anti-money Laundering  / Counter-Terrorist Finance

Articles by John Cassara   
(Recent articles have links.  Or scroll down to read full text or find link to published article)

January 13, 2025
Central Bank Digital Currencies:  Risks and Rewards
Paper published January 13, 2025, by the International Coalition Against Illicit Economies
October 10, 2024
The Coming Debate on Deportations
Article published October 10 by Crisis Magazine


September 17, 2024
E-Commerce and the Digital Marketplace: The Booming Business of Cross-Border Transactional Money Laundering
Article published September 17 by the International Coalition Against Illicit Economies (ICAIE)


August 26, 2024

Corporate Transparency Act (CTA) Needed by Law Enforcement to Help Follow the Money Trails
Article published August 26 by Townhall

June 17, 2024

Put the Secret Service and Customs Back In Treasury
Article published July 31 by Federal Newswire

The U.S. Should Target CCP Inc.
Article published in June 2024 by Federal Newswire

August 3, 2023

Mobile Payments and Mirror Swaps
Article published in July, 2023 by the International Coalition Against Illicit Economies (ICAIE)

August 2, 2023

"Say It Ain't So, Joe"
Article published August 2, 2023 in Crisis Magazine

July 13, 2023

China's Digital Authoritarianism is Coming our Way
Article published July 13, 2023 in Crisis Magazine

March 23, 2023

Congressional Testimony:  Follow the Money - CCP's Business Model Fueling the Fentanyl Crisis

U.S. House Committee on Financial Services 
Subcommittee on National Security, Illicit Finance, and International Financial Institutions


March 13, 2023

Why is the Pope Dealing with the CCP?

Article published March 13, 2023, in Crisis.

March 5, 2023

China's Role in Black Market Money Laundering

Article published March 5, 2023, in the American Thinker. 

August 21, 2020

China is the Biggest Money Laundering Threat

 Thirty years ago, when I first started my career investigating international money laundering, the investigative focus was on Colombian narcotics traffickers.  The spotlight later shifted to murderous Mexican drug cartels.  I spent six years assigned to the U.S. Embassy in Rome helping fight Italian American organized crime or the mafia by following the money trails. With the fall of the Soviet Union, Russian-organized crime looted its country, laundered the money, and successfully stretched its criminal tentacles across the Western world.   Over the last few decades, Afghanistan’s warlords have continued to supply the majority of the world’s opium.

Today there are still powerful and deadly Colombian, Mexican, and Afghan drug cartels.  The Italian and Russian mafias remain strong.  There are a plethora of other ethnic-based street gangs and organized criminal groups with international ties.  There continue to be cases of high profile U.S. white collar criminals involved with all sorts of financial crimes.   But over the length of my AML career, it is evident that the global criminal and money laundering threat has been fundamentally transformed.

Examining worldwide criminal activity in its varied forms and the magnitude of illicit proceeds generated and laundered, today China is by far the largest transnational criminal actor and biggest money laundering threat.  

I am not pointing my finger at Chinese or Asian people.  There is much to admire.  But today’s Chinese communist party (CCP) isn’t a race – it’s a regime.  Over the last decades, criminal activity has seemingly become part of China’s strategy to grow its economic and military power.  China uses a combination of statecraft, military buildup, espionage, theft, cheating, trade, loans, debt traps, payoffs, strategic investments and various forms of exchanges and engagements to structure a 21st century world order “with Chinese characteristics” in which global trading networks, political relationships, and international institutions support China’s expanding wealth and power.  “China Inc.,” a term that refers to behemoth market-oriented, state-owned enterprises with global commercial reach, also plays a key role in Chinese influence and control. 

One method of examining Chinese money laundering is by studying the type and amounts of illicit proceeds generated.  Illicit proceeds originate from various predicate offenses or specified unlawful activities.  The United States recognizes hundreds of predicate offenses for money laundering.  The international standard as championed by the Financial Action Task Force (FATF) is “all serious crimes.”

In 2016 the Organization of Economic Development (OECD) released a report on seven important sectors of illicit trade – all of them predicate offenses for money laundering.  In 2017, Global Financial Integrity published “Transnational Crime and the Developing World” in which they examined 11 areas of transnational crime.  In both reports, and all categories of crime, China is the common denominator.  Illicit proceeds generated by China dwarf all others.
The following is an abbreviated list of transnational crimes where China is the largest or next to largest actor:  Narcotics trafficking; counterfeit goods; intellectual property rights violations; illicit tobacco; human trafficking; wildlife trafficking; illegal logging; trade fraud; and weapons proliferation. The following are just a few examples:
  • Data from the Centers for Disease Control reported 72,000 Americans died from drug overdoses in 2017 with approximately 30,000 of these deaths due to primarily Chinese produced fentanyl or its synthetic analogues.   In 2018, ICE seized enough fentanyl to kill every American twice over.
  • According to a 2019 estimate by the European Union’s Intellectual Property Office and the OECD, global sales of counterfeit and pirated goods have soared to $522 billion a year, amounting to an enormous 3.3 percent of world trade.  According to the U.S. Chamber of Commerce, Greater China is the source of almost 90 percent of the world’s counterfeit goods.
  • Chinese theft of U.S. trade secrets could be as high as $600 billion.  China is also stealing the intellectual property of other developed countries.
  • China is the largest producer of counterfeit cigarettes.  Production currently runs at nearly 200 billion counterfeit cigarettes annually.  Just one 40-foot container of counterfeit cigarettes produced in China can garner approximately $2 million in profit when sold in Europe.
  • The U.S. Department of State calls China a “source, destination, and transit country for men, women, and children subjected to forced labor and sex trafficking.”  In 2019 the State Department put China in the lowest tier of its human trafficking rankings.
  • Traffickers in the United States make approximately $2.5 billion a year forcing women to have sex in some 9,000 massage parlors and other locations found along highways and behind storefronts in strip malls across the country.  Typical victims are recent Chinese immigrants burdened with debt and who speak little or no English. 
  • China is the driving force behind international wildlife exploitation.  According to one expert, the very survival of the elephant species “is in China’s hands.”
  • According to INTERPOL, the trade in illegally harvested timber is worth between $51 and $151 billion annually, devastating the environment, threatening rain forests, fueling corruption, and stealing tax revenues from governments.  China is the world’s largest producer and consumer of wood and wood products.  Sadly, much of the production comes from illegal timber.  Unlike major economies like the United States and the European Union, China has no meaningful regulation or enforcement to keep illegal timber from entering its borders. 
 
 Chinese actors are major players in the FATF’s top three money laundering methodologies –banking, bulk cash smuggling, and trade-based money laundering.  In addition, there are other Chinese-centric practices including underground and shadow banking; capital flight; black market exchanges; the purchase of real estate; gaming; the misuse of the international gold trade; alternative remittances or “flying money,” the use of secrecy jurisdictions and anonymous shell companies; organized crime; corruption; predatory lending and strong-arm tactics; cyber currencies and new payment methods.   Making matters worse, China has demonstrated weak or non-existent cooperation with international law enforcement in combatting the above activities and resulting money laundering.

In my new book, Money Laundering and Illicit Financial Flows, I include a lengthy chapter on China.  I explain China’s role in each of the above crimes and methodologies. Cumulatively, its direct and indirect involvement in transnational crime is staggering.  When possible, I include estimates of the amounts of illicit proceeds generated. Although the numbers are not precise and, in some cases simply do not exist, the bottom line is that a strong argument can be made that China is responsible for introducing and laundering approximately $1.5 to $2 trillion of illicit proceeds into the world’s licit economy every year.  Another way of looking at the magnitude of the problem is that very roughly one-half of the total amount of money laundered worldwide is of Chinese origin or there is Chinese involvement. 

Behind the numbers, lies the criminality.  Here are just a few examples of Chinese centric laundering methodologies and how their criminal activities affect us:
  • Fei-chein or “flying money” could well be the largest alternative remittance system in the world, dwarfing the better known hawala.  Historically and culturally, these underground systems frequently use trade-mis invoicing or “counter-valuation” to balance the books between brokers.
  • According to a former Canadian Ambassador to Beijing, “China is the number one exporter of hot money to the world.”
  • According to the National Association of Realtors, Chinese buyers have been the top foreign buyers in the United States both in units and dollar volume of residential housing for six years straight.  Despite capital flight controls in China, many of the purchases are made in cash.  There is also a lack of beneficial ownership information.
  • The British Virgin Islands (BVI) is one of the world’s biggest offshore destinations for secrecy.  It is also one of the favorite destinations for Chinese that want to move businesses and cash offshore.  Roughly 40 percent of the BVI’s offshore business comes from Greater China.  Chinese also commonly avail themselves of offshore financial structures in Singapore, Malaysia, the Cook Islands, Panama, and many other non-transparent havens.  According to revelations in the Panama Papers, many clients unmasked in the document dump include ruling communist Chinese elites and their family members.
  • In the U.S., Asian/China criminal enterprises have been identified in more than 50 metropolitan areas.
  • Using the “Vancouver model of money laundering,” massive amounts of Chinese capital (both licit and illicit) leave China avoiding capital controls.  The cash is washed via gaming and the purchase of real estate.  Most of the high end sales are hidden behind non-transparent shell companies.
  • Ironically, today’s communist China is arguably both the world’s foremost imperialist and mercantilist nation.  China aims for a strategic global stranglehold on key resources.  Chinese “investment” has occurred in approximately 152 countries.  Taking a page out of the mafia playbook, China preys on its victims by exploiting natural resources with predatory loans and “debt traps.”
  • International rankings of bribe payers list Chinese managers near the top.  They undermine good governance in host countries.  Some Chinese companies are so unscrupulous that the World Bank has banned them from bidding on contracts.
  • Almost all banks in China are state-owned and the world’s top four banks in assets are Chinese.  Many Chinese banks are notorious for corruption, lack of honest oversight, high-risk loans, clever valuation techniques, and shadow banking.  There are many examples of Chinese banks ignoring AML guidelines.
  • Perhaps the most pervasive form of Chinese money laundering comes from trade mis invoicing or trade fraud. Global Financial Integrity estimates the Chinese economy hemorrhaged $1.08 trillion in illicit financial outflows from 2000-2011 – with trends accelerating today.  Chinese capital flight often occurs through trade-based value transfer.  Illicit proceeds are also returned to China via trade.  For example, cheaply made Chinese products are over invoiced providing the rationale for payment back to China. 
There is an ongoing debate on whether or not Chinese global criminality and unethical behavior is done purposefully to achieve China’s national ambitions. Is Chinese transnational crime a form of asymmetric warfare?  Michael Collins, the deputy assistant director of the CIA's East Asia Mission Center stated in 2018 that Beijing’s tactics to achieve its ambitions fit the definition of a cold war; "I would argue by definition what they're waging against us is fundamentally a cold war . . .  A country that exploits all avenues of power licit and illicit, public and private, economic and military, to undermine the standing of your rival relative to your own standing without resorting to conflict.”  

There is no doubt that some activity such as forms of weapons proliferation, identity theft, and intellectual property rights violations are directed by the Government of China.  In fact, China’s National Intelligence Law from 2017 requires organizations and citizens to “support, assist, and cooperate with the state intelligence work.”  Other suspect activity is facilitated by independent actors, lack of capacity by law enforcement and customs, corruption, lack of political will and/or willful blindness. 

What are we to do?  Unfortunately, guidance will not be coming from the FATF.  (As someone who has participated as an “expert” in conducting both FATF and FATF-style regional body mutual evaluations as well as participating in U.S. FATF delegations at FATF plenary sessions, take it from me that the FATF can be politicized.  Read the 2019 FATF mutual evaluation report of China.  Be aware that China assumed the presidency of the FATF in 2019/2020).
Law enforcement must begin to focus resources and expertise on the China threat.  I am not optimistic that is going to happen.  What about sanctions and designations?  Unfortunately, some countries and politicians are beholden to Beijing.  The media and investigative journalists should focus much more attention on Chinese criminality.  I’m not optimistic that is going to happen either.  Parent corporations of the media giants are afraid of losing Chinese business.

So, I encourage AML professionals to study China/CCP criminality and illicit finance threats.  Increased due diligence is warranted.  The risks grow ever more complicated as the global exposure to China is increasing in both volume and geographic reach.  Understand the threat China poses to your country, international financial integrity, your institution, ethical behavior, and the rule of law.
 
*Note:  The information in this article comes directly from John Cassara’s new book, Money Laundering and Illicit Financial Flows: Following the Money and Value Trails.  See Chapter 11 on China.  The 173 endnotes in that chapter link to the original sourcing, including those in this article.

This article was published August 20, 2020 in The Money Laundering Bulletin

June 3, 2020

Money Laundering Matters (And Enforcement is Failing)

 Outside crimes of passion like murder, the typical motivating factor for criminals, criminal organizations, kleptocrats and some businesses and corporations is greed. It is an intrinsic part of the human condition and in today’s increasingly interconnected world, the manifestations of unconstrained criminal acquisitions are felt on all levels of society – politically, socially, economically and even culturally. The effects are pernicious, undermining the economic and political stability of countries as inequality swells in nations around the world.

On the local level, people can see the impact of greed on their communities. In the United States, the opioid, methamphetamine, heroin and cocaine epidemics have been devastating. Currently, gang violence, financial fraud, the proliferation of counterfeit goods, fraud in government contracting, corruption, identity theft, social benefits fraud, internet scams and ransomware attacks and a plethora of other crimes affecting daily lives. The individual human costs are staggering. Collectively, this criminal greed is taking a massive toll on societal values and norms.

Law enforcement, policymakers and the media often get distracted with the immediacy of criminal behavior. With 60-second video clips on the evening news discussing the lurid details of sex trafficking, families torn apart by drugs or gang violence, citizens and politicians become alarmed. Law enforcement reacts and cracks down, but the criminal organizations re-group and move on. It’s a vicious cycle.

Financial crimes and abusive tax evasion practiced by elites also contribute to the deterioration of societal relations. Worldwide, distrust in financial elites has reached an apex, coupled with (if not driven by) a multiple high-level corruption scandals and a corresponding absence of accountability. Corruption is a great facilitator. Increasing anger and systematic inequality are common themes in both advanced and developing economies.

The range and magnitude of transnational organized criminal activity that generates illicit financial flows are increasing. For example, human trafficking, wildlife trafficking, intellectual property rights violations, weapons proliferation, environmental and natural resource degradation and exploitation are all unfortunate indicators of greed that are facilitated by our increasingly globalized world.

Common sense, criminal science and criminals themselves all point that the aim of these activities is not the crime itself – but the proceeds of crime. Criminals and criminal organizations do not traffic in narcotics, people and weapons for the sake of the criminal act. They do not engage in scams and fraud to make innocents suffer. Elephants are not being slaughtered in Africa for bloodlust. They engage in illegal behavior because of the money the criminal actions generate. When notorious bank robber Willie Sutton was asked why he pursued his chosen career, he reportedly replied, “I rob banks because that’s where the money is.”  The same is true for organized crime groups. They engage in crime for the money. It’s a simple truism, but it is often overlooked.

Fifty years ago, following the announcement of the ‘War on Drugs,’ the US Congress started passing a series of laws buttressed by rules and regulations designed to promote financial transparency and aid criminal investigators to follow the dirty money trails. Today, about 19 million pieces of financial intelligence are filed by financial institutions and money service businesses every year with the US Department of Treasury. Financial transparency reporting requirements are now mandatory in many countries around the world, and yet, these and other countermeasures have proven ineffective in controlling the laundering of dirty money.

Money laundering is the hiding or disguising of the proceeds of any form of criminal activity. The keyword in the definition is “any.” It is much more than simply narcotics trafficking. The United States recognizes hundreds of predicate offenses or specified unlawful activities to charge money laundering. The international standard is “all serious crimes.”  In round numbers, the proceeds of international crime (excluding tax evasion) generate about US$4 trillion a year. Out of that amount, domestic and international law enforcement recover less than one percent. Meanwhile, government and industry anti-money laundering countermeasures and compliance programs cost in multi-tens of billions of dollars every year – far more than is being recovered. Examining the data, Raymond Baker, Founding President of Global Financial Integrity (GFI), commented “Total failure is just a decimal point away.”

In addition to forfeitures, the other metric that matters is money laundering convictions. The numbers vary greatly around the world, but the bottom line is that for a money launderer to be caught and convicted in the United States and most other countries, he or she is either very stupid or very unlucky. 

The twenty-first century poses ever greater challenges due to advancements in technology and transnational quality of actors. Global commercial and informational connectivity increasingly permit a lucrative criminal economy. Quantum cloud encryption may revolutionize business, but it may also revolutionize criminal activity. Social media and encryption are being used by criminal organizations. The current rate of data creation has us doubling the world’s data every two years.  There is a concurrent revolution in advanced analytics. In other words, we are enjoying technological developments, but so are criminals and other nefarious actors.

There is reason for hope. Congress is starting to realize that our anti-money laundering countermeasures are not effective. This is exemplified by bipartisan legislation promoted by the Financial Accountability and Corporate Transparency (FACT) Coalition, GFI and other actors to update federal anti-money laundering laws and end the incorporation of anonymous companies in the United States. Yet, even if that modest step is enacted, we continue to have our work cut out for us. As Ron Pol, a respected anti-money laundering researcher said, “Anti-money laundering [legislation] is the least effective of any anti-crime measure, anywhere.” That’s a powerful statement and, unfortunately, one that rings true.

It is long overdue to fundamentally re-think the entire US anti-money laundering strategy. Hard won lessons point the way forward. Increasing data, transparency and harnessing the incredible advances in technology can help improve tracking and monitoring mechanisms. An emphasis on following the money and seizing criminal assets, rather than focusing on products and participants would also go a long way. Additionally, individuals, criminal organizations, businesses and even countries that cheat and engage in illicit activity must be held accountable. The uncontrolled hemorrhaging of illicit financial flows and scarce capital from developing countries that exacerbates social, political and economic tensions must be combatted with renewed global and national commitment and coordination.

By making progress in seizing the proceeds of crime, advancements can be made in diminishing the rising levels of anger and feelings of helplessness, injustice and inequality so many of the world’s citizens are experiencing today. What could matter more?

Originally published June 3, 2020 on the Global Financial Integrity blog

January 12, 2020

Treasury's Role In Supporting Iranian Terror

There are reports that some of the $1.7 billion that Obama gave to Iran as part of the Iran deal or Joint Comprehensive Plan of Action (JCPOA) has been traced to Iran-backed terror groups, including Qassem Soleimani’s Quds Force, Iran’s principal foreign intelligence and covert action arm and part of the Islamic Revolutionary Guards Corps.   What is not discussed is that the money could not have been funneled to Iran without active support from actors within the Treasury Department. 

As a former Treasury Special Agent, the suspect actions of some of my ex-colleagues saddens and dismays me.  Their actions also hypocritically counter both our anti-money laundering/counter-terrorist finance programs and the international financial systems and safeguards that Treasury worked hard to implement and protect. 

Since 1979 Iran has conducted virtual acts of war and terror against the United States and our allies. The State Department designated Iran as the world’s worst state sponsor of terrorism.   Iran is also one of the most corrupt regimes in the world.  

So why did some Treasury officials move to obfuscate, if not launder, the money that Obama wanted delivered to the mullahs in Iran? Why did Treasury participate in a quid pro quo or act of bribery?  Why would they engage in subsequent deception and cover-up? 

The short answer is Treasury willfully became blind and politicized. It wasn’t just the Department of Justice and John Brennan’s CIA that were sullied during the Obama administration.   

In 2018, columnist Mark Theissen discussed some of Treasury’s suspicious activities in his article, “Obama took Lying to New Heights with the Iran Deal.” 
  • Obama failed to disclose to Congress secret side deals on inspections when he transmitted the nuclear accord to Capitol Hill.
  • Treasury secretly tried to help Iran use U.S. banks to convert $5.7 billion in Iranian assets, after promising Congress that Iran would not get access to the U.S. financial system.  Treasury officials then apparently lied to Congress about what the administration had done.
  • Senate investigators found that the Treasury Department “granted a specific license that authorized a conversion of Iranian assets worth billions of U.S. dollars using the U.S. financial system” including unlimited future Iranian deposits at Bank Muscat in Oman until the license expired.
  • After issuing the license, Treasury explicitly denied to Congress that it had done so.
  • Treasury’s Office of Foreign Assets Control (OFAC) "encouraged two U.S. correspondent banks to convert the funds." Senate investigators found "both banks declined to complete the transaction due to compliance, reputational, and legal risks associated with doing business with Iran."
  • In response to Congressional inquiries, Treasury officials declared "The U.S. Department of Treasury is not working on behalf of Iran to enable Iranian access to U.S. dollars elsewhere in the international financial system, nor are we assisting Iran in gaining access to dollar payment systems outside the U.S. financial system. The Administration has not been and is not planning to grant Iran access to the U.S. financial system."  The facts contradict Treasury’s statement.
  • Treasury participated in approximately 200 international "roadshows" where it encouraged foreign financial institutions to do business with Iran "as long as the rest of the world left the United States out of it."
The Obama administration also signed a secret document lifting sanctions on two Iranian state banks that were previously blacklisted for their involvement in financing Iran's ballistic missile program.  This occurred the same day Tehran released four American prisoners.  In prior years, Treasury was vehemently opposed to the same banks for their alleged role in financially backing Iran's missile program.  

