There is a very good article in the May 3, 2014 edition of the Economist on trade-based money laundering which I believe is the "next frontier in international money laundering enforcement."

A link to the article can be found here:  http://www.economist.com/news/international/21601537-trade-weakest-link-fight-against-dirty-money-uncontained

It has been  awhile since my last blog post.  I've got the same excuses as everybody else; holidays, work, traveling and misc. projects.  Anyway, I just want to note that Demons of Gadara is featured today and tomorrow on Marilyn Meredith's BlogSpot:  http:marilynmeredith.blogspot.com  It's a nice review.  Marilyn is a prominent writer and active in the Public Safety Writers Association.  Enjoy the read!

For over ten years, the United States has been attempting to identify, penetrate, disrupt, and dismantle a myriad of financial networks of rogue regimes, proliferators, terrorist groups, state sponsors of terrorism, and criminal syndicates.  Juan Zarate, one of the chief architects of this strategy, recently released his first book; Treasury’s War – The Unleashing of a New Era of Financial Warfare.  The insider’s account both pulls back the curtain of this shadowy world and gives a sobering assessment of many of the new financial threats we will be facing in the coming years.

Many readers know Juan Zarate as a national security commentator for CBS News.   His perspective and insights originate from his former positions as Deputy Assistant to the President and Deputy National Security Advisor for Combating Terrorism and the First Assistant Secretary of the Treasury for Terrorist Financing and Financial Crimes. 

I know Juan as my well-respected former boss at the Department of Treasury.   He is hard-working, a gentleman, and a patriot.

In the book, Zarate argues convincingly that “money is a common denominator that connects disparate groups and interests-often generating networks of convenience aligned against the United States.  Money is their enabler.  It is also their Achilles’’ heel.”

Zarate describes how after September 11 a small cadre of dedicated professionals within Treasury used imagination and innovative tactics to unleash a new type of financial warfare that harnessed the use of the dollar as the world’s primary currency, access to the American financial markets, globalization, new forms of financial data and intelligence, freezing orders, regulatory actions, and “smart” new applications of sanctions and designations to undermine American foes including Saddam Hussein’s Iraq, Iran, North Korea, Syria, narco-terrorists, kleptocrats and others

As a proud former Treasury Special Agent, I appreciated finally getting an insider’s account of how Treasury’s enforcement arm (Customs, ATF, and the Secret Service) was amputated at the time of the creation of the Department of Homeland Security.  Many of us are still bitter.  The last ten years have demonstrated that our anti-money laundering and counter-terrorist finance efforts have suffered over this myopic and politically expedient decision.  As I have argued for years, and Zarate makes clear, there is a need for a reinvigorated Treasury enforcement arm to focus on illicit financial flows. 

Another section of the book that I found very important is when Zarate masterfully lays out many of the threats we face in the “coming financial wars.”  It is sobering reading, particularly because we are simply not prepared.

I applaud the book.   However, it is important to understand that Zarate writes from a 30,000 foot policy maker’s perspective.  During much of the same time frame and particularly in the years immediately preceding September 11, my vantage point was that of a financial crimes investigator at the street level.   As a result, our assessments – though not our objectives - are vastly different.  In my first book, Hide & Seek: Intelligence, Law Enforcement, and the Stalled War on Terror Finance (Potomac Books, 2006)  I discuss from  a ground level viewpoint the actual implementation of our anti-money laundering / counter-terrorism policies both in the United States and overseas.

For example, over the years successive administrations, politicians from both parties, and apologists for Treasury have praised a series of “tough new sanctions” designed to squeeze our adversaries  While this is not the space to debate the efficacy of sanctions,  my views have been shaped by investigations of “sanctions busters” in places like Dubai. I would also like to point out that in 2012 the Director of National Intelligence testified that sanctions have had “zero effect” in slowing Iran’s nuclear program.  Or to quote an anonymous retired diplomat, “Sanctions always accomplish their principal objective, which is to make those who impose them feel good.”

