revenue generation and it is that experience that would be a valuable asset to any business development team. My infectious ability to generate excitement around the products and services I represent and the teams I have worked alongside is what sets me apart from others in my field.

Thank you for reading this Article - Steven Crociata

I would like to thank John Cassara former Treasury Special Agent in both the U.S. Secret Service and US Customs Service. I was proud to have been able to endorse his book:

Trade-Based Money Laundering: The Next Frontier in International Money Laundering Enforcement (Wiley and SAS Business Series) 1st Edition