President Obama had the right to conduct and implement his foreign policy.  Certainly, politically attuned attorneys in Treasury and elsewhere provided rulings and legal cover for the JCPOA.  President Trump exercised the same right to rescind the JCPOA, an agreement he called “one of the worst and most one-sided transactions the United States has ever entered into.”

There is conflicting information about the specifics of the $1.7 billion sent to Iran.  There has never been a full and transparent accounting showing how Treasury effected payment (e.g., manner of wire transfers, use of foreign banks, foreign currencies, flights of pallets of cash to Iran?).  The U.S. military and intelligence community has been able to follow some of the money as it was routed to Iranian-backed terror groups but we lack details.  How did they track it?  Were the money transfers hidden, disguised or laundered?  Were additional parties or conduits involved?  Were waivers or exemptions granted to skirt sanctions?  Was the U.S. government subsequently able to follow the money trail to corrupt Iranian officials?   The money has certainly not been used to better the lives of the Iranian people.

There are also charges and counter-charges about Iran’s right to compensation.

Before the 1979 Islamic revolution, Iran’s government put $400 million for military equipment into the Pentagon’s Foreign Military Sales (FMS) account. In 1981, Iran filed a claim at The Hague to have that money returned.  The Obama administration contended that the $1.7 billion sent to Iran represented the $400 million plus $1.3 billion in interest and that the money legally belonged to Iran.  That’s simplistic and doesn’t tell the whole story.  In 1981, the US filed an $817 million counterclaim alleging that Iran violated its obligations under the FMS program.  Some observers feel that it is Iran that owes the U.S., as the list of sponsored attacks, victims, and damages against Americans is long, bloody, and costly.

In 2000, President Bill Clinton signed a law stipulating that Iran’s FMS account could not be refunded until court judgments against Iran for damages from terrorist acts against American citizens were resolved to America’s satisfaction.  Obama ignored the law. To date, U.S. courts have ruled Iran owes nearly $55.6 billion to American victims of its terror.

There are also still questions about the JCPOA agreement’s promises to lift sanctions on Iran’s economy in exchange of Iran scaling back its nuclear program.  It is estimated  the JCPOA resulted in the release of between  $50 - $150 billion in frozen Iranian assets in the international financial system. Commentator Mark Levin looked at the numbers and said, “Obama is the biggest funder of terrorism the world has ever seen.”

Treasury is justifiably proud of innovative tools such as sanctions and designations it developed to fight the War on Terror. It is sad and ironic that the same Department of Treasure facilitated some of Iran’s terror. 

The Treasury’s Office of Inspector General should conduct an internal review of Obama’s Treasury regarding the above.  Judicial Watch, a nonprofit group promoting government transparency, could get involved.

The best course of action would be for President Trump -- while his impeachment plays out for his alleged “abuse of power” and “obstruction of Congress” -- to order the Departments of Treasury, Justice, and State, the National Security Council, and elsewhere to release all documents, including emails, touching upon the Obama administration’s deliberations on paying Iran’s claim, any linkage to the JCPOA, and possible side deals. President Trump should also order a full accounting of the form and method of the $1.7 billion payment to Iran.  

Americans deserve full transparency and accountability about the Obama Treasury Department’s role in providing money to the Iranian terror regime.

A link to the article is available here:  https://www.americanthinker.com/articles/2020/01/treasurys_role_in_financing_iranian_terror.html

​February 28, 2018

Money Launderers have to be Stupid or Unlucky to be Caught

These days, a money launderer has to be either very stupid or very unlucky to get caught. In fact, data suggests the U.S. government’s efforts to enforce America’s money-laundering laws fail 99.9 percent of the time. As financial crime expert Raymond Baker notes, “Total failure is just a decimal point away.”

All of which makes it all the more surprising that Paul Manafort and Rick Gates, President Trump’s former campaign chairman and his deputy, got busted last week. Special Counsel Robert Muller accused Manafort, with Gates’s help, of laundering approximately $30 million—an effort that, according to the indictment, began years ago but continued through their time on the Trump presidential campaign. The charges do not involve Mr. Trump or his campaign. 

Had Trump lost the election, Manafort and Gates might have gotten away with their alleged crimes. But now they’re caught up in Mueller’s investigation of Russian meddling in the 2016 election, and they have the misfortune of being pursued by skilled and motivated prosecutors with deep expertise in financial crimes and almost unlimited resources. Mueller’s team includes Andrew Weissmann, who no less than former White House strategist Steve Bannon has reportedly dubbed “the LeBron James of money-laundering investigations.”

It’s tempting to think of money laundering as a victimless crime. Who cares if Paul Manafort was able to buy himself some fancy rugs a nice brownstone in Brooklyn? So what if Rick Gates bought himself a nice house and sent his kids to private schools?  That view couldn’t be more wrong. I spent 26 years in the U.S. government, much of it fighting the scourge of money laundering. It’s a crime that sustains devastating drug epidemics—opioids, methamphetamines, cocaine. Gang violence, fraud in government programs, corruption, internet scams, identity theft and so many other crimes affect our daily lives. Terrorism—made possible in part by money laundering—threatens our national security.

Many of the ills we face come back to money. And money laundering—the hiding or disguising of the proceeds of any form of criminal activity—is the essential component of transnational crime. Without the ability to move money around, pay their foot soldiers and profit from their illegal activities, criminal networks wither and die. It shouldn’t take a national political scandal to crack down on their misdeeds.
***
How big is the world’s money-laundering crisis? It’s hard to say for sure, because precise data doesn’t exist. The IMF believes money laundering makes up about 2 to 5 percent of the world’s GDP, or approximately $1.5 trillion to $3.7 trillion in 2015. Similarly, the U.N. Office on Drugs and Crime found criminal proceeds in 2009 amounted to 3.6 percent of global GDP or roughly $2.1 trillion. Using these guesstimates, the amount of international money laundering today is approximately the same as the annual U.S. federal budget.  Depending on what is included in the count, the reality is much higher. For example, there is an international movement to recognize tax evasion as a predicate offense to charge money laundering. The Tax Justice Network, an NGO that advocates against tax evasion, estimates that between $21 and $32 trillion is hiding in more than 80 international tax havens.

The scope of the problem is breathtaking, as the release of the “Panama” and “Paradise” papers showed. Those records, millions of financial documents leaked from the files of Panama-based law firm Mossack Fonseca, show the extraordinary lengths legitimate businesses, criminals, corrupt government officials, celebrities and common taxpayers go to hide their income and wealth. According to the Panama papers, Mossack Fonseca set up more than 200,000 shell corporations over the years, with registration in places with particularly lax money-laundering laws—the kind of offshore web allegedly used by Manafort and Gates.

The IMF and UNODC don’t count trade-based money-laundering, either. When you include all its various forms, this technique is probably the world’s most common way to launder money. It is poorly understood, investigated or enforced—and therefore escapes our traditional countermeasures. Here’s one way it works: trade misinvoicing, an oft-used method of moving value illicitly across borders. Conspirators deliberately misrepresent the value of a commercial transaction on an invoice by misreporting the quantity, quality, price per unit and/or description of a good that results in the shipment being over or under-invoiced or other fraudulent schemes. The potential scale here is enormous, given that the amount of average annual global merchandise trade is approximately $20 trillion. According to some estimates, 80 percent of the world’s illicit money flow stems from trade-related activities.
So out of the multiple trillions of dollars that are laundered internationally every year, how much of the proceeds of crime are actually seized and forfeited? According to the UNODC, the answer is less than 1 percent.

The other bottom-line metric that matters is the number of successful anti-money laundering convictions. The State Department tracks these statistics on a yearly basis. They vary markedly from country to country. Yet a review of the overall reporting shows that the actual numbers of convictions are miniscule in comparison to the magnitude of transnational criminal activity. Many countries’ anti-money laundering efforts are essentially worthless. Some countries, the Philippines for example—have never had a money laundering conviction.  Criminals are attracted to the weak link; when one country fails to crack down on money laundering, it affects many others.

By looking at the bottom line numbers, unfortunately the United States is also a weak link.  Manafort and Gates were allegedly able to exploit vulnerabilities for years until they were caught because of unique circumstances.
***
The total amount of money laundered annually in the United States is conservatively estimated in the hundreds of billions of dollars. According to the IRS, tax evasion is skyrocketing—and “money laundering is in effect tax evasion in progress.” While tax evasion is not yet considered to be a “specified unlawful activity” to charge money laundering in the U.S., related crimes are. For example, identity theft connected to tax fraud is rampant.

In 2014, the U.S. “confiscated” approximately $4.4 billion. While this appears to be an impressive number, it is not certain what percentage was actually forfeited instead of ultimately released. Let us approximate $3 billion. The UNODC estimated proceeds from crime in the U.S. (excluding tax evasion, many forms of trade-based money laundering, cybercrimes, the use of new payment methods, etc.) was $300 billion in 2010, about 2 percent of the U.S. economy. If we use the conservative UNODC estimate (a more accurate estimate would be much higher), that means we are recovering less than 1 percent of the illicit money generated by criminal activity every year.

In one illustration, a few years up to $39 billion of illicit proceeds were smuggled annually across our southern border in the form of bulk cash. Analysis showed that for every $100 smuggled across our southern border we are recovering a quarter! Literally one quarter—as in 25 cents, not 25 dollars.
We often forget about the money made on the money that is successfully laundered. Although this is simplistic, let’s assume the $39 billion is accurate and the cartels simply invest the illicit proceeds at a 5 percent annualized rate of return; after 20 years, just that one year has mushroomed into a $1.7 trillion problem! And that represents just one year and one straightforward money laundering methodology limited to one geographic area.  

Some apologists in government or industry will have you believe that countering money laundering is all about “disruption,” or “deterrence” or the number of financial intelligence reports filed by financial institutions. These platitudes are ridiculous. Stopping money laundering ultimately all comes down to enforcement—and America is doing a lousy job of it.

Currently, there are about 1,200 money-laundering convictions a year at the federal level. That seems like a large number and undoubtedly some money launderers plead to other charges. But if we factor in the amount of criminal activity and the multi-hundreds of billions of illicit proceeds generated, it’s just a drop in the ocean.
***
The Bank Secrecy Act, the U.S. government’s primary model for stopping money laundering, was enacted almost 50 years ago. Our financial intelligence countermeasures were primarily designed to stop the money laundering of cowboy cocaine dealers operating in Miami. The model is outdated, inefficient and expensive. Financial institutions and money service businesses in the United States spend approximately $8 billion a year on to comply with money-laundering rules – more than twice the amount of criminal proceeds forfeited. As Ron Pol, a respected money laundering expert recently put it, “Anti-money laundering legislation is the least effective of any anti-crime measure, anywhere.”

But we have to try. The Senate Judiciary Committee is holding hearings aimed at modernizing laws against money laundering. Other committees are active as well. Government and industry representatives should work together and design and implement a modern, robust, efficient, effective and near real-time system for detecting money laundering that incorporates the necessary privacy safeguards and oversight.

We can do far better than a 1 percent success rate. It shouldn’t take a special counsel’s investigation to detect and prosecute money laundering.

The above article was originally published in Politico:  www.politico.com/magazine/story/2018/02/27/paul-manafort-was-stupid-or-unlucky-most-money-launderers-get-away-with-it-217090



November 29, 2017

Senate Judiciary Testimony

On November 28, I was honored to appear before the Senate Judiciary Committee.  The focus of the hearing was "Modernizing AML Laws to Combat Money Laundering and Terrorist Financing."  My testimony was designed to be hard hitting.  I used metrics to make the argument that our current AML efforts are failing.  I argue it is time to radically shift the AML/CFT paradigm.  My testimony is available here:  www.judiciary.senate.gov/imo/media/doc/Cassara%20Testimony.pdf



October 26, 2017

It's Time for the ATF to Refocus its Mission

On October 26, an article I wrote on illicit tobacco the need to revamp the Bureau of Alcohol Tobacco and Firearms was published in Federal News Radio.  A link to the artice is available here:
federalnewsradio.com/commentary/2017/10/its-time-for-the-atf-to-refocus-its-mission/


August 23, 2017

A Percentage Point Away From Total Failure

On August 23, a report that I authored was published by the FACT Coalition that reveals that our AML countermeasures are a percentage point away from total failure. 
The report is available online at:
thefactcoalition.org/wp-content/uploads/2017/08/Countering-International-Money-Laundering-Report-August-2017-FINAL.pdf



August 21, 2017

China Inc. is the World's Largest Money Laundering Threat

The article was published August 21, 2017 in the American Thinker.  The narrative is too long to post so please see the following link:
www.americanthinker.com/articles/2017/08/china_inc_is_the_worlds_biggest_money_laundering_threat.html

July 21, 2017

Underground Remittances

On July 18, 2017, I was honored to testify before the House Financial Services Subcomittee on Terrorism and Illicit Finance.  The focus of the hearing was remittances and the link to terror finance.  I was asked to address underground remittance networks such as hawala.   The link to my testimony can be found here:  https://financialservices.house.gov/uploadedfiles/hhrg-115-ba01-wstate-jcassara-20170718.pdf


March 16, 2017

 
Hawala Countermeasures?

Hawala and terror finance are in the news again.  Hawala networks are used by ISIS in war-torn Syria and Iraq. There are reports that hawala was used to help finance the 2015 ISIS attacks in Paris.  Hawala is still considered to be the “national banking system” of Afghanistan and it is intertwined with the formal banking system of neighboring Pakistan.  Hawala networks exist in other troublesome spots where our adversaries operate such as the Horn of Africa and Libya. 

The United States is not immune. Hawala has repeatedly been used to finance terror attacks against the U.S., including the 1998 bombing against our embassy in Nairobi, attacks against our troops in Afghanistan and Iraq, and the 2010 Times Square bombing in New York City.  In 2013, a federal judge in San Diego sentenced three Somali immigrants for providing financial support to al-Shabaab—a designated terrorist organization.  Evidence presented during trial showed that the defendants conspired to transfer funds to Somalia via hawala to wage jihad.    

Of course, hawala is often used in other criminal activity.  For example, in 2013 a naturalized U.S. citizen and his wife were indicted for medical billing fraud in Texas, and for sending the illicit proceeds to Iran via hawala.  In November, 2015, authorities in Los Angeles announced they had broken up an international hawala network with ties between Canada, India, the United States and other locations that moved millions of dollars for the Sinaloa drug cartel and other criminal groups. And international criminal organizations from sex traffickers in Nigeria, fraudsters in Eastern Europe, to drug traffickers in Southeast Asia use hawala.  Many of these criminal networks impact the U.S.

It is important to emphasize the overwhelming percentage of hawala transfers is benign. Law enforcement has no wish to interfere with immigrants sending a portion of their earnings back to the “old country” to support loved ones.  Unfortunately, criminals and terrorists take advantage of the same underground system and its ability to mostly bypass financial intelligence reporting requirements – our primary anti-money laundering/counter-terrorist finance (AML/CFT) safeguard.

The definition of hawala was concisely expressed during the 1998 U.S. federal trial of Iranian drug trafficker and money launderer Jafar Pour Jelil Rayhani and his associates.  During the trial, prosecutors called hawala “money transfer without money movement.”  That is, a broker on one side of the transaction accepts money from a client who wishes to send funds to someone else.  The first broker then communicates with the second broker at the desired destination who distributes the funds to the intended recipient (less small commissions at both ends).  The key ingredient is trust.  Most brokers are of the same ethnic group and many are members of the same family, tribe, or clan. 

It is only natural that many immigrant groups bring with them the kind of indigenous informal financial systems like hawala that they know and trust.   Moreover, they are attached to the three C’s of these opaque financial systems: they are certain, convenient, and cheap!
As a result, hawala and other alternative remittance systems in the United States have flourished.   Shifting immigration patterns around the world have made hawala and similar sister systems global.  Yet policymakers and the media only “discovered” hawala after the September 11 terror attacks.  There was a concern about “new forms” of terror finance – even though hawala has been around for hundreds of years, long before the advent of modern western banking.

Congress wanted a solution or at least the political appearance of a solution.  Policy makers and lawyers thought they could regulate the problem away.  As a result, Treasury’s Financial Crimes Enforcement Network (FinCEN) classifies hawala as a money services business (MSB) – similar to Western Union, Pay-Pal, casa de cambios, and “Mom and Pop” check cashing services. 

So hawala is legal as long as the operation is registered with FinCEN and meets individual state licensing requirements.  Unfortunately, the regulatory response hasn’t worked. While the exact number of MSBs is difficult to determine (perhaps numbering in the multi-hundreds of thousands), estimates suggest that fewer than 20 percent of MSBs are registered and a tiny number are hawaladars (hawala brokers).
Hawaladars are also supposed to report suspicious activities.  They don’t.  Should we be surprised?  Hawala is based on trust.  Why would a hawaladar file a suspicious activity report on an extended family member?

The IRS/Criminal Investigation Division has the law enforcement mandate to ensure MSB compliance.  Unfortunately, due to budget cuts and manpower constraints the IRS has not been unable to conduct necessary assessments or compel MSBs to register.  Mandated “outreach” programs that are designed to advise informal remittance networks of their registration and reporting responsibilities have also fallen short.  Similar registration, reporting, and enforcement action are lacking in other countries as well. 

In short, there is no regulatory “solution” for hawala.  Our adversaries understand this.  Osama bin Laden once referred to taking advantage of “cracks in the western financial system.”  Hawala isn’t a crack.  It’s a canyon.

In order to minimize the abuse of hawala, governments would need to address a multitude  macro and micro economic factors such currency controls,  currency devaluations, improving banking services, providing very low cost remittance alternatives, moving away from cash-based economies, reforming tax regulations, increasing literacy, and many other facilitarors.

Hawaladars are most vulnerable when they settle accounts.  Some use formal financial institutions or even cash couriers.  (Cyber and mobile payments are on the horizon).  But historically and culturally, settling accounts via trade-based value transfer is the preferred technique.  This is why many hawaladars have direct or indirect ties to import/export companies.  

Examining trading records for signs of “counter-valuation” or a method of settling accounts between hawala traders could be the backdoor into their operations.  Systematically cracking down on the associated trade fraud could also be a boon to revenue strapped governments.
In 2003 I proposed the creation of Trade Transparency Units or TTUs to spot trade anomalies that could be indicative of customs fraud, money laundering, or even underground financial systems such as hawala.  The concept is now part of our national anti-money laundering strategy.  To date there are approximately 15 international TTUs.  Most of these are concentrated in the Western Hemisphere and they focus on regional black market exchanges.  The TTU network should be expanded.

Meanwhile, there has been an explosion in trade and related data.   Advanced analytic programs are available.  AML/CFT countermeasures should be programmed for red-flag indicators that specifically cover hawala. 

There is no doubt that our adversaries will continue exploit “cracks” in our financial countermeasures until they are closed.
 
An edited version of this was published March 16, 2016 in The Cipher Brief;
see this link: www.thecipherbrief.com/article/middle-east/minimizing-abuse-hawalas-1089

February 28, 2017

Seized Drug Cash Builds the Wall
 
Sometimes the obvious just needs to be said.  Official Washington is bellyaching about the cost of President Trump’s “wall,” intended to protect the Southwest border.  Some put the cost over 20 billion dollars.  So be it.  Beyond contraband and illegal immigrants coming north, something goes south:  Cash.  Simply put, these illicit proceeds, counted in the tens of billions, would easily pay for the wall – time to say so.    
 
At root, criminal cartels do not traffic in drugs for ideology, gamesmanship, or to fill the time.  The objective is to make money, and pushing an addictive substance on a willing population and creating ever-expanding demand, is simply the means to a financial end.  Estimates of U.S. narcotics sales vary, but drugs flowing from and through Mexico generate inordinately high sums of illegal cash.  Half a decade ago, a 2010 White House study pegged the rough number at $109 billion annually.  Today, that number is doubtless higher.
 
Obviously, concealing and moving these illegal profits is a major undertaking for traffickers.  In sheer bulk weight, officials place the drug money poundage at approximately 20 million pounds annually.  However, long gone are the days of Miami Vice, when the money launderer could simply walk into a bank in the U.S. with a suit case full of cash, deposit it and be on his way.  With increasing financial transparency and bank reporting requirements, now being more rigorously enforced – traffickers have a burgeoning logistics problem.
 
Today, cartel functionaries default to smuggling bulk cash across national borders with the same stealth that accompanies the smuggling of drugs and people in.  Recent U.S. government estimates have suggested that a substantial portion of $18 billion to $39 billion per year in the form of bulk cash is smuggled annually across our southern border.  Accordingly, the process has gone industrial – which is exactly why it is the right avenue for recouping the money needed to build the wall.
 
This uncontrolled hemorrhage of billions of untaxed drug dollars into cartel coffers must stop.  It fuels massive and expanding drug gangs in the U.S., pays for public corruption, and is tightly tied to elevating violent crime in Mexico and the U.S.  Unfortunately, much of this smuggled currency goes undetected.  According to a 2011 GAO study, America seized less than 1 percent of the multi-billion in drug-trafficking proceeds clandestinely moved beyond our borders in recent years. 
 