In addition, Zarate makes no mention of the U.S. 2007 National Anti-Money Laundering Strategy (see: http://www.treasury.gov/resource-center/terrorist-illicit-finance/Documents/nmls.pdf). This is an important policy document that overlapped Zarate’s tenure.   Most observers feel that the implementation of our strategy has been a colossal failure.   Nor has there been any accountability for the various agencies and departments involved including Treasury.   For example, in the book there was no mention of the long-term dysfunction of Treasury’s Financial Crimes Enforcement Network (FinCEN) charged with implementing many of the Strategy’s action-items.

And despite Treasury’s Wars upbeat pronouncements and pats-on-the-back, the fact remains that according to the United Nations Office of Drug Control (UNODC), less than one per cent of global illicit financial flows is currently being seized and frozen.   It is probably about the same in the United States.  In my opinion, a one percent success rate is nothing to boast about.

Zarate does make clear that despite our myriad of new financial tools and countermeasures, our adversaries adapt.  And they continue to use effective but simple techniques such as bulk cash smuggling.  To put things in perspective, in the United States, our success rate in intercepting bulk cash along the southwest border is approximately .0025 percent!

Indigenous, underground banking systems such as hawala are also almost impervious to the kinds of financial countermeasures described Treasury’s War.  To help bring this threat alive, I recently released my first novel, Demons of Gadara.  The realistic story told from the vantage point of ground level demonstrates how our adversaries use value transfer and hawala in an act of terror.

Zarate is right to say we are in a “new era” of financial warfare.  To me the era is not reassuring.  It is frightening.

On April 15, 2009 then Secretary of State Hillary Clinton pushed for the arrest and prosecution of maritime pirates, and unveiled a plan to "track and freeze and try to disrupt" their assets. The statement is reminiscent of former President George W Bush in the days immediately after September 11 when he remarked: "We are going to kill or capture the terrorists and take their money."

Shortly afterwards I wrote an article published in Compliment about Clinton’s statement.  The full article is available on this website under “articles,” but I will repeat one line: “. . .  I predict that just like the War on Terror Finance, efforts to successfully track and freeze pirate assets and financing will be minimal.”

In the article, I explain the reasons why.

I ended the essay by writing, “I would like to know what financial "solutions" Secretary Clinton is talking about. I imagine Complinet's readership would as well, given that many of the government’s mandated financial transparency reporting requirements, coupled with lack of effective analysis and enforcement, thus far have not proved their worth in combating terror finance.  Terrorism? Piracy? Here we go again.”

Which brings us to the recent release of an excellent study on the financial trails of piracy authored by World Bank, UNODC, and INTERPOL; Pirate Trails: Following the Illicit Financial Flows of Piracy off the Horn of Africa.     Link below:


http://web.worldbank.org/WBSITE/EXTERNAL/TOPICS/EXTFINANCIALSECTOR/0,,contentMDK:23491862~pagePK:210058~piPK:210062~theSitePK:282885,00.html                                                      

The study estimates that more than $400 million was claimed in ransoms for pirate acts between April 2005 and December 2012 and that 179 ships were hijacked off the coast of Somalia and the Horn of Africa alone during that time frame.  These numbers do not take into account piracy off the coast of West Africa or Southeast Asia.

The study analyzes how much money is collected in ransom payments; how and to whom this money - the proceeds of piracy - are distributed; and some of the way the proceeds are invested.

As the authors state, “unchallenged piracy is not only a menace to political stability and a threat to international security, but it also undermines global growth prospects going forward. Up until now, little attention has been paid to tracking and disrupting the financial flows from piracy.”

I return to Clinton’s statement.  Without getting into the politics of it all, the last four years have proven that her 2009 statement was just one more in a series of falsehoods, demonstrated lack of understanding, lack of accountability, and empty posturing revolving around our “stalled” wars on international money laundering and the financing of terror in both the Obama and Bush administrations.

