Preface
Not long after the September 11 attacks, I had a conversation with a Pakistani entrepreneur. This businessman could be charitably described as being involved in international gray markets and illicit finance. We discussed many of the subjects addressed in this book, including trade-based money laundering, value transfer, hawala, fictitious invoicing, and countervaluation. At the end of the discussion, he looked at me and said, “Mr. John, don't you know that your adversaries are transferring money and value right under your noses? But the West doesn't see it. Your enemies are laughing at you.”
The conversation made a profound impact on me. I knew he was right. Spending the better part of a career as a special agent with the U.S. Customs Service, I conducted investigations both in the United States and overseas. Over the years, I developed sources and expertise in many of the indigenous, ethnic-based, underground financial systems that are found around the world. I knew firsthand that the common denominator in many of these underground financial systems was trade-based value transfer.
At the time of the conversation, the U.S. government and the international community had not focused attention or resources on the misuse of international trade to launder money, transfer value, avoid taxes, commit commercial fraud, and finance terror. It was completely under our radar. Our adversaries—criminals, terrorists, kleptocrats, and fraudsters—were operating in these areas with almost total impunity. And unfortunately, many years after that conversation and the tremendous expenditure of resources to counter illicit finance, trade-based money laundering and value transfer are still not recognized as significant dangers. Perhaps as the Pakistani businessman implied, it is because the subterfuges are “hiding in plain sight.”
After I “retired” from a 26-year career in the U.S. intelligence and law enforcement communities, I tried to draw attention to the intertwined threats of what the U.S. military calls asymmetric warfare, threat finance, international money laundering, and trade-based value transfer. I wrote two nonfiction books: Hide & Seek: Intelligence, Law Enforcement and the Stalled War on Terror Finance (Washington, D.C.: Potomac Books, 2006) and On the Trail of Terror Finance: What Law Enforcement and Intelligence Officers Need to Know (Washington, D.C.: Red Cell IG, 2010). I continued my efforts by writing articles, consulting, and speaking before various industry and government groups. Realizing that some are not enthusiastic about whitepapers and PowerPoint presentations, I wrote Demons of Gadara (CreateSpace, 2013)—the first novel that revolves around the themes of threat finance and trade-based value transfer. I tried to teach by telling a story.
This book is a continuation. It is designed as a straightforward, accessible, and user-friendly resource that is primarily directed toward anti–money-laundering/counterterrorist finance (AML/CFT) professionals such as compliance officers in financial institutions and money-service businesses. I hope to provide insight into opaque financial systems and trade scams that often impact their work. I believe concerned investigators, analysts, and policymakers in government will also find the book valuable.
Value transfer and underground finance are increasingly popular in academia. I have been particularly pleased to hear from students who share my belief in the importance of this topic and find this new field of study fascinating. This book is not written by an academic but, rather, by someone who has worked and supported value-transfer investigations in various international locations. I will try to convey—in a plain speaking and practical style—some lessons learned by personal experience and observations.
I would like to emphasize that this book is not a general AML/CFT primer. I am making the assumption that the reader has working knowledge of money laundering, terror finance, and many of our countermeasures. Instead, this book will focus on trade-based money laundering and value transfer—a specific methodology plus a few representative subsets and variations. Moreover, this book will not go into detail on trade finance. For those readers who feel they need a brief introduction to money laundering and terror finance to better understand some of the challenges and countermeasures surfaced in this book, see Appendix A.
How This Book Is Organized
Trade-based money laundering and value transfer are very broad topics. Chapter 1 introduces the magnitude of the problem, gives a general definition, and makes clear that the international trading system is abused by money launderers, terrorists, tax cheats, and many who engage in a variety of financial crimes. Chapter 2 provides an overview of basic trade-based laundering techniques that are referenced in succeeding chapters. Case examples and illustrative diagrams are used frequently throughout the book. The trade-based schemes are not United States centric, but rather come from around the world.
Chapters 3, 4, and 5 discuss prominent underground financial systems such as the black market peso exchange, hawala, and fei-chien. Historically and culturally, all of these systems—and others like them—are based on the misuse of international trade. Chapter 6 discusses why and how the international gold trade is prominently used to launder staggering amounts of illicit proceeds. Chapter 7 briefly describes commercial trade-based money laundering, such as diversion, misinvoicing, and transfer pricing. Since trade-based money laundering is so broad, Chapter 8 covers miscellaneous topics that do not neatly fit elsewhere, such as barter trade, the misuse of free trade zones, and others. Chapter 9 discusses how trade is monitored for enforcement purposes and includes insight on innovative countermeasures. Chapter 10 discusses red-flag indicators that can be used by both industry and government to help spot forms of trade-based money laundering and value transfer.
Finally, the conclusion contains recommendations for increasing trade transparency, awareness, and enforcement. And although I try as much as I can to stay away from jargon, acronyms, and technical terms, in order to simplify things for the reader there is a glossary of frequently used terms. In addition, where applicable, chapters contain both abstracts and “cheat sheets” of important points covered.
Sourcing
The sourcing for this book is a mix of personal observation and experience and information in the public domain. Some sections draw from my previous books and articles, updated and adapted as necessary. In certain sections, I borrowed heavily from On the Trail of Terror Finance: What Law Enforcement and Intelligence Officers Need to Know. The book was co-authored by Mr. Avi Jorisch. Both the Financial Action Task Force (FATF) and the Asia Pacific Group (APG) have produced valuable studies on trade-based money laundering. Web materials such as statistics, investigations, and guidelines are available but change frequently. Recent case examples are used as well as others that are dated. The reason I included some older cases is because they are in the public domain and still representative of current threats.
I have found that both government and academic reporting on money laundering and related topics are often prone to circular reporting, wherein analysis is used and reused often enough to make identifying the original source difficult. I assure the readers that to the best of my ability, I have practiced due diligence in my sourcing, and that this book represents my good-faith effort to make the subject matter as interesting, accurate, well-sourced, and current as possible.