Put another way, we are seizing a George Washington quarter for every $100 Benjamin note.  That by itself is an outrage, but now imagine directing a portion of the re-found money toward the wall’s construction.  The U.S. government is fully aware of this problem and bulk cash smuggling was prominently featured in our last National Money Laundering Strategy from 2007.  Additional cash is sometimes seized by other law enforcement agencies in the interior of the country – and by Mexican law enforcement south of the border as well – but specific efforts to address the financial aspects of global criminality are not systematic. 
  
We should hit this hard:  Increase national efforts and energies to counter bulk cash smuggling moving southward into Mexico.  A renewed focus here would be a force multiplier. Not only would it hit cartels where it ultimately hurts, but seizing bulk cash in targeted, counter-crime operations may also generate the funds needed to pay for improved security on the southwest border.  Just working with the rough $20 billion number for annual escaped bulk cash, ten percent increase in seizures would generate two billion a year.  In ten years, without increased efficiency, we would have the 20 billion needed to fund the wall – and likely take a bite out of drug trafficking, drug trafficker wealth, and domestic addiction in the process.  That is what casual observers would call a win-win-win. 
 
If we use big data, advanced analytics, create more effective targeting, and address other modes of illicit proceeds returning to Mexico in the form of trade-based value transfer and stored value cards, we could do even more or accelerate the recoup.  Employing successful tactics in the design and placement of the wall, creating and tracking advantages of terrain, natural barriers, and resource deployment, we could accelerate the security advantages by forcing southbound smugglers to use routes and border crossings we want them to use.
 
So, the Presidential Executive Order on Enforcing Federal Law with Respect to Transnational Criminal Organizations and Preventing International Trafficking, signed on February 9th, 2017, is spot on.  The Trump Administration intends to refocus national efforts to combat global criminality, enhancing border security with a comprehensive suite of methods and approaches.  The key is to do this without “breaking the bank.”  This is the way – hit bulk cash hard, and start collecting interest immediately.  Let’s use seized bulk cash to pay for “the wall.”
  
John A. Cassara is a former intelligence officer and Treasury Special Agent.  Additional information is available at www.JohnCassara.com

The original article was published February 28, 2017 in the Washington Times.  The link is available here:
www.washingtontimes.com/news/2017/feb/27/ready-billions-for-the-wall/

A more detailed version of the above proposal was also published April 25, 2017 in the American Thinker and is available here:
http://www.americanthinker.com/articles/2017/04/bulk_cash_pays_for_the_wall.html


November 3, 2016

“Deft Diplomacy” Results in the Politicization of the Treasury Department
 
This past April, Treasury’s Acting Under-Secretary for Terrorism and Financial Intelligence spoke at a Washington D.C. forum and delivered remarks that demonstrated what I long suspected - the politicization of the Department of Treasury’s enforcement arm. Recent developments have confirmed my fears. As a former Treasury Special Agent, I am appalled at what has been happening.

Reading a prepared statement, the Under-Secretary discussed the Iran sanctions program and described how it helped pave the way to the "Joint Comprehensive Plan of Action (JCPOA)” or the long running negotiations with Iran that will postpone Iranian nuclear weapon development.  Sitting in the audience that day, I expected insights and reasoned analysis about this controversial multinational agreement.  Instead, the speech by the Treasury official was an exercise in deception and political spin. Sections of the speech are titled "The JCPOA: A Sanctions Success Story" and "The Benefits of the Bargain."  You get the idea.  The Under-Secretary ended with a flourish labeling the agreement "deft diplomacy."  I was assigned to “main” Treasury for a short time.  I understand how these remarks are drafted and cleared.  In this case, I assume they were reviewed by both the State Department and the White House.  But just because something is called a "bargain" and a "success” doesn’t make it true. 

Since the September 11 terrorist attacks, the Department of Treasury pioneered a new era of financial warfare primarily revolving around targeted sanctions and designations.  Treasury has used American financial and economic power to protect the global banking system from international money laundering, other financial crimes, and even terror finance.  Working with international partners, the innovative use of these programs put in place by Treasury’s “financial intelligence wonks” – including Treasury’s Under-Secretary - was the primary reason that Iran came to the negotiating table.  However, instead of negotiating from a position of strength and with the cunning, patience, and long-term outlook practiced by our adversaries, the White House and its negotiators threw years of hard work and international consensus building away.  Despite the remarks by the administration and its spokespeople, the true legacies of the JCPOA will be a case study of naiveté, a much more dangerous world, and disastrous results.  

Ben Rhodes, the White House’s Deputy National Security Advisor, boasted to a journalist of duping the American public about the JCPOA.   Mr. Rhodes bragged about his ability to spin, weave, and restructure a narrative divorced from reality.  One can only surmise that the Treasury official’s speech was just one more opportunity for the White House to deceive and mislead. 

This now seems to be the modus operandi of Treasury.  A few Fridays ago, shortly before 6:00 p.m. and the start of a holiday weekend, Treasury released new guidelines for businesses that now allow previously prohibited transactions with Iran by offshore banking institutions as long as the transactions do not enter the U.S. financial system.  These developments further facilitate Iran’s objectives.  Releasing information on a late Friday afternoon is a favorite political tactic in Washington designed to bury controversial news.  This did not happen in the Department of Treasury I once knew.

It gets worse.  We now know the Obama administration signed a secret document to lift sanctions on two Iranian state banks that were previously blacklisted for their involvement in financing Iran’s ballistic-missile program.  This occurred the same day Tehran released four American prisoners.  In prior years, Treasury was vehemently opposed to the same banks for their alleged role in financially backing Iran’s missile program. 

In addition, it now appears that as part of its “comprehensive” and “deft” diplomatic package, the U.S. paid a $1.7 billion cash tribute to Iran at the same time the four American hostages were released. While others can debate whether or not we “owed” Iran this money, the fact is we cannot track this cash.  We can surmise some of it will be used to further terror.  It now appears the Iranians want additional “billions” to get more American hostages released.  Last week, the Department of Justice refused to address questions from Congress about its reported approval of the transfers.

The above deals further erode the sanctions the U.S. maintains on Iran and certain Iranian companies and people known as "specially designated nationals" or SDNs.  The sanctions date back to Iran’s seizure of hostages at the U.S. Embassy in Tehran, its support for Hezbollah, and other Iranian financial and operational backing for terrorist activities.  Iran’s actions in Lebanon, Afghanistan, and Iraq have led to the deaths of hundreds if not thousands of American lives – our U.S. soldiers and diplomats.

Full disclosure; a close friend of mine, a beautiful young lady, was murdered by Iranian proxies in the April 18, 1983 bombing of our U.S. Embassy in Beirut. 

Our government publicly states that “terrorists will be held accountable “and lists Iran as the “top state sponsor of terrorism.”  Yet using political doubletalk our same government engages in the kind of diplomacy that strengthens the Iranian terrorist regime. This charade is not lost on either our adversaries or our allies.

The politicization of Treasury’s enforcement arm does not only involve actions taken involving the JCPOA.  Lois Lerner’s pleading the Fifth Amendment against self-incrimination is eloquent testimony of the IRS’ efforts to suffocate groups critical of the administration.  There have been efforts to impeach the IRS Commissioner for making false statements under oath and failing to comply with a subpoena for evidence. 

While political appointees have always influenced the civil service, direction has reached new levels.   Political guidance at the Departments of Justice, Homeland Security, State and other agencies and departments I once held in high esteem frankly break my heart.   It is no wonder the overwhelming majority of the American people no longer trust their government.

If we are to turn this around, two things must happen: 1. The next administration must reestablish trust and credibility in the civil service by taking crass politics out of governance; 2. Civil servants – including those at the highest levels - must say no when they know they are being used for political ends.  We must restore honor and integrity in government service. 

The above article was published November 3, 2016 in the American Thinker.  The link is available here:
http://www.americanthinker.com/articles/2016/10/deft_diplomacy_results_in_the_politicization_of_the_treasury_department.html​

August 24, 2016

In AML/CFT Fight, 'The Emperor Wears No Clothes'

When I was a boy, I loved the fairy tale, "The Emperor Wears No Clothes."

Unfortunately, the metaphor could well be used to describe our efforts against international money laundering.  The overwhelming majority of observers are unwilling to see what is obvious: our anti-money laundering efforts are just a percentage point away from total failure.

But, this is no fairy tale.  The worldwide failure to combat money laundering has a dramatic impact.  Why?  Because outside of crimes of passion—for example, murder committed in a jealous rage—criminals, kleptocrats, and some unscrupulous companies are motivated by greed. 

In today’s interconnected world, the manifestations of unfettered avarice impact us all.  We see it in our communities: the opioid, meth, and cocaine epidemics are devastating. Human trafficking, fraud in government programs, and identity theft can affect our daily lives.  Of course, money laundering and terror finance also impact national security.

Sometimes law enforcement, policymakers, and the media get so distracted with the immediacy of the criminal behavior that they forget the aim of criminal activity isn’t the crime itself—but the proceeds of the crime. Just about everybody agrees that the “War on Drugs” failed.  But we do not acknowledge that our inability to stop the laundering and seize the proceeds fuels the greed behind the drug trade. 

How much money is being laundered? Estimates are all over the map, but the bottom line is: a lot. The IMF and United Nations Office on Drugs and Crime (UNODC) estimate the scale of global money laundering falls somewhere around two to five percent of global gross domestic product—roughly the size of the U.S. federal budget.  The IRS says that “money laundering is tax evasion in progress.”   If tax evasion here and abroad is included in the count, the magnitude of international money laundering is staggering.

“Total Failure Is Just a Decimal Point Away”
How well are we doing in fighting the problem?  The data present a bleak picture. Despite periodic, positive pronouncements from Treasury and various administrations, here are a few sobering numbers:
  • According to the UNODC, less than one percent of global illicit financial flows are seized and forfeited.
  • Raymond Baker, a financial crime expert, notes that the numbers show enforcement fails 99.9 percent of the time. “In other words, total failure is just a decimal point away.”
  • Dated information suggests money launderers face a less than five percent risk of conviction in the U.S. And, according to the State Department—buttressed by my personal observations—the situation in most areas of the world is even worse.
As a former Treasury special agent who investigated money laundering and terrorist finance, I have the utmost respect for law enforcement personnel who work hard to follow the money trails—sometimes at great personal risk.  Make no mistake, cases are being made.  Some investigations are complex and truly innovative.  But dividing the amount of money laundered by the number of successful cases demonstrates that our current efforts are essentially futile.

What Can Be Done?
Since retiring, I’ve advanced a number of “steps-forward” on how to more effectively combat money laundering. 
One of the things we must do immediately is end the incorporation of anonymous shell companies.  The U.S. is one of the easiest places in the world where terrorists, human traffickers, and corrupt foreign politicians can open anonymous companies to launder illicit money with impunity.  When investigating the most heinous crimes, it is commonplace for law enforcement to hit a dead-end when encountering a shell.

“Anonymous shell companies… are one of the primary tools used by bad guys to openly acquire and access nefarious funds,” wrote Dennis Lormel, the FBI’s former anti-terror finance chief, in 2013.  “These dubious dealings are not limited to… ‘offshore’ tropical islands. The United States is among the most egregious offenders with its woeful lack of regulations requiring the true ownership of companies to be identified.”
Little has changed since then.

In April, Patrick Fallon, head of the FBI’s financial crimes section, noted “While we [in the U.S. talk] about offshore accounts in other countries, I think we have a lot of room for improvement here to promote transparency… It is a significant impediment to our investigations when we can’t determine who the true owner is of a company.”
There is bipartisan legislation that would give our law enforcement officials the information they need to keep us safe.

This month, the nation’s top banks endorsed the legislation to ensure that they are not misused to launder illicit proceeds. In addition to the banks, the measure enjoys widespread support from law enforcement groups like the Federal Law Enforcement Officers Association, as well as a broad array of anti-corruption, human rights, and taxpayer advocates. 

​Failure is hard to acknowledge and some benefit from the status quo, but the time has come to get this done.
We need to take a hard look at our anti-money laundering efforts.  Congress should begin by acting to protect the American people from the harms associated with anonymous companies.  Until then, we have to recognize the naked truth:  “the emperor wears no clothes.”

The above article was published August 24, 2016 in The Hill.  The link is available here:
thehill.com/blogs/congress-blog/judicial/292479-in-fight-against-money-laundering-and-terror-finance-the-emperor

June 23, 2016

Congressional Hearing on "The Next Terrorist Financiers: Stopping Them Before They Start" - Mobile Payments

The testimony is about 10 pages and is too long to post below.  Here is the link to my written statement:
www.defenddemocracy.org/content/uploads/documents/Cassara_The_Next_Terrorist_Financiers.pdf




May 19, 2016

Service Based Money Laundering: The Next Illicit Finance Frontier

Just a few months before the summer Olympic Games in Brazil, there are developments in a far-reaching anti-corruption battle that has already tarnished the reputations of many powerful Brazilian business and political elites including the current and former Brazilian presidents.  The scandal might bring down the government.  The charges are just part of a much broader investigation called “Operation Car Wash” which has uncovered massive long-running corruption schemes centered on giant state oil company Petrobras.

Although a number of schemes were involved in the corruption scandal, executives at Petrobras allegedly took bribes in exchange for giving contracts to construction firms and other servicers, who then massively overbilled the oil company.  Allegedly, bribe money was laundered and directed into campaign coffers.
As a former U.S. intelligence officer and Treasury special agent, I believe some of the fraudulent tactics uncovered in the investigation will finally focus attention on widespread - but mostly ignored - “service-based money laundering” or SBML.
Of course, fraud is also rampant in the United States.  According to the U.S. Department of Treasury’s 2015 National Money Laundering Risk Assessment, “Fraud encompasses a number of distinct crimes, which together generate the largest volume of illicit proceeds in the United States” - perhaps twice the volume of illicit proceeds earned from drug trafficking.  Fraud is often used as base crime to charge money laundering. 

Over the last few years, trade-based money laundering (TBML) has received increasing recognition as one of the top money laundering methodologies in the world.  On the other hand, service-based money laundering is almost unknown in anti-money laundering enforcement.  Instead of laundering money or transferring value through trade goods, services are used. Similar to TBML, SBML revolves around invoice fraud and manipulation.  Common service-based laundering scams include accounting, legal, marketing, and natural resource exploration fees, etc.   Fraudulent construction costs, such as the ones uncovered in Operation Car Wash, are ripe for abuse. Technical fees, such as writing computer code, add complexity to the scam and require investigators with specialized expertise to unravel service-based fraud. 
​
In my duties both investigating and providing training on international money laundering, I learned of creative techniques   criminals use to launder funds through fraudulent services. Once in Belgrade, Serbian authorities told me about a case where organized crime used fraudulent invoices generated from “music concert promotions” in order to send illicit funds to Cyprus.  In Montenegro, according to the State Department’s 2015 global anti-money laundering review, “off-shore companies send fictitious bills to a Montenegrin company (for market research, consulting, software, leasing, etc.) for the purpose of extracting money from the company’s account in Montenegro so funds can be sent abroad. It is a form of service-based laundering.”
Stopping SBML is challenging from an investigative standpoint.  For example, in TBML, authorities can often track an item or a commodity. They can follow a physical trail.  For example, a product is manufactured and sent from country A to country B perhaps transshipped through country C.  Import and export data exists.  Through analytics, we can discover anomalies that might be indicative of customs fraud and follow the value trail.  In SBML, a physical commodity trail does not exist; the validity of the value of the invoice/s is subjective; there is a lack of data; there are difficulties surrounding competence, jurisdiction, and venue.  And, of course, much service-based fraud is related to tax evasion.

The international community needs to address SBML.  Prosecuting high profile cases will help bring awareness to this widespread but little recognized money laundering methodology.   Operation Car Wash in Brazil is a promising start.

The above article was published May 19, 2016 by the Foundation for the Defense of Democracies; the article is available here:
www.defenddemocracy.org/media-hit/john-cassara-service-based-money-laundering-the-next-illicit-finance-frontier/

February 21, 2016

The Chinese "Flying Money" Underground Financial System

The article was published February 21 in Banking Exchange.  Here is the link to the article
http://www.bankingexchange.com/news-feed/item/6079-flying-money-may-land-in-u-s
February 3, 2016

Hearing on "Trading with the Enemy: Trade-Based Money Laundering is the Growth Industry in Terror Finance"

The testimony is about 10 pages, has a few graphics, and is too long to post below.  Here is the link to written testimony:
http://www.defenddemocracy.org/testimony/trading-with-the-enemy-trade-based-money-laundering-is-the-growth-industry 

​
November 18, 2015

Hearing on “Terrorist Funding: Kidnapping for Ransom, Antiquities, and Private Donors”

Before the Terrorism, Nonproliferation, and Trade Subcommittee  of the House Foreign Affairs Committee

 November 17, 2015

Chairman Poe and Members of the Subcommittee on Terrorism, Nonproliferation and Trade;

Thank you for the opportunity to testify today.  It is an honor for me to be here. 

I retired after a 26 year career as a Case Officer for the Central Intelligence Agency and as a Special Agent for the U.S. Department of Treasury.  I believe I am the only individual to have ever been both a covert Case Officer and a Treasury Special Agent. 

Much of my career with Treasury was involved with combating international money laundering and terror finance.   Since my retirement, I have been a contractor and consultant for a number of U.S. departments, agencies, and business enterprises.   I have been fortunate to continue my domestic and international travels primarily providing training and technical assistance in financial crimes enforcement.  I have written four books on money laundering and terror finance as well as numerous published articles.  Additional information can be found on my website: www.JohnCassara.com
. . . . . . . . . . . .

“Without money, there is no terrorism.”

This simple truism was recognized early on.  A few days after the deadliest terrorist attack in U.S. history, President George W. Bush stated, “Money is the lifeblood of terrorist operations. Today we are asking the world to stop payment.” 

More than 14 years after the September 11 attacks, we are meeting here this afternoon in part to ask, "Has President Bush’s original request been fulfilled?  Has the world stopped payment?

Of course, the answer is not simple.  Successful terrorist and organized criminal groups diversify their funding sources.  Similarly, they diversify the ways they launder their money.  Our adversaries are creative and they adapt. 

This afternoon, I would like to talk about an increasingly troublesome source of funding – kidnapping, ransom and extortion sometimes known by its acronym KRE.

I would then like to briefly discuss two other related money laundering and terror finance methodologies: trade-based money laundering (TBML) and underground financial systems.  Both are loosely tied to KRE.

Kidnapping for ransom is a crime as old as antiquity.  In recent years, terrorist and associated criminal organizations have turned to kidnapping as a relatively easy and lucrative source of funding.  The United Nations feels the problem is growing.  The UN estimates that approximately $120 million in ransom payments was paid to terrorist groups alone between 2004 and 2012.[i]  And according to a 2012 assessment by David S. Cohen, the Treasury Under Secretary for Terrorism and Finance Intelligence, kidnapping for ransom is our most significant terrorist financing threat today.[ii]

In 2014, 35 percent of kidnappings were in Asia, followed by Africa at 30 percent, the Americas with 21 percent, the Middle East with 12 percent and Europe/Russia with 2 percent.[iii]

We are all concerned about the growth and savagery of the Islamic State of Iraq and the Levant (ISIS).  The terror organization has kidnapped multi-hundreds if not thousands of victims, including local Iraqis, Syrians and members of ethnic minorities, as well as Westerners, and East Asians located in the region. Some were used to extract ransom payments, and others were brutally murdered to send a political message.  Because kidnapping is both profitable and valuable as a propaganda tool, ISIS has reportedly purchased Western hostages from moderate rebels at border exchanges.   According to a Financial Action Task Force (FATF) assessment, in 2014 ISIS raised approximately $20 - $45 million from kidnapping for ransom.[iv]

Foreign nationals taken hostage worldwide vary from aid workers to tourists, from employees of private companies to diplomats or other government officials. Americans are not immune.  Although an estimated 60 – 70 percent of overseas kidnapping of U.S. citizens goes unreported, last year, according to the Bureau of Consular Affairs at the State Department, more than two dozen Americans working in private industry were kidnapped in terrorism-related incidents.[v]

Demands may also be evolving beyond ransoms to extortion and protection money. One Al-Qaeda affiliate was planning to extort substantial annual payments, amounting to millions of euros a year, from a European-based company, in exchange for a promise not to target that company’s interests in Africa. And extortion is[vi] often used by terrorist groups in the extraction industry such as oil and minerals, agriculture, various production facilities, cultural artefacts, etc.  In Southeast Asia, piracy at sea is reaching record levels.[vii]  By using tactics such as extortion and shakedowns, terrorist organizations are following the playbook of organized crime.

Because kidnapping and associated crimes have been so successful, it appears the average ransom payment is increasing.  It is a vicious cycle.  There is no doubt that ransom payments lead to future kidnappings, and future kidnappings lead to additional ransom payments. And, of course, the ransom payments build the capacity of terrorist organizations which in turn fuels additional terrorist attacks. 

Logically, we must do what President Bush urged:  “Ask the world to stop payment.” 