I’m going to keep on trying to “stir the pot.”   Your views?

John

There is a special promotion on Amazon’s Kindle for Demons of Gadara.  For the next five days the e-book version is available for only $2.99.  That’s a deal!

By the way, last week I heard from a high level Italian law enforcement official who told me he really enjoyed the book.  (Much of the book takes place in Rome).   He told me he thought the book was very realistic and it more accurately portrayed some of the issues Italian law enforcement faces than some of the books he has read authored by Italians!   That comment meant a lot to me as I  wanted realism and accuracy in the story.  I have been so pleased and honored by the comments and reviews already posted on Amazon.

Thanks and I would love to hear from you!

John

On November 2, the New York Times published an op-ed I wrote; “Delaware, A Den of Thieves.”

http://www.nytimes.com/2013/11/02/opinion/delaware-den-of-thieves.html?_r=0

The article discusses how Delaware and other states offer “shell companies” and do not disclose “beneficial owner” information.   With this type of secrecy law enforcement officials cannot follow the money trail.

However, the reason for this blog entry is to point out an error.  I included a number of examples of international and domestic investigations into money laundering, corruption, tax evasion and other financial crimes that involve “Delaware corporations.”   Some of the examples were edited  or omitted due to word count.  I understand that.   However, one example that was included in the op-ed was a domestic case involving a “Nevada-based corporation that had received more than 3,700 suspicious wire transfers totaling $81 million over two years.”   However, because the authorities were not able to obtain beneficial ownership information the case was closed.

In the final editing, somebody unknown added to the description of the above case the words, “In one case I worked on.”  However, I NEVER WROTE THAT and never saw that line in the last version of the op-ed forwarded to me for review.  In short, I DID NOT work the referenced Nevada case.  That is not to say the case is invented. 

If anyone wishes to google the phrase, “Nevada-based corporation that had received more than 3,700 suspicious wire transfers totaling $81 million over two years,” a number of entries will appear.  This case has often been quoted by law enforcement officials and others frustrated with lack of beneficial ownership information.

I do not want to appear to take credit for working a case I wasn't involved in.  Besides being untruthful, it goes against law enforcement etiquette.   I don’t know why those words were included in the op-ed but to repeat I never wrote them.  

John

I often speak to state and local law enforcement groups around the country about money laundering and threat finance.   In my introductory remarks I generally ask the following question; “Who here has ever worked a money laundering/ financial crimes investigation?    Perhaps ten percent of the group responds positively.   I next ask, “Who here is familiar with the kind of financial intelligence available from Treasury’s FinCEN and who uses it?”  Invariably only a few hands go up. 

This is admittedly an unscientific sampling but the results have been consistent.  Generally speaking, state and local law enforcement are woefully ill-informed about money laundering and the tools available to them to help identify and combat it. 

There are a myriad of reasons for the lack of knowledge and expertise.  Some have been discussed in other steps in this series including failed management syndromes, fixation on the quick statistic, lack of data and analytics, etc.

One thing that amazes me is that for the seeming majority of the law enforcement personnel that I speak with they never really stop to think about why criminals and criminal organization engage in crime.   Of course, it’s all about the money.   Criminals are motivated by greed.  They don’t traffic in drugs, or people, or counterfeit goods, or stolen cars just for the sake of the illicit act.  They commit crimes for money.   Unfortunately, many of my law enforcement colleagues get fixated on the crime itself.  Their investigation ends with the arrest and/or the seizure.

I urge them to always remember to ask the next question, "What about the money?”

So in order to rejuvenate our stalled anti-money laundering efforts, we must do a better job of training state and local law enforcement officers on what money laundering is and how to follow the money and/or value trail.  We also must do a better job of getting financial intelligence and advanced analytic tools into the hands of analysts and investigators that can use it at the state and local level (see step 6).  In this era of budgetary cut backs this will be hard, but there are some excellent training programs out there that don’t cost that much money but pay huge dividends.