To this end, there have been several United Nations Security Council Resolutions (UNSCRs), including 2133 (2014) and 2170 (2014) that call on member states to prevent terrorists from benefitting, directly or indirectly from ransom payments. UNSCR 2161 (2014) confirms that the prohibition on providing funds to individuals and entities on the al-Qaida Sanctions List, including ISIS, also applies to the payment of ransoms to individuals, groups, or entities on the list, regardless of how or by whom the ransom is paid. Thus 2161 applies to both direct and indirect ransom payments through multiple intermediaries. The restrictions cover not only the ultimate payer of the ransom, but also the parties that may mediate such transfers, including insurance companies, consultancies, and any other financial facilitators.[viii]

Despite the restrictions, the world has not stopped payment.  Reportedly, even some governments have rewarded terrorists with ransom payments.  But of course, the complicating factor is our humanity.  It is difficult to turn away from the anguished cries of those kidnapped and the frantic appeals of their loved ones. 

ISIS, Al-Qaeda in the Lands of the Islamic Maghreb (AQIM), Al-Qaeda in the Arabian Peninsula (AQAP), the Taliban in Pakistan and Afghanistan, Abu Sayyaf, Boko Haram and dozens of other lesser known groups - sometimes in coordination with local criminals – use a variety of funding methods. Generally speaking they keep their money within their networks and have relatively little interaction or reliance on international financial systems.  That is why our financial countermeasures such as financial intelligence, sanctions, and designations are for the most part ineffective against terror groups.  I explain this in my book Hide & Seek: Intelligence, Law Enforcement and the Stalled War on Terror Finance (2006, Potomac Books).

These groups and others like them often use cash, gold, and traditional, ethnic-based or cultural systems such as hawala and trade-based money laundering and value transfer.  Although open source reporting is sketchy, these informal systems are all believed to be used in KRE.

The FATF defines TBML as “the process of disguising the proceeds of crime and moving value through the use of trade transactions in an attempt to legitimize their illicit origins.”[ix]  In relation to terror-finance, TBML takes a wide variety of forms.  For example, it could be simple barter or a commodity-for-commodity exchange.   In certain parts of Afghanistan and Pakistan, for example, the going rate for a kilo of heroin is a television set.   Drug warlords exchange one commodity they control (opium) for others that they desire (luxury and sports utility vehicles).  However, generally speaking, money laundering and value transfer through simple invoice fraud and manipulation are most common. The key element is the misrepresentation of the trade good to transfer value between importer and exporter.  The quantity, quality, and description of the trade goods can be manipulated.  The shipment of the actual goods and the accompanying documentation provide cover for “payment” or the transfer of money.   The manipulation often occurs either through over-or under-valuation - depending on the objective to be achieved. To move money out of a country, participants import goods at overvalued prices or export goods at undervalued prices.  To move money into a country, participants import goods at undervalued prices or export goods at overvalued prices. For the most part, all of this avoids countries' financial intelligence reporting requirements. Trade-based value transfer is found in every country around the world.

Trade-based value transfer has existed long before the advent of modern “Western” banking.  In areas where our adversaries operate, trade-based value transfer is part of a way of life.  It is part of their culture; a way of doing business.

In addition to customs fraud, trade-based value transfer is often used to provide “counter-valuation” or a way of balancing the books in many global underground financial systems - including some that have been used to finance terror.  Trade-based value transfer is found in hawala networks, most other regional "alternative remittance systems," the massive underground Chinese fei-chien “flying money system,” the misuse of the Afghan Transit Trade, Iran/Dubai commercial connections, suspect international Lebanese/Hezbollah trading syndicates, non-banked lawless regimes such those in Somalia and Libya, and many more.  

The magnitude of the problem is staggering.  The World Bank estimates that global remittances through official channels like banks and Western Union will reach $707 billion by 2016.[x]  Unofficially, nobody knows.  However, the International Monetary Fund believes, “unrecorded flows through informal channels are believed to be at least 50 percent larger than recorded flows.”[xi]   According to these World Bank and IMF estimates, unofficial remittances are enormous!   Yet we continue to ignore trade’s role in underground financial systems.

Trade and underground finance are part of the kidnap for ransom equation.  For example, money and value transfer services are found throughout Iraq and Syria, including in areas where ISIS operates.  These financial companies or hawaladars are trusted brokers that have established relationships throughout the region, which allow them to “transfer” funds to finance trade and pay remittances, and other financial activities.  Many are family, clan, or tribe centric.  They operate on trust and secrecy. These money and value transfer service (MVTS) companies do not conduct electronic funds transfers as banks do but rather communicate via email, fax, or phone with a local or foreign associate to pay or receive payment from the counterparty to a transaction. The MVTS companies then settle their business at a later date, including physical cash payments or via the conventional banking system.  I believe we will also be seeing the increasing use of cyber currencies to settle accounts.  However, I want to again repeat and emphasize a fact that is continually overlooked; historically and culturally, in all of the areas of the world where our terrorist adversaries operate, trade is used to balance the books or settle accounts.  This is often done by the process of over-or-under invoicing sometimes called “counter-valuation.”  For example, that is why many hawaladars have direct or indirect ties to import/export or trading companies.  Examining related trading records for invoice fraud and value transfer could be the backdoor into money/value transfer systems.   Unfortunately, neither the United States nor our partners are doing this.

The FATF states that TBML is one of the three largest money laundering methodologies in the world.[xii] (Money laundering through financial institutions and bulk cash smuggling are the other two). 

I would like to give you just a few examples of the magnitude of the problem.

Dr. John Zdanowicz, an academic and early pioneer in the field of TBML, examined 2013 U.S. trade data primarily obtained from the U.S. Census Bureau.  By examining under-valued exports ($124,116,420,714) and over-valued imports ($94,796,135,280) Dr. Zdanowicz found that $218,912,555,994 was moved out of the United States in the form of value transfer!  That figure represents 5.69% of U.S. trade.  Examining over-valued exports ($68,332,594,940) and under-valued imports ($272,753,571,621), Dr. Zdanowicz calculates that $341,086,166,561 was moved into the United States!  That figure represents 8.87% of U.S. trade in 2013.[xiii]

I believe the United States has one of the most robust customs enforcement arms around the world.  So if almost 6 – 9 percent of our trade is tainted by customs fraud and perhaps trade-based money laundering, what does that mean for the rest of the world – particularly in areas of weak governance and high corruption like areas where our adversaries operate?

In another example, Global Financial Integrity (GFI), a Washington, D.C.-based non-profit, has done considerable work in examining trade-misinvoicing.  It is a method for moving money illicitly across borders, which involves deliberately misreporting the value of a commercial transaction on an invoice and other documents submitted to customs.  It is a form of trade-based money laundering.  In a 2014 study, GFI found that the developing world lost $6.6 trillion in illicit financial flows from 2003 to 2012, with illicit outflows alarmingly increasing at an average rate of more than approximately 9.4 percent per year.[xiv]  The number is now approaching $1 trillion a year hemorrhaging from the developing world via trade-misinvoicing alone![xv]

As noted, other forms of TBML include barter trade, capital flight, tax evasion, informal value transfer systems (such as hawala), various forms of commercial fraud and trade-misinvoicing and criminal trade-based money laundering.

I have conducted numerous investigations and written extensively about TBML.  Last week, a new book that I wrote was released; Trade-Based Money Laundering: The Next Frontier in International Money Laundering Enforcement (Wiley).  In the book, I make the argument that if one includes all its varied forms, trade-based money laundering could well be the largest money laundering methodology in the world.  And, unfortunately, it is also the least understood, recognized, and enforced.

I urge the subcommittee on Terrorism, Nonproliferation, and Trade to further examine TBML.  There are compelling reasons to do so.  A systematic crack down on trade-fraud in the United States could possibly recover hundreds of billions of dollars a year alone in lost revenue.  Perhaps more importantly, increased trade transparency will better secure the homeland and could be our most effective back door into underground finance.

In Trade-Based Money Laundering, I detail a number of recommendations and “steps forward.”[xvi]  I will briefly summarize a few of them:

1.       As noted, I believe TBML could be the largest and most pervasive money laundering methodology in the world.  However, we do not know for certain because the issue has never been systematically examined.  This is even more surprising in the United States because annually we are possibly losing billions of dollars in lost taxes due to trade-mispricing alone.  While not necessarily true for all money laundering methodologies, trade generates data.  I believe it is possible for economists, statisticians, and analysts to come up with a fairly accurate estimate of the overall magnitude of global TBML and value transfer.  Narrowing it down to specific problematic countries is easier still.

I suggest this subcommittee urge the Department of Treasury’s Office of Intelligence and Analysis (OIA) to at least examine U.S. related data and come up with an official estimate for the amount of TBML that impacts the U.S.   A generally accepted estimate of the magnitude of TBML in all its varied forms is important for a number of reasons: a.) It will provide clarity; b). It will focus attention on the issue; c.) From an enforcement perspective, the supporting analysis should provide both excellent insight into specific areas where criminals are vulnerable and promising opportunities for targeting; and d.) A systematic crack down on TBML and customs fraud will translate into enormous revenue gain for the governments involved.

2.      In the world of anti-money laundering/counter-terrorist finance (AML/CFT), the FATF makes things happen.  The FATF recognizes TBML is a huge concern.  There is a special FATF typology report on TBML.  However, in 2012 when the current FATF recommendations were reviewed and promulgated, TBML was not specifically addressed.  It is past time this is done. I suggest this subcommittee contact the U.S. Department of Treasury (which heads the U.S. FATF delegation) and urge that the U.S. introduce a resolution calling for the misuse of trade to launder money and transfer value to be examined as a possible new FATF recommendation.

3.      I agree wholeheartedly with Raymond Baker of Global Financial Integrity that,  “We cannot succeed in stopping the criminals while at the same time telling multinational corporations that they can continue to mis-invoice as they choose.”   Abusive and fraudulent pricing techniques are used every day by thousands of multi-national corporations around the world to move money and transfer value across borders.  Current AML/CFT countermeasures turn a blind eye to the use of “legitimate” actors’ use of shadow financial systems, questionable financial flows, offshore havens, and assorted grey techniques used for the purposes of tax evasion, wealth preservation, and increasing profits.  Yet at the same time, authorities will aggressively pursue criminal organizations’ use of the same techniques to move tainted money across borders.  This type of intellectual and political disingenuousness and hypocrisy contributes to our underwhelming success in effectively combating money laundering and other types of financial crimes.  Global corporations must embrace legitimate trade.   Legitimate actors should demand trade transparency.  This means respecting customs duties, VAT assessments, currency exchange regulations, AML/CFT regulations, etc.  I urge Congress to work to define illicit commercial financial flows that are facilitated via trade and then create effective and enforceable measures to curtail them.   These needed reforms will also add revenue.

4.      Trade transparency is the single best measure to detect trade-based money laundering and associated crimes.  It is something that every government and legitimate industry and trader should welcome.  Discounting the unattainable, by using modern analytic tools to exploit a variety of relevant big data sets, I believe international trade transparency is theoretically achievable or certainly possible at a factor many times over what we have today. All countries track what comes in and what goes out for security, statistical and revenue purposes.   So by examining and comparing one country’s targeted exports with the corresponding trading partner’s record of imports it is a fairly straight forward process to spot anomalies.  Some trade irregularities can be easily dismissed as numerical outliers.  But sometimes anomalies can be indicative of customs fraud, tax evasion, value transfer, TBML, or perhaps even underground financial systems such as hawala that are used in kidnap for ransom. 

In 2004, the United States government adopted a proposal I advanced and created the world’s first trade transparency unit (TTU).  It is located within Homeland Security Investigations.  Per the above, the TTU uses trade data and other data to identify suspect transactions. Since that time, about a dozen other countries have established similar units and over a billion dollars of cash and assets have been seized.  The creation of TTUs has simultaneously overlapped with exponential advances in big data and advanced analytics.  Overlaying financial intelligence, law enforcement and customs data, travel data, commercial records, etc. further increases transparency and facilitates more precise targeting.    And via customs-to-customs agreements, TTUs are able to exchange specific information about suspect transactions.

As I have discussed, in addition to being an innovative countermeasure to TBML and value transfer, combatting trade-fraud is a revenue enhancer for participating governments.  Frankly, it is for this reason that many countries have expressed interest in the concept. 

I urge Congress to fully fund the TTU initiative so as to promote its expansion.  Moreover, the concept of trade transparency should be built into the US trade agenda.  For example, the new Trans-Pacific Partnership (TPP) is set to lower or eliminate tariffs on everything from imported Japanese cars to New Zealand lamb, while opening two-fifths of the global economy to easier trade in services and electronic commerce.[xvii]  I don’t have a position on the pros and cons of the TPP.  But the volume of the increased trade will provide increasing opportunities for trade-based value transfer and money laundering.  I suggest we help protect abuse by insuring that every TPP signatory country establish a TTU and share appropriate targeted trade data to spot anomalies that could be indicative of trade fraud at best and TBML at worst.

I appreciate the opportunity to appear before you today and I'm happy to answer any questions you may have.


November 4, 2015
Hawala

In November 2013, a federal judge in San Diego, California, sentenced three Somali immigrants for providing financial support to al-Shabaab—a designated terrorist organization.  Evidence presented during trial showed that the defendants conspired to transfer funds to Somalia through a hawala underground remittance operation known as the Shidaal Express.  Among those involved in the conspiracy were a cab driver, the imam at a popular mosque frequented by the city’s immigrant Somali community, and a man who worked in the hawala operation that moved the illicit funds.  The cab driver had direct ties with al-Shabaab and one of its most prominent leaders—Aden Hashi Ayrow.  The jury listened to dozens of intercepted telephone conversations, including many between the cab driver and Ayrow.  In those calls, Ayrow begged him to send money to al-Shabaab, saying it was “time to finance the jihad.”

The definition of hawala was concisely expressed during the 1998 U.S. federal trial of an Iranian drug trafficker and money launderer.  Prosecutors called hawala “money transfer without money movement.”  A broker on one side of the transaction accepts money from a client who wishes to send funds to someone else.  The first broker then communicates with the second broker at the desired destination.  The second broker distributes the funds to the intended recipient (less a small commission at both ends).  The key ingredient is trust.  Most brokers are of the same ethnic group, and many are members of the same family, tribe, or clan.  The simple formula works well—both in domestic transactions and across the oceans.

It is important to remember that the overwhelming percentage of hawala transfers is benign.  Law enforcement has no wish to interfere with immigrants sending a portion of their earnings back to the “old country” to support their loved ones.  Unfortunately, criminals and terrorists have taken advantage of the underground system and its ability to mostly bypass financial intelligence reporting requirements.

Hawala has repeatedly been used to finance terror attacks against the United States, including the 1998 bombing against our embassies in Kenya and Tanzania, attacks against our troops in Afghanistan and Iraq, and even the 2010 Times Square bombing in New York City.  Hawala is also often used in other criminal activities.  For example, In March 2013, a medical doctor and his wife were indicted for medical billing fraud in Texas and for sending the illicit proceeds to Iran via hawala.  

When my Italian grandparents emigrated to the United States in the 1890s, most immigrants also came from Europe.  They found the kind of “Western” banking and financial services that they were familiar with.  About fifty years ago, immigration to this country dramatically changed.  More and more immigrants come from the developing world.  It is only natural that many immigrant groups have brought with them the informal financial systems, like hawala, that they know and trust.  Moreover, they are attached to the three Cs of these indigenous and opaque financial systems:  certain, convenient, and cheap!  

As a result, hawala and other alternative remittance systems in the United States have flourished.  The U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) is dedicated to safeguarding the financial system from illicit use and combating money laundering and promoting national security through the collection, analysis, and dissemination of financial intelligence and strategic use of financial authorities.  FinCEN classifies hawala as a money services business (MSB).  The underground financial system is legal as long as the hawala operation is registered with FinCEN.  In 46 of the 50 United States, hawaladars  (hawala brokers) must register.  Hawaladars  are also supposed to report suspicious activities.  However, few register and even fewer report.  To see whether a hawaladar or other suspect MSB has registered with FinCEN, visit http://www.fincen.gov/financial_institutions/msb/msbstateselector.html.

Another vulnerability of hawaladars and those engaged in illegal money transfers involves the periodic settling of accounts with their foreign counterparts.  Some brokers use formal financial institutions.  Financial intelligence, such as suspicious activity reports (SARs), might be available.  Bulk cash smuggling is occasionally used. On the horizon, I believe we will begin to see hawaladars increase their use of cyber currency and mobile payments.  But historically and culturally, trade-based fraud and value transfer is the preferred technique.  That is why many hawaladars have direct or indirect ties to import/export companies.  Examining related trading records for invoice fraud and value transfer could be the backdoor into hawala operations.  

The use of hawala and other related informal value transfer systems—such as the Chinese flying money, or fei-chien—is widespread in the United States.  They often hide in plain sight.  We must recognize their operation and be aware of how they may be used to launder and transfer suspect funds.

Originally published November 1, 2015 on www.SLATT.org
June 17, 2015
Out of Africa:  AML Compliance for Mobile Payments

In 1995, I was based in the American Embassy in Rome.  I was a Treasury Special Agent and an anti-money laundering specialist.  Our office was regional and I frequently traveled to the Middle East and sub-Sahara Africa in pursuit of transnational financial crimes.

I received an unusual request from our Embassy in Maseru.  The Governor of the Central Bank of the “Mountain Kingdom” of Lesotho was concerned about nascent money laundering threats and requested that an expert address a seminar on the subject.  

In short order, I found myself in Johannesburg renting a “wrong-side” drive vehicle for the lengthy trip over remote roads that would take me to Maseru.  I have vivid memories of the journey including the beautiful landscapes, the friendliness of the people, and the eagerness of the Lesotho audience to learn how to combat money laundering.  The Central Bank was literally starting from square one.  My other vivid memory is that the American Embassy ordered my departure as soon as the seminar ended because of a rumored coup the following day!  

In the intervening twenty years, much has changed.  Yet both the Mountain Kingdom of Lesotho and I have maintained our interest in anti-money laundering enforcement.  

I recently discovered that a shared concern is what the U.S. Department of State once called “the growing threat of M-payments.”  Mobile payments is actually an umbrella term that covers high-tech monetary transfer systems such as digital precious metals, Internet payment services, prepaid calling and credit cards, and M-payments (i.e., the use of a cellphones).

The rapid spread of cellphones has provided much-needed access to financial services in emerging markets.   M-payment technology allows previously un-banked communities to bypass both brick-and-mortar banks and ATMs.  The new mobile technology potentially provides a virtual ATM or a virtual wallet to every cellphone user.  Using the ubiquitous cell phone, money can be credited, debited, used for purchases, and transferred.  

During my overseas travels to the developing world, I have seen the exponential growth of M-payments.  For example, in Tanzania only 12 percent of the population is engaged in the formal financial sector.  Mobile banking services fill a need and, as a result, are expanding rapidly. The Central Bank of Tanzania estimates that the equivalent of $650 million is transferred each month through mobile transfers.  

While all of this is wonderful news, the “threat” revolves around how criminals can use this same new technology to launder criminal proceeds.  This brings us back to the Mountain Kingdom of Lesotho.

M-payments in Lesotho are flourishing.  So recently the Central Bank of Lesotho mandated that mobile money systems such Ecocash and M-Pesa must adhere to the Lesotho Money Laundering and Proceeds of Crime Act.  The Central Bank issued guidance that was developed to conform to “international best practices and standards.”  M-payment providers are mandated to follow anti-money laundering and counter-terrorist finance (AML/CFT) compliance programs.   All transactions must be local and the amounts transferred have daily and monthly limits.  In order to transfer higher amounts, know-your-customer (KYC) rules apply and subscribers are required to present their passport and proof of their sources of income.  The system also has unusual behavior triggers which can lead to a suspicious transaction report (STR) being filed with the financial intelligence unit (FIU).

Only the Philippines and a few other countries that I am aware of are incorporating similar AML/CFT safeguards in their burgeoning M-Payment industry.  In the U.S., we continue to dawdle. 

In Lesotho, industry has embraced the new mandates.  For example, recently the CEO of Econet Telecom Lesotho (ETL) welcomed the new AML regulations announced by the Central Bank and pledged cooperation to ensure that large and suspicious transactions are monitored.

Make no mistake.  Lesotho and most other countries in Africa are plagued by traditional money laundering, corruption, fraud, tax evasion, and other financial crimes.  But in this instance, tiny and remote Lesotho – a country completely surrounded by the Republic off South Africa - is breaking important new ground in AML countermeasures for mobile payments.  

I chuckle at the irony.  Twenty years ago I traveled to Lesotho to teach about anti-money laundering measures.  Today, Lesotho can teach the rest of the world about how to monitor an emerging money laundering threat!

With M-Payments, I am most concerned about “digital value smurfing,” a term coined by the Asian Development Bank.   In traditional money laundering, “smurfs” -- or “runners” -- deposit or place small amounts of illicit or “dirty” money into financial institutions in ways that do not trigger financial transparency reporting requirements.   Digital smurfs can be given illicit criminal proceeds and directed to load their cell phones with digital value -- conforming to any legal or reporting limit.  Dozens or even hundreds of digital smurfs could then be directed to transfer the value to accounts controlled by organized crime. 

The Lesotho model will help mitigate the digital smurfing risk.  It will work for them because the size of the customer base is manageable.  Lesotho has a population of two million.  The real challenge will be to implement M-Payment (AML/CFT) safeguards for large user communities.  

For example, there are more mobile phones in Brazil than people, with approximately 275 million subscribers in a population of approximately 200 million – or approximately 100 times the population of Lesotho.   Brazil is the fourth largest mobile market in the world.  Yet despite the extensive mobile device penetration, mobile payments have been relatively slow to catch on.  That will change soon.    

This is why a hybrid approach is needed.  In addition to the kind of compliance programs pioneered in Lesotho, for large user groups such as Brazil – or here in the United States - something else is required. 

M-Payments generate big data.   Integrated countermeasures must take advantage of the data and incorporate sophisticated analytics that recognize and even predict suspect transactions.  The technology exists.  Financial institutions and money service businesses have been using AML/CFT compliance software for years.  

I have long urged that government regulators, law enforcement, mobile service providers, and data and analytics companies sit down together and engineer AML/CFT solutions before time runs out.  But so far I have been disappointed with the inaction.  That is why I applaud both the forward thinking and its implementation in Lesotho.

Originally published in Mobile Payments Today
http://www.mobilepaymentstoday.com/articles/out-of-africa-aml-compliance-for-mobile-payments/
May 18, 2015
Identification Theft and Tax Fraud

Tax time is maddening.  It is made more so by understanding that tax fraud is rampant.   According to the IRS, the amount of tax-refund fraud alone should soon reach $21 billion!  And much of the fraud involves the almost exponential growth of identity theft.  

Here are just a few examples from 2014:
  •  In Alabama, a group of co-conspirators ran a large-scale identity theft ring in which they filed over 7,000 false tax returns that claimed more than $20 million in fraudulent claims. Some of the ways the group obtained stolen identities included stealing them from places where they worked including a hospital records office, a military base, state welfare agencies, a call center, and corrections facilities.
  • In Georgia, Mauricio Warner was found guilty of filing over 5,000 false tax returns using the names and social security numbers of unsuspecting victims that were told they could submit an application for an “Obama stimulus payment,” or “Free Government Money” by giving him their names and social security numbers.
  • In Ohio, Jonathan Webster was found guilty of aggravated identity theft.  Webster purchased advertising in newspapers representing himself as a charity seeking to provide financial assistance to others.  He set up an online website where individuals could provide their names and social security numbers.  As a result, more than 500 false income tax returns were filed.

Sadly, there are many other examples of identity theft and tax refund scams including robbing nursing home patients of their identities, fraudulent tax preparation services, and international criminal organizations buying and selling stolen personal identifiers in bulk off the “dark web.”

Last year even Attorney General Eric Holder admitted to having his identity stolen.  According to Holder, “These scams are no longer just about white-collar criminals. They are carried out by a variety of actors from greedy tax return prepares to identity brokers who profit from the sale of personal information  to gangs and drug rings looking for easy access to cash.”

So what is being done to stop it?

The IRS website announces that stopping identity theft and refund fraud is a “top priority.”   IRS Criminal Investigations is the lead federal agency that investigates identity theft and is involved in more than 78 multi-regional task forces or working groups to combat the problem at the federal, state, and local levels.  In fiscal year 2014, the IRS initiated 1,063 identity theft related criminal investigations.    

Unfortunately, the IRS and its partners at the federal level including the DOJ, Secret Service, the Postal Inspection Service, the FBI and other federal law enforcement agencies are fighting a losing battle.

One of the main reasons why stolen identity refund fraud (SIRF) crimes are proliferating is because it is so easy.  In order to file a false tax return, all it takes is a name, date of birth and social security number.  

For example, the IRS accepts tax filings as soon as January 1.  Using the above basic ingredients for a scam, a fraudulent return is filed early in the year.  Employers aren't required to submit employment information to the IRS until March.  By that time, approximately half of all refunds have been paid out.  And the IRS doesn’t even begin to compare matching employer-submitted data to tax returns until the summer.   The system invites abuse.

Another reason why enforcement is not going to solve the problem is because of the high number of cases and corresponding lack of resources.   

To put things in perspective, according to the IRS, from 2008 through May of 2012, the Service identified more than 550,000 taxpayers who have had their identities stolen for the purpose of claiming false refunds in their names.   That number is on the low side because it represents only what the IRS has “identified.”  Moreover, by the IRS’ own estimation SIRF has grown exponentially the last three years.   Divide the above number of actual IRS investigations in 2014 into the total number of identified individuals that are the victims of these crimes.  

Another way of looking at it is that IRS CI has approximately 2500 investigators.  They’re stretched thin.  Subtract those that are assigned to other types of cases, supervisors, those detailed to headquarters, etc.  Divide that number into the skyrocketing number of SIRF cases.

The bottom line is that a SIRF criminal probably has a single digit chance of being identified, investigated, prosecuted and convicted!

Individual criminals and global criminal organizations know that SIRF is more lucrative than narcotics trafficking and is accomplished at far less risk!

As a former Treasury Special Agent with experience in financial crimes enforcement, I know first-hand that we do not have enough manpower and resources to solve this problem by reacting with after- the-fact enforcement.  

Rather, we need to prevent these crimes from occurring in the first place.  The solution is data and analytics. 

The IRS certainly has the data.  But we need to augment the data with 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 detect suspicious data, activity and anomalies using scoring engines that can both rate, with high degrees of statistical accuracy, behaviors that warrant possible further inquiry.   In other words, advanced analytics can near instantaneously score submissions for tax refunds.

Furthermore, predictive analytics can use elements involved in a successful SIRF cases and overly these elements on other data sets to detect previously unknown behaviors or activities, enhancing and expanding an investigator’s knowledge and productivity.   IRS CI can use this information to more effectively deploy resources.   And as an investigative tool, visual analytics can be used as 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 even the iPad.

Congress should stop being penny wise and pound foolish and give the IRS the analytic resources needed to stop SIRF in its tracks.  Concurrently, genuine taxpayers should be told that they might have to wait just a little longer for their tax returns so as to ensure filers’ true identities and prevent tens of billions of dollars of fraud. 

These common sense solutions should make everybody's tax day a little less maddening.

Note:  An edited version of this article was published May 18, 2015 in the Federal Times and is available here:
http://www.federaltimes.com/story/government/solutions-ideas/2015/05/18/analytics-identity-theft-tax-fraud/27541305/
September 17, 2014
The Symbiosis: Terror, Organized Crime, and Fraud

It was a brutal and cold blooded terrorist attack on an upscale shopping mall. The massacre of innocents was horrific. After four days of carnage, more than 60 people were killed and hundreds injured. The particularly chilling aspect of the September, 2013 violence in Nairobi, Kenya is the realization that it could happen again. Anywhere. 

The terrorists were members of al-Shabaab, a militant Somali Islamic terrorist group with ties to al Qaeda.  In 2008, the U.S. State Department designated al-Shabaab as a foreign terrorist organization.[i] Yet just a few weeks prior to the 2013 attack, Kenya designated al-Shabaab as an organized “criminal” group.”  At the time, Kenya’s Attorney General described terrorism not as a war to be fought with troops but as criminal networks in the country.[ii]   

The dual terrorist and organized crime designations demonstrate that a symbiosis is developing between organized crime and terrorist organizations.  The link has been observed around the world.  For example:
  •  The Pakistani Taliban is engaged in a variety of local criminal activities such as extortion, kidnapping, and trafficking in cigarettes to finance their activities including terror.  Sharfuddin Memon, director of a Karachi citizens’ crime watch group, described the motivations behind this activity: “The world thinks this is about religion, but that’s a mistake.  It’s about money and power.  Faith has nothing to do with it.”[iii]
  •  In Italy, prosecutor Luigi Orsi acknowledged that after September 11, a number of high-profile cases against Arab businessmen and Islamic charities faded after initial fanfare.  “I changed my vision of the problem,” he said.  “It is almost impossible to concretely connect big businessmen, charities, diplomats, money masterminds to the ‘soldiers’ in the field. There are too many filters.  So we have changed strategy.  The focus now is the street level.”[iv]
  • In the United States, police authorities have observed for years how local crime has helped finance terrorist activities.  For example, both the 1993 attack on the World Trade Center and the 1995 bombing of the Murrah Federal Building in Oklahoma City were financed in part by local crime.
Why do al-Shabaab and other terrorist groups – foreign and domestic – increasingly look to crime to finance their activities?

Since the end of the Cold War, there has been a dramatic decline in the number of countries that support and finance targeted acts of terrorism in order to achieve their national objectives.  Today only Iran continues to provide active financial and material support to terrorist groups around the world. 

Other traditional paradigms have changed.  For example, prior to the September 11 terrorist attacks, al-Qaeda reportedly received most of its financial resources from Usama bin-Laden’s personal wealth, along with contributions from wealthy Saudi and other Gulf donors.  In addition, the organization itself was centrally located, administered, directed and financed.  Yet al-Qaeda and other jihadist groups have been forced to disperse when the United States and coalition partners destroyed their base of operations in Afghanistan.  Today, their operational cells and affiliate organizations, including al-Shabaab, receive little centralized direction or funding.  

Given the decline of the historical model – that is, groups with centralized command and control receiving most of their money from “state sponsors,” evil regimes, and wealthy donors – terrorists and their supporters must increasingly rely on self-finance.  In many cases, this means turning to local crime and transnational criminal networks.[v] 

For example, al Shabaab and radical Somali warlords have earned tens of millions of dollars a year from illicit exports of charcoal to the Gulf States.  Other money comes from trafficking in poached ivory, trading in khat (a local narcotic), and informal taxes or extortion on small businesses in Somalia operating under areas controlled by al-Shabaab.  However, a substantial portion of funding originates from the worldwide Somali diaspora – including radical elements engaged in a variety of criminal activity in the United States. 

Initial reports that some Americans were among the attackers in Nairobi were not proved.  However, according to a count by the New America Foundation, 22 primarily Somali-American residents of Minnesota alone have funded or fought with al-Shabaab over the last few years. Supporters of al-Shabaab have also been found in diverse American locales such as Seattle, St. Louis, San Diego, Minnesota, Maryland, Ohio and Alabama.[vi]

Fraud has long been a favorite of organized criminal groups in the United States and around the world.  The nexus between fraud and terrorism is undisputed.[vii]   Fraud is a very broad topic, and manifests in many ways. Some of the most applicable types of fraud related to this topic include:
  • Immigration fraud
  • Identify theft/fraud
  • Intellectual property rights violations
  •  Trafficking in counterfeit cigarettes 
  • Defrauding government social programs
  • False invoicing
  • Credit card fraud and skimming
  • On-line fraud
  • Mortgage fraud
  • Medicare and healthcare fraud
  • Charitable fraud
  • Fraudulent insurance claims, staged crashes, etc. 
In the United States, experience has shown that most fraud gangs are ethnic-based.[viii]  They are Vietnamese, Chinese, Jamaican, Russian, Armenian, and Nigerian, groups from the Middle East, South Asia, varied Spanish-speaking countries, and many others. 

It is important to emphasize that the overwhelming majority of immigrants in the United States are law abiding.  Most successfully assimilate. Yet many confront cultural, linguistic, and religious obstacles.  Some harbor resentments and others seek to cash in on societal largess.  Law enforcement officials have repeatedly seen first or second generation young immigrants turn to a life of gangs and crime. Although many gravitate towards trafficking in narcotics and organized theft, increasingly it appears the crime of choice is fraud.  There are various types of financial scams that have proven very lucrative and have far less risk then trafficking in drugs.  

Some suspect networks have links with terrorist organizations. According to a report for the National Defense Authorization Act for fiscal year 2014, “The committee believes that criminal cartel organizations are hosting themselves in U.S. cities and may be teaming with terrorists also embedded in the United States to fund terror networks overseas. These networks provide sustained and substantial funding to pay operatives, support families, purchase and traffic weapons, indoctrinate and recruit new members, train, travel, and bribe officials and also perpetrate billions of dollars’ worth of fraud against banks, businesses and governments.”[ix]

Organized crime is a very broad term.  Over the years it has come to include cartels and gangs. Some groups are large and complex.  Others operate within small cells.  From a law enforcement perspective, they are almost always insular, ethnic and very difficult to penetrate.  Some are domestic in scope and others have tentacles that reach around the world.  In Italy, organized crime is sometimes called la piovra or “the octopus.”

In addition to criminal activity, many groups including al-Shabaab sympathizers in the United States also use underground financial systems to remit funds overseas.  Here again, the overwhelming percentage of immigrants use these low cost underground financial systems to send hard earned money back to their home country to support loved ones.  Law enforcement has no wish to interfere with this type of activity.  However, because these “alternative” remittance systems are non-transparent and generally avoid government scrutiny including financial intelligence reporting requirements, they are also used by both criminal and terrorist organizations. 

For example, in November, 2013 a federal judge in San Diego sentenced three Somali immigrants for providing financial support to al-Shabaab.[x]  Evidence presented during the trial showed the defendants conspired to transfer funds to Somalia through a now non-operational hawala known as the Shidaal Express.

Hawala in the United States is classified as a “money service business” or msb.  So hawala is legal but as msbs practitioners must register with Treasury’s Financial Crimes Enforcement Network (FinCEN).  Msbs must also be licensed in approximately 46 of the 50 states.[xi]  Hawaldars must also report suspicious financial activity to FinCEN.  Unfortunately, the underground, ethnic-based, opaque financial operations seldom comply with the law. 

Knowledge of underground financial systems such as hawala is important to investigators both in government and industry. Many successfully investigate fraudulent activity but are stymied in following the proceeds of the crime that are often sent outside of the country. 

Given the above, "draining the swamp" or cracking down at home and abroad on local and transnational financial crime might eventually become one of the most effective strategies to combat terrorism.  For this strategy to succeed, law enforcement, intelligence and military overseas and even commercial investigators and analysts should look beyond the immediate circumstances of a given local crime. They must learn to "ask the next question" during the course of routine investigations; “Where is the money going?”

Yet most investigators – public and private – often get caught up in the quick statistic or the quick fix. That is how they are recognized and rewarded.  They are not interested, often times not allowed, generally don’t have the training and expertise, nor have the networks to determine if the local crime they uncovered has broader implications. 

The lack of awareness is often coupled with not understanding terrorists’ link to fraud schemes.  According to Frank Perri who has written extensively about the fraud/terror nexus, “Fraud analysis must be central, not peripheral, in understanding the patters of terrorist behavior.”[xii]

Our adversaries – here and abroad - know that they need money to survive and fund their operations. They are proving adept and creative at finding new ways to access this lifeblood, including new forms of fraudulent activity.

Fortunately, over the last few years, there have been tremendous advances in the amount of data collected and sophisticated analytical tools to help fraud investigators.  

Just a few examples of helpful data sets include financial, trade, transport, and travel.  A myriad of business data exists. Communications and social media are growing exponentially. Industry calls these massive data bases, “big data."  Concurrently, there have been major advances in data mining and advanced analytical capabilities that can help organizations derive the “intelligence” from this vast amount of data.  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 government agencies and departments, as well as industry, detect suspicious activity using scoring engines that can 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 overlay these elements on other data sets to detect previously unknown behaviors or activities, enhancing and expanding an investigator’s knowledge, efforts, and production 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 helps investigators analyze 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 fraudulent methodologies or hawala.[xiii]   

In summary and going forward, our primary countermeasures should be: 1. Awareness of the growing symbiotic relationship between organized criminal groups, terror and fraud; 2. A renewed emphasis on “following the money” trails in all of their varied forms; and 3. Increased communication between government and industry; 4. Data and analytics as force multipliers.  We must do a better job of using new analytical tools to pro-actively connect the dots and thwart fraudulent activity.  

An edited version of the above article was published September 16, 2014 in ACAMS TODAY and can be found here:
http://acamstoday.org/wordpress/2014/09/16/the-symbiosis-terror-organized-crime-and-fraud/

(References available online)
August 28, 2014
Data Privacy Can Be Used For Evil, Too

 Are bitcoins and other cyber currencies the next crack in our financial armor?

In October 2001, shortly before US and coalition forces entered Afghanistan, a Pakistani journalist located and interviewed Osama bin Laden about the recent terrorist attacks against the US. Some of the journalist’s questions dealt with the plot’s financing. Bin Laden was quoted as saying that Al Qaeda and other jihadist groups were not concerned about financial countermeasures because “Al Qaeda is comprised of modern, educated young people who are as aware of the cracks in the Western financial system as they are of the lines in their own hands.”

Fast forward to 2014. Many observers feel the emergence of the Sunni extremist group ISIS in Syria and Iraq poses even more of a risk to the West than Al Qaeda. Recently, an obviously modern, educated ISIS operative published a blog post calling for jihadists to help fund operations using bitcoins – a cyber-currency.

Although bitcoins are only one tiny piece of the digital currency landscape, the way we handle them will inform our decisions for managing future cyber currencies.

What is it?
  • Bitcoin is a user payment option that works in a similar way as PayPal, Western Union, Bill Me Later and Google Wallet. There are a couple of distinctions though:
  • Bitcoin transactions don’t contain personally identifiable information.
  • The open-source software can be modified and improved by any developer.
  • Transactions are not reliant on a company, bank or government.
  • Bitcoins are accepted in far more countries than PayPal and Western Union.
  • Each transaction is digitally authenticated and no two transactions carry the same Bitcoin address.

Bitcoin allows people and businesses to trade directly with others – mostly online – without third-party involvement. Many major retailers are now accepting bitcoin, including Dell, Overstock and Expedia. And there are a growing number of bitcoin ATMs throughout the US. Bitcoin makes transactions across geographies and digital channels more convenient.

Bitcoin and other cyber currencies are popular with libertarians, technophiles, speculators, tax cheats, criminals, and now, possibly, terrorists. Although the IRS has ruled that virtual currency is treated as property for US federal tax purposes, US law enforcement and regulatory and tax agencies are struggling to decide whether or not virtual currencies are real currencies.

Bitcoin users create a bitcoin wallet to hold the currency and from which to transfer bitcoins to another user. The transactions are recorded in the public domain via blockchain. Blockchain is readily available. It anonymizes transactions to safeguard against forgery and fraud. If bitcoin users don’t take steps to anonymize their bitcoins, their transactions can be monitored.

What’s the danger?

Understanding that cyber criminals need absolute anonymity, the ISIS blogger recommends Dark Wallet . . . “a new bitcoin wallet designed to completely hide the activities of its users, providing total online anonymity. It [neutralizes] government regulation that tries to identify bitcoins through associating them with an individual’s wallets. It mixes all transactions together into an indecipherable mess, making bitcoin untraceable. This allows our brothers . . . to avoid government taxes and secretly fund the mujahedeen with no legal danger upon them.”

Dark Wallet fills the need for privacy of legitimate cyber transactions, but its primary purpose is to protect more nefarious ones. According to WIRED, Cody Wilson, one of Dark Wallet’s creators, was quoted as saying that he intends for the software to provide a “private means for black market transactions, whether they’re for non-prescribed medical inhalers, MDMA for drug enthusiasts or weapons.”

The Silk Road case provides a good example of how an online marketplace – where transactions are conducted using virtual currency – can provide a network for nearly untraceable criminal transactions. The site opened in 2011 and in those two years, the FBI estimates that it generated revenue worth more than 9.5 million bitcoins – worth at the time about US$1.3 billion. In the Silk Road case, clever cyber sleuthing by the FBI and overseas counterparts resulted in the arrest of the primary owner operator and associates in multiple countries. By and large, though, our countermeasures are still not enough to stop criminal use of cyber currencies.

What should we do?

In my first book, Hide & Seek: Intelligence, Law Enforcement and the Stalled War on Terror Finance, I argued that the US government spent an incredible amount of resources after September 11 looking for terrorist financing in many of the wrong places. Moreover, (because of bureaucratic interests and myopia) our primary countermeasure to terror finance was the Bank Secrecy Act. The law and succeeding regulations were largely unsuccessful at uncovering terrorism financing because the financial intelligence was developed to fight the War on Drugs. Unlike the War on Drugs – where large amounts of dirty money sloshed around primarily Western-style financial institutions – the War on Terror confronted comparatively small amounts of money that sometimes used opaque alternative or underground financial systems generally outside of Western scrutiny.

It was like trying to fit a square peg in a round hole. By and large, it didn’t work. As Osama bin Laden said, jihadists were aware of the cracks and the barriers and simply took prudent steps to go around them.

I’m afraid bitcoins and other cyber currencies are another crack that will be exploited by our adversaries. And this one is as wide as the Grand Canyon.

New rules and regulations are not going to solve this problem. As the 9/11 Commission said, we need to develop imaginative countermeasures.

Is there a data and analytics solution?

I recently had the good fortune of reading Chris Whalen’s master’s thesis on the “National Security Implications of Digital Currency.” Chris’ ability to provide both the context of the development of cyber currency and sketch the coming threats is impressive. Having no technical background myself, I shared his research with John Stultz, SAS Senior Solutions Architect. I asked him if there could possibly be a data and analytics solution that could provide the authorities a certain degree of transparency in monitoring dark cyber transactions.

John found the topic fascinating, and he accepted the challenge. In summary, he picked up on Chris’ observation that, “Detailed information concerning transactions can be derived through querying the blockchain.” John feels that those transactional data events could be queried in near-real time.