The metrics show that feds simply can’t do the job.  We need reinforcements from the state and local level.  Not only that, it is precisely at the local level where we should be able to better identify criminal activity that is the predicate offense for money laundering.

Well, that’s it; scroll back to review my seven point plan to revitalize and re-prioritize our efforts to combat money laundering.   

1.      Develop a Strategy

2.      Accountability

3.      Close the Revolving Door

4.      Revitalize Treasury Enforcement

5.      Change the Incentives

6.      Data and Analytics are our Force Multiplier

7.      Better Empower State & Local Law Enforcement  

I would love to hear your views!

We will never have enough law enforcement professionals, particularly those skilled in complex money laundering and financial crimes investigations.  Technology has to be our force multiplier.

Unfortunately, while the federal government is slowly beginning to incorporate some advanced analytical capabilities, it lags far behind in its deployment of commercially available and viable technologies.   Compared with the high levels associated with human resource staffing, technology does not cost that much.  So for Step 6 in my series of steps of what is necessary to meet the the challenges of financial crimes, I believe we must start moving aggressively to incorporate advanced analytics at the federal, state, and local law enforcement levels.

Over the last few years, there have been tremendous advances in the amount of data collected and available for analysis. 

Just a few examples include financial, trade, transport, and travel data. Communications and social networking are growing exponentially. Industry calls these record sets of information, "big data."  I will not discuss the collection of classified data. Concurrently, there have been major advances in data mining and advanced analytical capabilities that can help organizations derive the “intelligence” from vast data sets.  Data warehousing and retrieval are enhanced by cutting edge technologies that search,  mine, analyze, link, and detect anomalies, suspicious behaviors, and related or interconnected activities and people.  Fraud frameworks can be deployed to help concerned government agencies and departments detect suspicious activity using scoring engines that can both rate, with high degrees of statistical accuracy, behaviors that warrant further investigation while generating alerts when something of importance changes.  Predictive analytics use elements involved in a successful case or investigation and overlays these elements on  other data sets to detect previously unknown behaviors or activities, enhancing and expanding an investigator’s knowledge and efforts while more  effectively deploying resources. Social network analytics helps investigators detect and prevent criminal activity by going beyond individual transactions to analyze all related activities in various mediums and networks uncovering previously unknown relationships.  Visual analytics is a high-performance, in-memory solution for exploring massive amounts of data very quickly. It enables users to spot patterns, identify opportunities for further analysis and convey visual results via Web reports or the iPad.  Moreover, it is now possible to engineer "red flag indicators" in financial reports - both within the government and in commercial enterprises that file the information - that will identify likely suspect methodologies such a hawala or trade-based  money laundering.  

I’m not a technical person.  But I do know that the above examples are great tools that are available NOW.

Years ago, when I was a criminal investigator for U.S. Customs/Treasury assigned to the American Embassy in Rome I worked a long-term complex international money laundering case.  The investigation had ties to the Middle East, Europe, and the United States.  It involved the misuse of the international gold trade to launder staggering amounts of drug money.  I spent two years of my life working the case.  I developed an incredible amount of intelligence, recruited numerous sources in multiple countries, coordinated investigations with international police forces, learned a great deal about trade-based money laundering, etc. and finally had enough information to present the case for prosecution to the U.S. Department of Justice in Washington, D.C.   They liked the case but declined prosecution. It was extremely difficult to prove the nexus of the predicate offense of trafficking in narcotics to the laundered money and properties in the U.S. and Europe we had identified as the fruits of the criminal activity. 

The end result from management’s perspective was that the case was a tremendous waste of time, money, and resources.  A more practical result from my perspective is that when I was rated for promotion, I had no “stats.”  I had no arrests, convictions, prosecutions, seizures, etc.  These are the bottom line metrics that drive management’s decision making on everything from personnel decisions, investigative priorities, allocation of resources, etc.  I couldn’t compete with my colleagues assigned, for example,  to the southwest border that could get multiple “bag and tag” arrests and multiple “stats” which look good before the promotion boards.