Chris continued, “Bitcoin wallet software, which provides access to the Bitcoin system, is available for most mobile devices and computer systems. Each device is a node on the system that is able to retrieve the same data feed as any of device on the network. Each device is subject to the same rules and processes that occur on the system. Attaching an identity to the user of the software would provide a venue for establishing beneficial ownership and control of digital currency that was derived from illicit financial activities.”

John felt this information was helpful since it implies there would be data elements that could be used for entity resolution in the absence of personal identifier information. Or there might be data elements (time stamps, user software device identifiers, log data, geo data from cell tower transmitters …) that coincides with the blockchain information (time stamps or other identifiers) that would support entity resolution in a way that would allow SAS analytics to detect behavior - who is doing what.

Quoting John’s email to me; “Law enforcement, government bodies and financial services organizations can use network analysis to build links between data entities (data from bitcoin queries or bitcoin wallet software information that is paired to an individual’s mobile device or computer system — if that information is available) to uncover hidden relationships – the context of transactions when a person’s identity is unknown.

Network analysis on this big data in a near-real time data streaming environment would support alerting and triage on behavioral patterns within the world of bitcoin transactions. It just depends on what type of data is actually available.”

John says that even at the lowest level of the bitcoin queries, agencies could identify anomalies and aberrant behaviors that could triaged and then analyzed further for possible connections.

“There could be other data environments that could help enable the alerting, such as social media, cultural unrest, news feeds on bitcoin sales activity or black market web traffic for goods being sold,” John writes. “Assumptions of geography can be made – given the time stamps of bitcoin transactions and where in the world it is day or night. There can be all sorts of ways of embellishing the data to help provide contextual analysis. This approach reminds me somewhat of how federal agencies use analytics for detecting insider trading: Behavioral indicators are generated and incongruous behavior can be quickly detected.”

Suggestion

As I said earlier, many of the major retailers are now accepting payment in bitcoin and other digital currencies. Non-profits, universities and travel agencies are also jumping on board. But even as acceptance grows, there are still outstanding concerns. For instance, although US regulators recently voted to allow political action committees to accept contributions via bitcoin, they imposed a US$100 limit. Commissioner Ellen Weintraub, a Democratic appointee, told the Washington Post, “We have to balance a desire to accommodate innovation, which is a good thing, with a concern that we continue to protect transparency in the [US political] system and ensure that foreign money doesn’t seep in.”

The above article was published August 27 in SAScom and is available here:
http://www.sas.com/en_us/insights/articles/risk-fraud/data-privacy-virtual-currencies.html
August 23, 2014
Combating Food Stamp Fraud with Analytics

In late July, two men were convicted for their participation in a fraud-based conspiracy that caused nearly $2 million in losses to the Supplemental Nutrition Assistance Program (SNAP).   In North Texas, the conspirators purchased food stamp benefits from the intended recipients in exchange for cash.  The benefits were discounted by approximately fifty percent.  The recipients could then use the cash to pay for any legal or illegal product or service they wish – outside the confines of the SNAP guidelines.

The above case follows “one of the largest food stamp frauds” in history that took place in June. Dozens of suspects were involved in funneling approximately $18 million worth of food stamps through grocery and convenience stores throughout Georgia.  As in the North Texas case, conspirators bought benefits from the intended beneficiaries for a fraction of their face value.  The defendants then allegedly laundered the criminal proceeds received from the scheme. 

According to the U.S. Department of Agriculture (USDA) that administers SNAP, approximately 46 million people receive SNAP benefits and in fiscal year 2012 $86.5 billion was appropriated to the program.  Additional billions were appropriated to the Women, Infant, and Children (WIC) benefit program.  The growth of these programs has skyrocketed in recent years due to the Great Recession, continuing economic malaise, and the growth of entitlement programs in general. 

Unfortunately, the issue of fraud and food stamps has become politically charged.  However, all fair minded people should agree that the vast majority of people on SNAP need assistance.  Conversely, we should also agree that fraud exists.  And in a program as large as SNAP, we are talking about very large amounts of wasted taxpayer money. 

According USDA statistics, the “trafficking rate in SNAP has dropped dramatically” from about four cents on the dollar in 1993 to about 1.3 percent in 2011.  So using USDA’a own numbers, SNAP fraud totals at least $1 billion of taxpayer money. 

But how much fraud is truly involved?  The exact number is impossible to determine because complete data doesn’t exist and the devil is in the details.  For example, the USDA statistics only reflect fraud that is actually identified - such as the trading of SNAP benefits for cash cases highlighted above.  In other words, officially SNAP fraud is what authorities catch.  Currently, there are no reliable estimates on the amount of fraud that is not recognized.

In fact, most experts think the majority of the fraud occurs when individuals game the system and claim benefits for which they are not entitled.  Or legitimate SNAP recipients’ status changes.  For example, somebody finds a job, gets a better job, gets married, inherits money, or gains from other life changes.  Their level of income is altered and recipients no longer qualify for the program or should receive reduced payments. And level of income obviously does not include money earned under the table.  Moreover, claims of identity, family size, and assets are seldom corroborated and home verification visits are rarely made.   

That is because the SNAP program relies primarily on self-enforcement.  The SNAP client is supposed to notify USDA of changes in their status.  Some do.  Obviously, others commit fraud and continue to receive benefits.  Periodic “recertification” processes are mostly a bureaucratic exercise.  Most interviews are conducted over the phone and little documentation is required. 

In addition, there are indications that SNAP benefits are traded and sold on Craigslist, eBay, Facebook, and Twitter.  Moreover, SNAP recipients receive electronic benefits transfer (EBT) cards through their states and the cards are replenished monthly.  The EBT card does not use photo identification which invites misuse.  And a recipient can report a card lost or stolen and still receive his or her food stamp benefits. 

And of course, the SNAP and WIC programs – like all large government and private programs – suffer an unknown “payment error rate” due to internal missteps or bureaucratic incompetence.

In short, it is certain that the actual SNAP fraud rate is far in excess of official pronouncements.

Although state agencies are increasingly empowered to help crack down on SNAP fraud, the onus falls on USDA where authorities are adamant that there is “zero tolerance” for fraud in the SNAP program.   However, according to the same USDA, there are only approximately 100 analysts and investigators nationwide that monitor the $90 billion program.  After subtracting management and support personnel, the number is lessened further.  For example, USDA claims that in FY 2012 its enforcement arm reviewed over 15,000 stores and conducted nearly 4,500 undercover investigations.  Simple division demonstrates that the majority of these reviews and investigations are cursory in nature. 

Fortunately, the USDA is committed to using the latest in available technology to monitor and limit the abuse of the SNAP program.  EBT gives the USDA data to audit and identify suspicious activity for analysis and possible investigation.   But this is not enough.  We have to move beyond “pay and chase” to prevention.  Fraudsters take advantage of the federal government’s inability to connect the dots between state and federal government databases that contain such information as beneficiary and retailer information, financial intelligence, retail store sales taxes, wage taxes, income tax, corporation records, driver’s licenses, business licenses, criminal records and deportations. Connecting the dots is what’s required to identify anomalies and fraud patterns, as well as match and link the malignant social network. It is often the patterns and conduct of the recipients and their relationships with the retailers that are the earmarks of a fraudulent food stamp ecosystem.

Today’s powerful analytics enables a hybrid approach, which integrates knowledge of existing schemes, powerful predictive analysis capabilities, and modeling of relationships among entities in the benefits system to recognize fraud earlier in the process – and even stop it before it occurs. While each method is limited when used separately, together they present a formidable deterrent to fraud that can lead to the detection of these crime rings much, much sooner.

Through Improved data integration, rules-based algorithms, anomaly detection, predictive modeling, and social network analysis (SNA), it is possible to identify the kinds of fraudsters and crime rings plaguing the USDA’s food stamp program.

The administration, congress, and the USDA should agree to take politics out of the discussion and work to ensure benefits go to those that need them and, at the same time, protect the American taxpayer from fraud.  With the amount of money involved, being satisfied with an artificially low fraud rate that reflects what authorities catch is both misleading and a disservice to all.  Given the reality and priority of USDA enforcement, advanced robust analytics that focus on fraud detection and prevention is well worth the investment.

A shorter version of the above was published August 22, 2014 in NextGov: 
http://www.nextgov.com/emerging-tech/2014/08/rooting-out-food-stamp-fraud-advanced-analytics/92060/
April 7, 2014
Bulk Cash Smuggling

Gold-plated handguns.   Million dollar pieces of art.  Exotic wildlife.   These and other ostentatious symbols of “wealth” were reportedly found at some of the properties formerly owned by Joaquin "El Chapo" Guzman – Mexico’s top drug “kingpin.”  But it was the bulk cash, mostly in carefully stacked $100 notes, that caught my attention.   Reports from Mexico speculate the money recovered was in the billions.  While that number is hard to digest, there can be no doubt that before his February 21 arrest, the former “godfather” of the Sinoloa Cartel controlled an organized criminal enterprise conservatively estimated at having $3 billion in annual revenue.

According to experts at the Financial Action Task Force (FATF), bulk cash smuggling is one of the three principal international money laundering methodologies.  “Bulk cash” refers to the large amounts of currency notes that criminals accumulate as a result of various types of illicit activity – particularly narcotics trafficking.  “Smuggling,” in the context of bulk cash, refers to money launderers subsequent attempts to physically transport the cash from one country to another – for example from the United States to Mexico – where it is easier to launder.  Congress criminalized the act of smuggling large amounts of cash as part of the USA PATRIOT Act.

Sometimes lost in the hyperbole of discussion about transnational crime is the fact that criminal organizations are motivated by greed.  The Sinola Cartels does not traffic in drugs for the sake of drugs.  The cartel’s – and other organized crime groups’ – objective is to make money.   And trafficking drugs is highly profitable. 

While estimates of U.S. narcotics sales vary widely from $50 - $100 billion annually, $100 billion in drug sales may generate as much as 20 million pounds of currency!  As a result, those that launder narcotics proceeds have a logistics problem.   

Gone are the early days portrayed in Miami Vice where a money launderer acting for the drug kingpins could simply walk into a bank in the U.S. with a suit case full of cash and deposit it into a bank with no questions asked.   It would also have to be a big suitcase.  For example, a money launderer attempting to deposit $1 million in $100 bills would have a stack of cash standing five feet high and weighing more than 20 pounds!  Smaller denominations would make the transaction even more absurd.  It takes fifty thousand $20 bills, weighing more than 100 pounds, to make $1 million. 

So because of the logistics issues involved coupled with mandated financial transparency reporting requirements imposed on financial institutions by the U.S. government, narcotics trafficking organizations increasingly try to smuggle bulk cash into jurisdictions such as Mexico where “placing” their ill-gotten gains into financial networks is much easier.

How do they smuggle the cash?  The techniques are only limited by the criminals’ imaginations.   I have collected photographs of dozens of different smuggling techniques.  Some of the most common include:
  • Bulk cash that is simply driven across the border via cars and trucks.  In some cases it is concealed in spare tires, gasoline tanks, seat cushions, floor boards, and car panels.
  • Tanker trucks or similar vehicles that have false bottoms or altered gasoline or water tanks.
  • Currency is concealed in shipping containers, whether freely or secreted in other items.
  • Bulk cash is hidden in a variety of consumer goods such as boxes of cereal and other food stuffs, teddy bears, dolls, boxes of cigarettes, detergent, baked into bread, stuffed into air compressors, tools, furniture, sports equipment, flowers, produce, etc.
  •  Bulk cash couriers sometimes tape currency on their bodies or use special smuggling vests, girdles, belts and even pantyhose.
  • Similar to narcotics smuggling, cash is also concealed in body cavities.  Smugglers also swallow condoms filled with tightly rolled cash.
  • Bulk cash is frequently found in passengers’ briefcases, suit cases, duffle bags, and so forth.
  • Cash is sometimes found in the lining of coats and other garments.
  • Cash is also shipped via mail and commercial delivery services.

So how have we done? Although a variety of law enforcement agencies play a role in detecting and intercepting bulk cash smuggling, Homeland Security Investigations’ (HSI) Immigration and Customs Enforcement (ICE) and DHS’ Customs and Border Protection (CBP) are most active.  In fiscal year 2013, ICE special agents arrested over 520 individuals who were attempting to smuggle currency and seized more than $59 million in bulk currency or monetary instruments.  From March 2009 – February 2011, CBP seized $67 million worth of bulk cash.  While in 2010, bulk cash seizures in Mexico totaled about $40 million. 

Other federal, state and local law enforcement officers also intercept bulk cash during routine police work.  Atlanta, Phoenix, Chicago, Seattle and other major cities are hubs for narcotics trafficking.  For example, trucks carrying contraband from Atlanta can reach more than 80 percent of the U.S. population within two days; meanwhile, cash often moves the opposite direction.  Smuggled funds, sometimes as much as $10 million in a single shipment, are found in all manner of vehicles transporting legitimate goods headed for border ports.  Sometimes the drivers are not even aware of their cash cargo.

Despite the valiant efforts by our law enforcement professionals to stem the tide, buttressed by new initiatives such as regional task forces and HSI’s National Bulk Cash Smuggling Center, the bottom line is not good.  Although the metrics are not precise, according to the government’s own numbers we are probably intercepting less than one percent of the billions smuggled across our southern border every year. Moreover, a small army of individuals are involved with the logistics of this trade.  Their chances of getting caught, prosecuted, and convicted are remote at best.

These statistics are even more sobering because bulk cash smuggling is the most straight forward of money laundering investigations.  We are not talking about complex money trails layered via off shore havens, tracking trade-based laundering schemes, or tracing virtual currencies in cyber space.  At its core, bulk cash is a physical commodity (money) that generally moves from point A (U.S. side of the border) to point B (Mexican side of the border).  It’s not complicated. 

A one percent interception rate represents failure.  Yet from the cartels’ perspective, a one percent interception rate is effective and an inexpensive cost of doing business.  More importantly, the uncontrolled hemorrhage of billions of dollars of untaxed drug proceeds that flow into the coffers of organized criminal organizations directly fuels massive crime, corruption, and violence in Mexico that is spreading to parts of the United States.  Simply put, our inability to put a dent in bulk cash smuggling is a national embarrassment.

The U.S. government is fully aware of the problem.  In fact, bulk cash smuggling was prominently featured in the last (2007) National Money Laundering Strategy.  The “action items” in the report, centered on traditional law enforcement countermeasures such as increased intelligence, coordination, border inspections, etc., have proved wholly inadequate.  In 2013, the U.S. Senate Drug Caucus released an excellent report on improving U.S. anti-money laundering practices.  The report notes that bulk cash smuggling continues to be a primary money laundering technique and that our counter-measures have been ineffectual.

Isn’t it time to try something new?  There will never be enough customs inspectors and criminal investigators in the fight against international money laundering.  And personnel are very expensive. But better use of data and technology can be a modern day force multiplier. There have been tremendous advances in the amount and variety of data collected. Financial intelligence, travel and trade records, motor vehicle data, criminal intelligence reports are just a few examples of “big data” sets available to law enforcement agencies.  Predictive analytics, financial fraud frameworks and social network analytics are new capabilities that can help law enforcement more efficiently target.

For example, our border with Mexico is 1,933 miles; with Canada it is 3,987. The United Sates has 329 official points of entry (land, sea, and air).  Over 100,000 people cross the San Ysidro border between Mexico and the United States daily.  Approximately, 4,670 twenty foot equivalent shipping containers leave the port of Long Beach daily. Which passenger, vehicle, container is singled out for inspection? 

There are exciting developments in an emerging breed of software that can explore and analyze data to help uncover unknown patterns, links, opportunities and insights that can drive pro-active, cause-based decisions. Often referred to as “predictive analytics,” it is now available to help law enforcement sort through large volumes of data to predict the likelihood of targeted activity.  A limited pilot program has proved very successful in intercepting narcotics flowing north from Mexico into the United States.  I believe this same technology could revolutionize law enforcement decision-making at the border by increasing our odds of identifying, intercepting, and seizing bulk cash.

The bottom line in this era of diminishing resources is that predictive analytics could boost efficiency and the odds of success.  With bulk cash smuggling, if we simply improve our “success” rate a percentage point or two, we will realize gains of muli-hundreds of millions of dollars.  Let’s give it a try.

A shorter version published April 7, 2014 in Nextgov:
http://www.nextgov.com/technology-news/tech-insider/2014/04/how-big-data-could-help-law-enforcement-catch-bulk-cash-smugglers/82048/
November 1, 2013
Delaware, Den of Thieves?

OUTSIDE of crimes of passion, criminal activity is typically motivated by greed. 

As a special agent for the Treasury Department, I investigated financial crimes like money laundering and terrorism financing. I trained foreign police forces to “follow the money” and track the flow of capital across borders. 

During these training sessions, I’d often hear this: “My agency has a financial crimes investigation. The money trail leads to the American state of Delaware. We can’t get any information and don’t know what to do. We are going to have to close our investigation. Can you help?" 

The question embarrassed me. There was nothing I could do. 

In the years I was assigned to Treasury’s Financial Crimes Enforcement Network, or Fincen, I observed many formal requests for assistance having to do with companies associated with Delaware, Nevada or Wyoming. These states have a tawdry image: they have become nearly synonymous with underground financing, tax evasion and other bad deeds facilitated by anonymous shell companies — or by companies lacking information on their “beneficial owners,” the person or entity that actually controls the company, not the (often meaningless) name under which the company is registered. 

Our State and Treasury Departments routinely identify countries that are havens for financial crimes. But, whether because of shortsightedness or hypocrisy, we overlook the financial crimes that are abetted in our own country by lax state laws. While the problem is concentrated in Delaware, there has been a “race to the bottom” by other states that have enacted corporate secrecy laws to try to attract incorporation fees. 

The Financial Action Task Force, an international body that sets standards for the fight against money laundering, terrorist financing and other threats to the international financial system, has repeatedly criticized America for failing to comply with a guideline requiring the disclosure of beneficial ownership information. The Organization for Economic Cooperation and Development, with which the task force is affiliated, has championed international standards for financial transparency, but cannot compel compliance. 

Watchdog groups like the Organized Crime and Corruption Reporting Project, Global Financial Integrity and Global Witness say that anonymous companies registered in the United States have become the vehicle of choice for drug dealers, organized criminals and corrupt politicians to evade taxes and launder illicit funds. A study by researchers at Brigham Young University, the University of Texas and Griffith University in Australia concluded that America was the second easiest country, after Kenya, in which to incorporate a shell company. 

Domestic law enforcement agencies are as stymied as foreign ones. In one case I worked on, American investigators had to give up their examination of a Nevada-based corporation that had received more than 3,700 suspicious wire transfers totaling $81 million over two years. The case did not result in prosecution because the investigators could not definitively identify the owners. 

Anonymous corporations are not only favored tools of criminals, but they also facilitate corruption, particularly in the developing world. A recent World Bank study found that the United States was the favored destination for corrupt foreign politicians opening phantom companies to conceal their ill-gotten gains. 

Last month, Representatives Maxine Waters of California and Carolyn B. Maloney of New York, the top Democrats on the House Financial Services Committee, introduced legislation that would require United States corporations to disclose to the Treasury Department their beneficial owners. On Thursday, Prime Minister David Cameron of Britain went even further, announcing that a planned national registry of companies’ true owners would be open to the public, not just to law enforcement authorities. 

The proposal enjoys support from law enforcement experts like Dennis M. Lormel, who led the F.B.I.’s efforts against terrorism financing after 9/11, and the former Manhattan district attorney Robert M. Morgenthau (and his successor, Cyrus R. Vance Jr.). 

While officials in Delaware, Wyoming and Nevada talk about their corporate “traditions,” I am unimpressed. Business incorporation fees have accounted for as much as a quarter of Delaware’s general revenues. It’s no surprise that officials in Dover and Wilmington want to protect their state’s status as a corporate registry, but if that means facilitating criminal activity, their stance is a form of willful blindness. America must require uniform corporate-registration practices if it is to persuade other nations to cooperate in the fight against financial crimes.

Originally published November 2, 2013 as an op-ed in the New York Times;
http://www.nytimes.com/2013/11/02/opinion/delaware-den-of-thieves.html?ref=opinion&_r=1&&pagewanted=print
Social Media Provides Data for Unraveling Illicit Financing Schemes

As individuals and groups become more dependent on social media for communication, it’s not surprising that law enforcement agencies are finding the information obtained from social networking sites increasingly valuable.

To some, the stream of data gleaned through social media analytics is on par with human intelligence or signals intelligence. 

The reason is simple: Social media sites have experienced exponential growth in recent years. Facebook, for example, registered approximately 350 million users worldwide in 2010; by 2013 the number jumped to over 1 billion. YouTube, a popular video-sharing site, has over 4 billion views worldwide per day. Twitter grew from 75 million registered users in 2010 to approximately 500 million users in 2013.

The trend isn’t limited to law-abiding citizens. Criminals, organized crime syndicates, gangs and terrorists also use social media. They post information and share photos and videos, and terrorist groups use the tools to recruit new members, disseminate propaganda and solicit funds. 

It is only logical that law enforcement agencies have been combing these sites to intercept information about criminals’ whereabouts, activities and assets. Useful information is available from platforms like Facebook, Tumblr, bulletin boards, user groups, and even Craigslist can provide useful insights.

Over the last 25 years, my interest has been countering financial crimes -- particularly money laundering and terrorism financing. I have heard advanced analytics described as the “art of the possible.” Could social media -- or “socint” -- combined with exciting new developments in analytics be a valuable new source of information to help combat illicit finance?

Before we explore the possibilities, there are a few caveats. This topic is so new that examples, at least in the public domain, are not available. Another issue is the range of internal government agency and departmental permissions and legal restrictions that govern the use of social media at the federal, state, and local levels. There are significant privacy and profiling concerns. And finally, social media data and analytics should only be considered as one more investigative technique or tool. It is not the silver bullet solution many seek. 

Very broadly speaking, there are three types of financial crimes investigations: reactive, proactive, and strategic.

In reactive investigations, the violation has already occurred. For example, an informant tells a criminal investigator that Subject X is trafficking narcotics in the local community. To launder the proceeds, Subject X establishes the ABC Front Company.

After receiving the allegations, one of the first things the criminal investigator is going to do is check various data bases to see if there is any information about Subject X or the ABC Company. The investigator might check appropriate law enforcement, financial, and commercial databases for additional information. The data may indicate Subject X has a prior criminal record. Or maybe the investigator discovers information that casts doubt on the source.

Checking social media postings and profiles could be a useful next step. Sometimes a suspect posts information boasting of a new car purchase or discussing details of planned foreign travel. Law enforcement can also use social media to help identify a criminal’s networks, friends, and associates.

In proactive analysis, a violation of law has not occurred but the criminal investigator is preemptively searching for potential violations. For example, years ago I was based in the U.S. embassy in Rome. I worked with Italian law enforcement colleagues combating Italian-American organized crime by examining the flow of money between Italy and the United States. By identifying anomalies in the data and cross-referencing the individuals involved with law enforcement records, we often would spot subjects associated with the mafia. We did not know if criminal activity was occurring, but proactively we identified likely targets for further inquiries both in Italy and the United States.

Criminal investigators could use advanced social media analytics the same way. By focusing on financial keyword or taxonomy searches and cross-referencing suspect or egregious references with appropriate databases, likely targets of investigation could be identified. 

Transient social media content can be a valuable information asset. Analysts are able to continuously monitor, capture and integrate online and social conversation data. Social media could allow financial crimes investigators to proactively identify new topics and content categories, and determine their relevance to current topics and individuals of concern.

Strategic financial analysis focuses on the big picture hoping to identify patterns, methods, and trends. For example, a few years ago, the Islamic Army in Iraq appealed to sympathizers via both traditional means and social media sites to solicit donations by using a new regional online payment provider. Officials can use this type of social media driven intelligence to gain insight, investigate, construct countermeasures, and refocus resources.  By warehousing the data long enough, it is possible to spot new developments and change analysis over time.

Reactive, proactive, and strategic analysis holds promise. Yet potentially the most exciting breakthrough is that, for the first time, socint offers financial crimes analysts and investigators access to contemporaneous information. This could offer an entirely new level of insight.

By monitoring unstructured social media, such as tweets, status updates, and blog posts, valuable insights can be gleaned. Commercial enterprises do this now to gauge the intentions of their customers, suppliers, partners, employees, and competitors. Law enforcement and intelligence officers concerned with threat finance could use the same techniques. Socint has the potential to be a game-changer.

John A. Cassara, a former intelligence officer and Treasury Department special agent, is author of several books on money laundering and terror finance and is an industry adviser to SAS Federal LLC.

Originally published in NextGov, August 30, 2013.
http://www.nextgov.com/voices/john-a-cassara/2390/
Financial Crime Fighting for the Experts

In an unprecedented global financial probe, federal officials  announced in May they had shut down a digital currency website operating a $6 billion money-laundering network.   The scheme was neatly summarized by one investigator as “a PayPal for  criminals,” a shadow online banking system used to conduct illegal transactions  and launder the proceeds.
 
It was a groundbreaking investigation by the Global Illicit  Financial Team, which consists of Immigration and Customs Enforcement’s Homeland Security Investigations directorate, the Secret Service and the Internal Revenue Service’s Criminal Investigations Division. Search and arrest warrants were served in seven countries and the assets of Liberty Reserve  frozen.
 
Globally, an estimated 1 million people used the site to conduct more than 50 million illicit transactions, making it the largest  money-laundering case in history. The impact is far-reaching given the precious few major financial law enforcement breakthroughs since the Sept. 11, 2001, terrorist attacks. Unlike other recent headline-making regulatory cases, like the HSBC bank money-laundering scandal in 2012, arrests were made, criminal proceeds will be recovered and people will be held accountable. 
 
Despite the challenges involving venue and jurisdiction, the case tapped widespread U.S. and international law enforcement cooperation. Going forward, the Global Illicit Financial Team is an example of what could be --  with the right agency at the helm.
 
In the rush to react to Sept. 11, politicians from both parties scrambled to create the Homeland Security Department. Since then, operational  problems at DHS have been widely chronicled, and the behemoth department has not lived up to its initial billing. his has been particularly true in combating international money laundering and its inverse partner terrorist finance.  
 
The Treasury Department, the IRS’ parent agency, by definition focuses on financial matters including 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.
 
When DHS was formed, Treasury’s 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. At Justice and DHS, money laundering is addressed as a subset of other crimes, such as bank robberies, white-collar fraud and narcotics rings. 

Treasury is able to develop strategies, policies and regulations  in the fight against money laundering and terrorist financing, but it lacks the investigative resources to implement and enforce those policies. The domestic financial sector views Treasury as its natural government partner, and such relationships with industry should not be weakened. 
 
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 Global Illicit Financial Team should at least be embedded as a nimble state-of-the-art financial crimes task force under the Treasury banner.
 
Using the resources 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, domestic and international enforcement and regulatory networks, and financial expertise -- real progress can be made in combating large scale and complex financial crimes.

Originally published in Nextgov, July 19, 2013; 
http://www.nextgov.com/emerging-tech/2013/07/analysis-leave-financial-crime-fighting-experts/67085/#disqus_thread
Combating Blood Money with Big Data

“Illicit proceeds from crime are blood money, and blood money  should have no place in the U.S. financial system.” That was the conclusion of a  report released in April by the Senate Caucus on International Narcotics Control. The best defense against those illicit financial networks? Big data.
 
In 2009, an estimated $1.6 trillion -- 2.7 percent of global  gross domestic product -- was laundered worldwide, including hundreds of billions of dollars in the United States. The Senate Drug Caucus makes clear that much more must be done to combat illicit financial transactions.
 
Federal officials have acknowledged that U.S. anti-money  laundering efforts, measured in convictions and forfeitures, are abysmal. David Cohen, the Treasury Department’s undersecretary for terrorism and financial   intelligence, recently announced that the Obama administration will conduct a   wide-scale review of regulations under the 1970 Bank Secrecy Act.
 
The report notes gaps in the government’s anti-money laundering  framework and calls for stronger Justice Department action, stricter disclosure  rules for the formation of shell companies, cross-border reporting requirements for prepaid bank cards, and tougher enforcement of the 2007 National Money Laundering Strategy.
 
But the most striking recommendations tap data and analytics as  the critical countermeasures to money laundering and terrorist financing. For starters, the report calls for better data  collection.
 
Whether it’s processing the 18 million pieces of financial  intelligence filed with Treasury each year, monitoring suspicious transactions, compiling suspicious telephone and license plate numbers, mining law enforcement and intelligence reports, or monitoring social media -- data must  be collected. Data also must be formatted, analyzed and visualized.
 
“Far too little is known about the financial structures and procedures of drug trafficking organizations, particularly those from Mexico,” the report says, adding that efforts to understand drug trafficking finances are “severely lacking” on both sides of the border.
 
With the right reporting requirements, advanced analytics can  help solve that problem. Rather than expecting analysts to know precisely what to look for, built-in alert systems can proactively identify, prioritize and  present information to analysts based on pattern identification and quantification of risk.
 
The Drug Caucus says law enforcement and regulatory agencies should prioritize major investigations that target money laundering facilitators -- meaning data should be ranked and scored. By using predictive analytics, law enforcement officials can maximize scarce resources and staff to identify critical investigations.
 
Agencies also need to do a better job of examining the “volume of  international trade and the prevalence of trade-based money laundering schemes,”  the report says. This requires state-of-the-art software that can spot anomalies  indicative of trade fraud or trade-based money laundering. The anomalies could  open a back door to underground financial systems such as hawala and the black  market peso exchange, both of which have been singled out for scrutiny by the  Drug Caucus. Trade-based money laundering and hawala are frequently linked to terrorism both overseas and in the United States. 
 
“In a time of fiscal constraint, improving our anti-money  laundering laws will serve the dual purpose of combating transnational organized crime while also bringing much needed revenue back to the United   States Treasury,” the report says.
 
In short, cracking down on the torrent of blood money makes good  sense and is good policy. Because of the exponential growth in data, combined  with recent advances in analytics, law enforcement agencies have an opportunity to hit criminal organizations where it matters most -- in the pocketbook.  
 
John A. Cassara, a former intelligence officer and Treasury Department special agent, is author of several books on money laundering and terror finance and is an industry adviser to SAS Federal LLC

Originally published May 22, 2013 in Nextgov http://www.nextgov.com/big-data/2013/05/op-ed-combating-blood-money-big-data/63503/?oref=river
Losing the War on Drugs

It has been four decades since President Nixon declared a war on drugs. But by conventional standards, the effort has failed. In fact, the Justice Department’s 2011 National Drug Threat Assessment noted “the overall availability of illicit drugs in the United States is increasing.” 

During the Nixon era, the importance of following the money  became apparent in the drug war. The 1970 Bank Secrecy Act was designed to give criminal investigators better tools to identify proceeds from the sale of illicit narcotics. But while drug interdiction continues to receive recognition and scrutiny, the asymmetric financial battles receive surprisingly little attention.

Criminals traffic in narcotics as a means to an end -- money. The collective federal, state, local and international record on following dirty money, stopping illicit proceeds and punishing money launderers is abysmal.

Government data on illicit financial networks have been  notoriously imprecise and lacking, but startling nonetheless. The United Nations Office on Drugs and Crime estimates that $1.6 trillion -- 2.7 percent of global gross domestic product -- was laundered in 2009. Financial flows related to drug trafficking and other related transnational organized crime have been pegged at $580 billion.

The Office of National Drug Control Policy estimates that Americans spend $65 billion per year on illegal drugs. Others believe the number is more than $100 billion. This insatiable appetite for narcotics coupled with a sizable economy makes the United States the most prolific money laundering country in the world.

National drug control officials estimate that law enforcement agencies seize $1 billion per year. That’s a success rate of only 1.5 percent. The United Nations office reports less than 1 percent of illicit global financial flows are being seized and frozen.

The Government Accountability Office estimates $39 billion in drug money is smuggled across the United States’ southern border each year. Of every $100 that goes south, U.S. law enforcement officers intercept only 25 cents. Particularly shocking is that smuggling illicit proceeds into another country or jurisdiction is arguably the simplest laundering methodology.

This failure of enforcement has consequences. In addition to the human and societal devastation caused by drugs, the tens of billions of dollars smuggled fuels international drug cartels.

Conviction rates are spotty and difficult to obtain, but the interagency National Money Laundering Strategy, released in 2007, reported only 1,575 money laundering convictions at the federal level in fiscal 2004. This encompasses prosecutions related to all serious crimes, not just drug trafficking. Analysts also have reported that the risk of conviction for money launderers in the United States is less than 5 
percent.

Some believe eye-catching actions against major banks can force change. In a recent case, HSBC, one of the world’s largest financial institutions, was fined $1.9 billion for failing to pursue anti-money laundering within its branches. But actions such as these are regulatory. The $1.9 billion will be taken from HSBC shareholders, not from drug traffickers, and no one will be prosecuted.

Despite the disappointments, there are ready countermeasures. The National Money Laundering Strategy provides an excellent roadmap. Signed by the secretaries of the Homeland Security, Justice and Treasury departments, the document identifies threats and lays out comprehensive action plans.

Unfortunately, little progress has been made since the strategy was published. Congressional oversight committees should call hearings or send letters of inquiry to the agencies involved. Lawmakers should ask for an accounting of enforcement actions and insist on a renewed commitment to stamping out money laundering.

In November 2012, David Cohen,Treasury’s undersecretary for terrorism and financial intelligence, announced the Obama administration will conduct an assessment of anti-money laundering efforts and the effectiveness of regulations. The Senate Drug Caucus is similarly engaged.

There will never be enough criminal investigators in the fight against international money laundering, but better use of data and technology can be a modern day force multiplier. There have been tremendous advances in the amount and variety of data collected. Financial intelligence, travel and trade records are just a few examples of the big data available to law enforcement agencies. Data warehousing, predictive analytics, financial fraud frameworks and social network analytics are new capabilities that can help agencies derive meaningful operational intelligence.

It’s time for government to recognize the collective shortcomings in the war against drug-money laundering and rededicate its resources to 
enforcement.

Originally published in Government Executive; February 20, 2013
http://www.govexec.com/management/2013/02/analysis-losing-war-drugs/61403/?oref=dropdown
Predictive Analytics: The Future of Successful Law Enforcement?

Criminal investigators and their managers are engaged in a  constant struggle to identify and pursue successful investigations. For example, today's complex financial fraud cases sometimes take years to complete. From a management point of view, it is a tremendous investment. They can't afford to waste scarce resources that lead to investigative dead-ends. 

What most outsiders do not realize is that a very large  percentage of investigations are unsuccessful. 

Although commentators argue the point, the bottom-line metric that quantifies success for law enforcement is the number of investigations that result in successful prosecutions and convictions. Another key metric for certain crimes is criminal assets forfeited. It is hoped that those numbers will correlate to deterrence. 

Within law enforcement, there is a subtle and sometimes selective weeding of cases that are chosen to be pursued. For example, cases are constantly by-passed or bureaucratically pigeon-holed because of issues of jurisdiction or venue. Resource constraints, departmental policy and sometimes even political considerations are also considered. 

In my law enforcement career, I was frequently frustrated when a promising case was rejected for prosecution by an assistant U.S. attorney because it did not meet the vagaries of "prosecutorial merit," including a dollar threshold (how much money was actually lost in the alleged criminal acts).  For example, in a September 2012 report, the Institute of Medicine estimated that criminal health care fraud costs taxpayers approximately $75 billion a year.

Yet depending on the jurisdiction and extenuating circumstances, prosecutors could impose a limit that unless more than $1 million dollars of Medicaid fraud has been committed, a case would simply not be accepted. Or  sometimes long-term, complex, financial-crimes investigations are not accepted for prosecution because the case is simply too hard to understand or difficult to put together. And, of course, prosecutors always want cases that have jury appeal.

At the same time, the situation is becoming increasingly complex because more and more data is being made available to criminal investigators. To take just one example, about 18 million pieces of financial intelligence or Bank Secrecy Act data are filed with the Treasury Department every year. This paper trail often helps law enforcement analysts and investigators follow the money. Other big data sets include law enforcement records, commercial database entries, travel and immigration records, trade data, and motor vehicle registration information. However, turning increasingly large amounts of data into useful insights and discovering future successful cases remain a challenge.

Yet despite the challenges and constraints, every law enforcement agency or department has many examples of successful cases. They might involve narcotics smuggling, white-collar fraud, stolen vehicles, weapons trafficking, welfare fraud, counterfeit identification or intellectual property rights violations.

Successful cases tend to have common denominators. Some of the criteria include the way or method in which a case was initiated, data sources, investigative techniques used and successful prosecutorial strategy. These winning cases could act as models or templates for future cases.

A way to improve this process is with an emerging breed of software that can explore and analyze data to help uncover unknown patterns, links, opportunities and insights that can drive pro-active, evidence-based  decisions. Often referred to as “predictive analytics,” it is available to help law enforcement sort through big  data sets to find nearly identical data elements that match successful cases. I believe this technology could revolutionize law enforcement decision-making. 

For example, data elements in a human trafficking case in Los ngeles could be matched to a similar, successfully completed case in South Florida. Investigators and their managers in California would feel confident initiating a costly investigation knowing that a similar case proved successful  and that they already have an investigative road map.  

The next step in the process is prosecution. According to a ranking Justice Department official, prosecutors generally do not use empirical data in case selection. Rather, the case has to "feel right." The official continued that case selection is currently "more art than science." 

Using predictive analytics as a state-of-the-art decision-making tool can help prosecutors feel more confident about prosecuting a case. They will know beforehand that the case has been vetted, initiated and investigated using elements that proved successful in the past.

The bottom line in this era of diminishing resources is that predictive analytics could boost productivity for criminal investigators and prosecutors. It could fundamentally transform the way cases are selected, investigated and prosecuted. 

About the Author:  John A. Cassara spent more than 25 years as an intelligence officer and Treasury Department special agent, and he has 
written several books on money laundering and terror finance. He is an industryadviser to SAS Federal LLC. 

Originally published Government Computer News;  January 18, 2013
http://gcn.com/articles/2013/01/18/predictive-analytics-successful-prosecution.aspx 
We Must Clean Up our Act on Money Laundering  

HSBC has set aside $700m to cover possible fines for money laundering. Walmart is facing new allegations from the US Congress that it too was involved in such practices in Mexico. Since the financial crisis, many US banks, such as Wachovia and Citigroup, have run afoul of laundering rules. 

Regulators investigate. Hearings are held. Headlines are generated. Reputations are tarnished. But where is the outrage over the day-to-day money laundering that is much greater in size and scope than the alleged practices by the banks?

The International Monetary Fund has estimated that money laundering worth about $3.5tn occurs each year, roughly the amount spent annually by the US federal government.

Money is laundered in many ways but experts tend to identify three main mechanisms: via financial institutions; bulk-cash smuggling across borders; and via traded goods.

The US approach to money laundering by financial institutions is principally to demand transparency in reporting. The system works, by and large. The HSBC case is an apt example – regulators pursued the bank because of problems with its own reporting and due diligence.

But what about the record of the US and other countries to combat other forms of money laundering?

In the US, criminals launder tens of billions of drug dollars every year by simply smuggling it out of the country. The preferred destination is Mexico. The proceeds of narcotics trafficking is fuelling a conflict that has killed thousands of people. But a US Treasury programme aimed at starving Mexican drug cartels of cash has blocked only a few million dollars. Out of every $100 that is smuggled across the southern US border, officials seize a mere 25 cents, according to an investigation by the Associated Press.

In Afghanistan, more than $1bn in bulk cash flows leave the country every year. Most of the money is destined for Dubai, where many wealthy Afghans park both their families and funds. US officials estimate that the amount of cash leaving Afghanistan exceeds its annual tax and other revenue.

Elsewhere, the US Treasury has identified complex schemes to launder the proceeds of the narcotics trade in Europe, Africa and Asia. In each case, the problem is exacerbated by large-scale customs fraud. The amounts of money involved are staggering – far exceeding the allegations of money laundering levied against HSBC and other banks by the US regulators. Yet virtually nothing is being done to combat the problem.

Moreover, “trade-based value transfer”, where money is not physically moved, is used in the settling of accounts between those involved in underground financial systems such as hawala. Osama bin Laden once stated that jihadist groups have identified such “cracks in the Western financial system”.

There are also many new methods such as internet payment providers, mobile phone money transfers, pre-paid debit cards and laundering in virtual gaming worlds. From a law enforcement perspective, the problem of keeping up is daunting. Faced with budget constraints that demand law enforcement do more with less, little is being done.

Convictions for money laundering is the measurement ultimately used by governments around the world to measure success. Yet with few exceptions, countries are failing. Sometimes the limiting factor is expertise. But too often shortcomings revolve around local corruption and a lack of political will.

Just compare the amount of money laundered worldwide with the number of reported convictions (only a handful in any given year). It saddens me to say that for a money launderer to be caught and convicted, he or she is either very careless or very  unlucky.

While the challenges are daunting, there is reason for optimism. There have been huge advances in the amount and variety of data collected. While it is important to strike the right balance between security and privacy, data mining and advanced analytical capabilities can help organisations derive meaningful “intelligence”. For example, data warehousing and social network analytics are only a few of the modern tools that should be at the disposal of financial crimes investigators.

So I urge that we keep the stories about HSBC and other banks in perspective. Instead of making political points over recent headlines, government officials should use this opportunity to rededicate themselves to combat the worldwide scourge of greed and dirty money.

Originally published August 16, 2012 by the Financial Times
Mobile Payments, Smurfs & Emerging Threats

A remote Kenyan villager uses his cell phone as a "virtual wallet." Why does this new technology potentially pose a global anti-money 
laundering threat? 

Answer:  In my  intelligence and law enforcement career, I have seen time and again how  criminals gravitate toward the weak link. Organized crime values the ability to  receive and distribute funds without being subject to financial transparency.  So in our increasingly interconnected global village, criminal elements will  assuredly take advantage of innovative developments in mobile banking, commerce, and communications to further criminal endeavors and launder illicit funds. 

We are witnessing a plethora of new, high-tech value transfer systems that can be abused to launder money and finance terror. The Financial Action Task Force (FATF) the global anti-money laundering policy making body calls them “new payment methods” or NPMs.  Examples include digital precious metals, Internet payment services, prepaid calling and credit cards and mobile payments or “M-Payments.”  Although the technology and terminology are changing rapidly, generally speaking M-Payments are acknowledged to mean the use of a cell phone to credit, send, receive, transfer money or digital value. 