The above exemplifies many of the current problems we face today.  There is an expression in law enforcement management circles; “Big cases equal big problems.”  Although everybody wants big, headline-grabbing, impact, game-changing investigations and prosecutions, most managers feel the headaches aren’t worth it.  They opt instead for smaller, routine, insignificant, cases where they can harvest statistics that make themselves appear productive. In short, they play it safe.  This also contributes to our “stalled” efforts to combat money laundering and contributes to the lack of “imagination” that has proved detrimental in our war against terror finance.  This will be increasingly important in the coming years as we are hard pressed to keep pace with new and evolving money laundering methodologies. 

This management syndrome can and should be changed.  Our priorities and incentives must change as well. Directives need to come from headquarters that encourage “impact cases.”  (See the article I wrote a number of years ago, “Where Have the Impact Cases Gone.”)   Stats should be weighted to reward those who pursue long-term, difficult investigations that, unfortunately, sometimes do not bear fruit but maybe result in excellent information. Congress can get involved by allocating funds towards the development of complex, financial crimes investigations.  And then, they should hold the agencies and departments responsible for delivering (see step two in this series on “accountability”). 

In the rush to react to the events surrounding September 11, politicians from both parties scrambled to create the Department of Homeland Security. Since then, problems at DHS have been widely chronicled, and the behemoth department has not lived up to its initial billing. This has been particularly true in combating international money laundering and its inverse partner terrorist finance. 

When DHS was formed, Treasury’s proud enforcement arm was gutted.  The U.S. Customs Service (created in 1789) and the Secret Service (established in 1865) were transferred to Homeland Security, and the Bureau of Alcohol Tobacco and Firearms was shifted to the Justice Department.

The FBI, within the DOJ, is very good at financial crimes; i.e., catching white collar criminals and bank robbers.  The DEA, also within DOJ, only pursues money laundering relating to narcotics.  DHS is pulled by conflicting priorities.  The current dearth of successful money laundering prosecutions, impact cases, seizures and forfeitures, etc. demonstrate that the current situation is not working.

Yet the Treasury Department by definition focuses on financial matters.  This includes international money laundering and value transfer, which employs trade-based and underground finance networks, and new mobile and cyber payment technologies. These are vitally important issues that have not received the focus they deserve. Moreover, the domestic financial sector views Treasury as its natural government partner, and over the coming years relationships with industry will only grow in importance.

Unfortunately, however, today’s Treasury, minus its enforcement arm, in only able to develop strategies, policies and regulations in the fight against money laundering and terrorist financing. It  lacks the investigative, intelligence, and enforcement resources to implement and enforce those policies. (I am not counting IRS/CID because its priority remains taxes).

I believe the Secret Service and Customs should be brought back to Treasury. Most Secret Service and Homeland Security Investigations agents would jump at the opportunity. If politically unpalatable, the creation of a Global Illicit Financial Team – a type of interagency federal law enforcement task force - should be created as a nimble state-of-the-art financial investigating team operating under the Treasury banner.

Using the resources and authorities that are uniquely Treasury’s -- including the 18 million pieces of intelligence filed each year in its Financial Crimes Enforcement Network, the robust legal tools deployed under the USA PATRIOT Act, criminal sanctions and designations spearheaded by OFAC, domestic and international enforcement and regulatory networks, and financial expertise -- real progress can be made in combating large scale and complex financial crimes. 

A re-attached Treasury enforcement arm would help mitigate some of the failed Washington management syndromes I identified in previous steps such as “group think” and “lack of imagination.”  An enforcement arm would also help right the wrong created when Treasury was castrated for reasons of political expediency after September 11.  Moreover, a new and robust Treasury enforcement capability would pay homage to the legacy and history of a proud Department.  Most importantly, a Treasury enforcement arm would encourage financial enforcement expertise and would re-vitalize our efforts to combat international money laundering and other financial crimes.