Today only 1.5 billion people have direct access to financial services, but there are more than 5 billion cell phones. In the next five years, there are likely to be as many mobile cellular subscriptions as there are people on this planet. By 2020, experts predict more than 50 billion connected devices.  Assuredly, criminals and criminal organizations will be attracted to this new financial and communications medium.

Advantages and pitfalls of emerging markets 

In many areas in the developing world, mobile communications have allowed societies to leapfrog over old land-land technology.  The rapid spread of cell phones is a major contributor to developing much-needed access to financial services.  Ghana, the Philippines, and Kenya, are examples of countries where financial services are now being offered via cell phones. Subscribers can pay bills, transfer money, receive credits, open accounts, and check balances. Workers can be paid by phone.  Goods and services can be purchased. Before leaving on a trip, a subscriber can deposit money and then withdraw funds at the other end, which has many advantages over carrying a significant amount of cash. M-payment technology allow communities to bypass both brick-and-mortar banks and ATMs. The new mobile 
technology potentially provides a virtual ATM or a virtual wallet to every cell phone user.

M-Payments are already being used by many expatriates and guest workers who wish to send part of their wages home to support their families. M-payment remittances are replacing the use of traditional banks and money service businesses that historically have charged high fees for small  transfers.  Ironically, M-Payments will also encourage some users to bypass the use of underground remittance systems such as hawala that have stymied law enforcement and intelligence officials.

One of the most robust examples of M-Payments in operation is found in Kenya.  In 2007, Kenya’s Safaricom launched its pioneering mobile payment program called “M-Pesa.”  (Pesa means ‘money’ in Swahili).  It was an instant hit.  Today M-Pesa transfers more than $1 billion monthly in East Africa.

How does it work? 

In Kenya, there are more than 100,000 small retailers involved in the selling of mobile-phone airtime, generally in the form of scratch cards.  The small retailers can also register to be mobile-money agents, taking in and paying out cash.  Tens of thousands of them have already signed up as M-Pesa agents – far outnumbering Kenya’s approximately 1000 bank  branches.

When a customer is registered with M-Pesa, paying in cash  involves exchanging physical money for virtual value, sometimes called e-float.  The value is credited to his mobile-money account.  There is a small fee of 3-5 percent – generally depending on the amount transferred. The  recipient next receives a text message with notice of the transfer of credit to his or her electronic wallet.  E-float value can then be transferred to other users by mobile phone, and exchanged for cash by the recipient, who visits another licensed agent.  The recipient can also go to a subscribing retail store, bank, formal money remitter, or even a fast-food restaurant to use the credit.  

Additional financial services are being introduced. Multi-nationals such as McDonalds, Starbucks,Western Union and a number of banks are rushing to incorporate M-payments.

In the US, M-Payments are projected to gross $214 billion by  2015, including  transactions involving mobile bill payments and carrier billing transactions. However, thus far, US consumers have been slow to adopt mobile payments for many reasons including interoperability, doubts about security, availability and consumer protection issues.

Stopping the dirty money spread

Recently, James Freis the Director or Treasury’s Financial Crimes Enforcement Network (FinCEN), told a Congressional committee that any entity in the mobile payments chain that transfers money or other value between two parties “would likely be a money services business under FinCEN’s regulations,  and as such must register and comply with all the reporting, recordkeeping, and monitoring requirements applicable to a money transmitter.”  Unfortunately, those same requirements have not stopped widespread money laundering in other types of formal and informal money service businesses. 

With M-Payments I am most concerned about digital value smurfing—a term coined by the Asian Development Bank.  In traditional money laundering, “smurfs” or runners deposit or place small amounts of illicit or dirty money into financial institutions in ways that do not trigger financial transparency reporting requirements. Digital smurfs can be given dirty money and directed to load their cell phones with digital value – conforming to any legal or reporting limit. Dozens or even hundreds of digital smurfs could then be directed to transfer the value to accounts controlled by organized crime. 

With such transfers, criminals are able to avoid traditional money laundering vulnerabilities such as transporting bulk cash and financial transparency reporting requirements. They will be able to place dirty money into new financial communications  mediums that are not skilled at detecting criminal schemes. Further advantages  for money launderers employing digital value smurfing include the quick conversion of cash to digital value, and the potential to employ different digital value pools such as on-line accounts and Internet payment clearing  services.  M-Payments will take the placement and layering stages of laundering dirty money to new levels.

Law enforcement will be further challenged by issues such as  venue, jurisdiction and competency. The expertise to systematically track M-Payments simply does not exist.  A lack of physical evidence further handicaps law enforcement investigations, as there may not be any cash or money equivalents to monitor or seize.  If the conveyor or recipient phone is destroyed, it may be impossible to reconstruct or determine the information that was on the phone. If the communications service and M-Payments are prepaid, the service provider may not fully identify its customers. The problems could be compounded by the use of false identification to obtain subscriber status or to purchase or rent M-payment services. Using prepaid cellular phones could allow criminals use their minutes without leaving a trace of their calling records.

Money launderers and those that finance terrorism will avail themselves of the new M-payment systems. Responsible jurisdictions must find a balance between the expediency of M-Payments, privacy and the need to guard against abuse.

M-Payments generate big data. Viable integrated countermeasures will surely incorporate sophisticated analytics.  In the United States, industry, law  enforcement, and regulators must work together now before it is too late to  engineer meaningful safeguards into M-payment technology and services.

Originally published August 1, 2012 by SAS
May 18, 2012
Prepared Testimony Before the House Homeland Subcommittee on Counter-terrorism and Intelligence                       

"Terrorist Financing since 9/11: Assessing the Evolution of al Qaeda and State Sponsors of  Terror"

Chairman Meehan and Members of the Subcommittee on Counter-terrorism and Intelligence;

Thank you for the opportunity to testify today.  It is an honor for me to be here.  

In 2005, I retired after a 26 year career as a Case Officer for the Central Intelligence Agency and as a Special Agent for the U.S. Department 
of Treasury.  I believe I am the only individual to have ever been both a covert Case Officer and a Treasury Special Agent.  

Much of my career with Treasury was involved with combating international money laundering and terror finance.  I currently work as a contractor and consultant for a number of U.S. departments, agencies, and business enterprises, although the views that I express here are only my views and not necessarily representative of these organizations.  I have been fortunate to continue my domestic and international travels primarily providing training and technical assistance in financial crimes enforcement.  I have written three books on terror finance and numerous articles.  I have direct experience with many of 
the issues being discussed here today.

A few days after the most successful terrorist attack in U.S. history, President George W. Bush stated, “Money is the lifeblood of terrorist operations. Today we are asking the world to stop payment.”  We are meeting here this morning in part to ask whether that request has been fulfilled and, if not, what more can and should be done.

The short answer is both “yes” and “no.” Completely eradicating terror finance is impossible. There is no magic bullet. Yet after ten years of concerted effort, it is now harder, costlier, and riskier for terrorists to raise and transfer funds, both in the United States and around the world. That’s the good news. Unfortunately, there is  no doubt that our financial countermeasures have not been as smart or efficient as they could be and that we will continue to face new challenges in the coming years. 

The learning curve has been steep. For example, in the years  immediately after September 11th, most policymakers within the Treasury Department were convinced that “financial intelligence” or Bank Secrecy Act  (BSA) data was the key to following the terrorist money trail. They had  misplaced faith in the approximately in (2012 numbers) 17 million pieces of  financial data that are filed annually with Treasury, including approximately  one million Suspicious Activity Reports (SARs). This is in addition to the additional pieces of financial information filed around the world. This data comes from a wide variety of sources, including banks, money service businesses, and individuals. 

"Financial intelligence," also known as "BSA data," or "financial transparency reporting requirements" was initiated during the early years of the “War on Drugs” when enormous amounts of illicit proceeds from the international narcotics trade regularly sloshed around western financial institutions. So it is important to understand the financial reports were not originally designed to combat terror finance where piece of financial intelligence was filed on any of the 19 September 11 hijackers.  And even if there had been, the United States did not have the programs and management structures in place that would have detected the suspicious financial activity. I say this with confidence because I worked at Treasury's FinancialCrimes Enforcement Network (FinCEN) at the time.  I demonstrated the failings in my first book, Hide & Seek: Intelligence, Law Enforcement and the Stalled War on Terror Finance (Potomac Books, 2006).  The same dearth of financial intelligence has subsequently held true for major terrorist attacks from Bali to Baghdad.  

Although the last ten years have demonstrated that financial intelligence here and abroad is not the panacea for counter-terrorist finance, much of the financial data does contain excellent information and some has  proved vital in "connecting the dots."  The data is invaluable in money laundering and other investigations.  That being said, it is not being effectively exploited. 

Over the past ten years, our adversaries' operational and  financial tactics have evolved. We are faced with immense challenges. The situation is made worse by the comparatively small amounts of funding involved  with terror finance.  For example, it is estimated that September 11 cost al Qaeda approximately $300,000 -  $500,000.  Even this relatively small amount towers over the recent attempt to hide explosives in a printer cartridge aboard an air cargo flight to the U.S. Al Qaeda in the Arabian Peninsula boasted in its online magazine that, “It is such a good bargain for usto spread fear amongst the enemy and keep him on his toes in exchange for a few  months work and a few thousand dollars.”  

While there are no simple solutions to all of the challenges  identified by this subcommittee, I believe there are some straight forward and cost effective steps we should take. I have broadly categorized them as  technology, transparency, and draining the swamp. The three are intertwined and  complimentary.  

Technology

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 this vast amount of data.  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, efforts, productivities 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.   

Unfortunately, while the federal government is beginning to  incorporate these advanced analytical capabilities, it lags far behind in its deployment of commercially available and viable technologies. As a subset, the federal financial investigative resources trail even further behind.  FinCEN is mandated to collect, house,  analyze, and disseminate financial intelligence. FinCEN should be the U.S. government’s premier financial crimes resource. However, FinCEN has never lived up to its early promise and potential. One important problem with FinCEN is that although it has attempted to implement a number of data mining activities over the years, they have not been successful. Recently, progress has been made developing and employing new analytical tools. However, the FinCEN analysts are only able to use perhaps ten per cent of their new analytical capacity. The expertise and managerial will simply do not exist to fully exploit many of the tools now finally at their disposal.

Within the next few years, it is estimated that approximately 500 - 700 million additional pieces of financial information in the form of wire transfer data will be routed annually to FinCEN.  If FinCEN is not able to successfully analyze the current one million BSA filings it receives annually it is highly doubtful that it will succeed with this new tasking.  Yet law enforcement and intelligence professionals should have access to  the data and be able to interpret it. Technology will be the force multiplier and the only realistic solution to effectively exploit current and new streams of financial data.

In order to move forward, we must move to get around the FinCEN impediment.  I propose that we  "downstream" both financial information and  analytics platforms directly to end users in the law enforcement community. For example, the financial data and an  accompanying user-friendly analytics platform could be made directly accessible  to various task forces, U.S. attorney offices, regional Suspicious Activity Report (SAR) review teams, appropriate federal, state and local law enforcement  departments and agencies. Since FinCEN is mandated by the Department of  Treasury to administer the Bank Secrecy Act (BSA) and accompanying data, FinCEN could license and control the release of the data and the analytics platform. 

Moreover, in my discussions with members of the U.S. intelligence and defense communities, frustration is often expressed that they do not have direct access to appropriate and targeted financial databases that intersect with their international areas of responsibility.  Instead of looking for ways to increase the dissemination of necessary data, legal advisors within Treasury work to impede the release of information. While I certainly understand and endorse privacy and other concerns, the technology exists today to engineer safeguards into the dissemination of the data to prevent abuse. I urge that our colleagues be given increased access to this vital information in order to help safeguard our security.   

Transparency
Shortly after the September 11 terrorist attacks, I had a  conversation with a Pakistani businessman involved with the underworld of crime.  He was involved in the gray markets of South Asia and the Middle East. He said, “Mr. John, don't you know that the criminals and the terrorists are moving money and transferring value right under your noses? But the West doesn't see it.  Your enemies are laughing at you.”

His words infuriated me because I knew he was right. I worked overseas for years with frequent travels to the Arabian peninsula, Africa and South Asia.  For the most part, U.S. officials could not understand or identify the opaque, indigenous but very effective ways of transferring money and value so different from our own.  For example, the above Pakistani businessman was referring to various forms of what we loosely call  “trade-based money laundering.”  It involves the transfer of “value” via commodities and trade goods.  In addition to customs fraud, trade-based value transfer is often used to provide “counter-valuation” or a way of balancing the books in many global underground financial systems -  including some that have been used to finance terror.  

In theory, by promoting trade transparency and using technology to spot anomalies in trade data (and overlapping those flagged anomalies with financial, travel, transportation, law enforcement and other databases) we may be able to use trade as a "back door" to enter into previously hidden underground financial networks. 

Trade-based money  laundering scams take a wide variety of forms. For example, it could be simple barter or a commodity-for-commodity exchange.   In certain parts of Afghanistan and Pakistan, for example, the going rate for a kilo of heroin is a color television set.   Drug warlords exchange one commodity they control (opium) for others that they desire (luxury and sports utility vehicles).   In the United States and Mexico, weapons go south and drugs come north.  However, generally speaking, money laundering and value transfer through simple invoice fraud and manipulation are most common. The key element here is the misrepresentation of the trade good to transfer value between importer and exporter. The quantity, quality, and description of the trade goods can be manipulated. The shipment of the actual goods and the accompanying documentation provide cover for “payment” or the transfer of money. The manipulation occurs either through over-or under-valuation, depending on the objective to be achieved. To move money out of a country, participants import goods at overvalued prices or export goods at undervalued prices.  To move money into a country participants, import goods at undervalued prices or export goods at overvalued prices.  For the most part, all of this avoids countries' financial intelligence reporting requirements. 

Trade-based value transfer is found in every country around the world.  I believe it is the "new  frontier" in international money laundering and counter-terrorist finance  countermeasures.  Without going into detail, trade-based value transfer is found in hawala networks, most other regional "alternative remittance systems," the misuse of the Afghan Transit Trade, Iran/Dubai commercial connections, suspect international  Lebanese/Hezbollah trading syndicates, non-banked lawless regimes such as  Somalia, etc. 

I have written extensively about trade-based money laundering.  I invented the concept of trade-transparency units (TTUs), which is now part of the U.S. government National Anti-Money Laundering Strategy. I am delighted that the Department of Homeland Security's Immigration and Customs Enforcement (ICE) has adopted this concept by establishing the world's first TTU.  There are approximately eight additional TTUs in the Western Hemisphere and more TTUs are planned.  

In addition to being an innovative countermeasure to trade-based money laundering and value transfer, systematically cracking down on trade-fraud is a revenue enhancer for participating governments.  Frankly, it is for this reason that many countries outside of the United States have expressed interest in the concept. In essence, these governments understand that they are not collecting the appropriate amount of duties on the goods because the values on the invoices are mis-stated. Finding new revenue, without actually having to raise tax rates, is an economic imperative.

TTUs are already proving to be valuable resources for our government and international partners. For example, in 2008 the United States and Mexico partnered in the  creation of a TTU in Mexico City.  Such efforts should be promoted and expanded. Congress can help by ensuring that the TTUs have sufficient resources to  systematically examine trade fraud in the United States for reasons of both national security and to enhance our revenue. We should also promote trade transparency overseas by building it into the US trade agenda.

Drain the Swamp
Since the end of the Cold War, there has been a dramatic decline in the number of countries that support and finance targeted acts of terrorism in order to achieve their national objectives.  Today, Iran is the major "state sponsor" of terrorism.  In the early days of al-Qaeda, the terrorist group received much of its financial resources from Osama bin Laden's personal family wealth, along with contributions from wealthy Saudi and other donors. Today, al-Qaeda and other jihadist groups have been forced to disperse and receive little centralized direction or funding. This is the good news.

With the decline of the above historical model - that is, groups with centralized command and control receiving most of their money from "state sponsors," evil regimes, and wealthy donors - terrorists and their supporters must increasingly rely on self-finance.  In many cases, a symbiosis is developing between organized crime and terrorist organizations, and this sort of link has been observed around the world. As I detail in a book I co-authored with former Treasury official Avi Jorisch, On the Trail of Terror Finance: What Law Enforcement and Intelligence Officers Need to Know (Red Cell Publishing 2010) we have observed individual terrorists and terrorist groups involvement with narcotics trafficking, intellectual property rights violations or trafficking in counterfeit goods, cigarette smuggling, robberies, credit card scams, fraud, trafficking in stolen cars, kidnapping for ransom, extortion, and other serious crimes. Unfortunately, 
self-finance in this way is much harder to detect, track, and disrupt.

Given the above, "draining the swamp" or cracking down at home and abroad on local and transnational financial crime might eventually become one of the most effective strategies to combat terrorism.  Even the U.S. military and international peacekeeping forces operating in lawless states have come to recognize that their adversaries, many with terrorist links, increasingly engage in traditional crime to help finance their activities.

For this strategy to succeed, law enforcement, intelligence, and military organizations must learn to look beyond the immediate circumstances of a given local crime. Whether they are confronted with narcotics trafficking, organized robbery, human trafficking or other activities, street cops, criminal investigators, and analysts alike must learn to ask whether these seemingly isolated acts have more sinister ties. Officials, both in the United States and overseas, must learn to "ask the next question" during the course of routine investigations: where is the money going?

Yet most law enforcement officers get caught up in the quick  statistic.  That is how they are  recognized and rewarded.  They are not interested, often times not allowed, and do not have the networks to determine if the local crime they uncovered has broader implications. 

In my travels around the United States and overseas, I have  observed first hand how little law enforcement groups actually know about following the money.  It is particularly shocking because outside of crimes of passion, criminals and criminal organizations engage in criminal activity because of greed; i.e., money.  For example, Karachi, Pakistan's largest city and economic hub, is heavily infiltrated by militants and terrorists making money through criminal activities such as cigarettesmuggling, selling counterfeit goods, bank robbery, street robbery, kidnapping for ransom and other heinous crimes. Mr. Sharfuddin Memon, a director of a Karachi citizens’ crime watch group, described the motivations behind this activity: "The world thinks this is about religion, but that's a mistake.  It's about money and power.  Faith has nothing to do with it." 

I urge Congress to support effective training programs that educate law enforcement and intelligence officers on the importance of "asking 
the next question" and following the money trail. I also believe we should make much more concerted efforts - using various means - to work with international public media and other communications networks and brand terrorists for what they are: international thugs.  They should not be allowed to glorify themselves.  The last ten years have demonstrated that criminals are using jihad as a concept to legitimize their activities.  By using  publicity, transparency, and draining the swamp we will delegitimize them.

As I said at the outset, our enemies are adept at exploiting the weaknesses in the US financial reporting system. Osama bin Laden once called these "cracks in the Western financial system."  Their financial behavior has evolved.  I also mentioned new financial threats on the horizon. Some of these include pre-paid gift and stored value cards; service-based laundering; mobile payments commonly referred to as "m-payments" or the use of cell phones to store, receive, and transmit money; digital currencies; virtual currencies in the on-line virtual world, etc. Unfortunately, time does not permit a full review.  However, many of these and other financial threats and countermeasures that may merit scrutiny by this subcommittee were articulated over five years ago in the 2007 National Money Laundering Strategy written by the Departments of Treasury, Justice, and Homeland Security.  The document was a blueprint for further action in the areas of financial crimes and threat finance. Unfortunately, in many areas, little or nothing has been done.  I urge the subcommittee to review the document and ask hard questions about progress to date. 

"Without money there is no terrorism." While this is a simplistic formula, our adversaries know that they need money to survive and fund their operations.  They are proving adept and creative at finding new ways to access this lifeblood. I have profound respect for our intelligence and enforcement communities. The challenges they face in following illicit financial trails are immense.

I appreciate the opportunity to appear before you today and I'm happy to elaborate on my experiences and to answer any questions you may have. 
Analysis: Follow The Money  

Financial intelligence is one of the strongest weapons against terrorist and drug networks, but agencies must keep up with the changing threat.

This year is noteworthy for more than the 10th anniversary of the Sept. 11, 2001, terrorist attacks. Forty years ago, President Nixon declared a war on drugs. What do the two dates have in common? Arguably the most important countermeasure against both terrorism and narcotics trafficking - financial intelligence.

Most criminal activity is about greed, i.e. money. To help  criminal investigators follow the money, Congress in 1970 passed a series of laws and regulations collectively known as the Bank Secrecy Act. "Secrecy" is a misnomer, however. A better term is "financial transparency" or "financial intelligence."

The data that emerged quickly proved its worth, helping combat money laundering related to narcotics and many other crimes. In 1990, Congress' confidence in financial intelligence was further evidenced by the creation of the Financial Crimes Enforcement Network, or FinCEN, at the Treasury Department. FinCEN's mandate was to collect, analyze and disseminate financial intelligence to more effectively support law enforcement.

Long before the idea of breaking down bureaucratic walls became popular, FinCEN was sharing financial intelligence with non-Treasury agents at the federal, state, local and, increasingly, international levels. FinCEN also is a network, a link among law enforcement, financial and regulatory organizations. Subsequently, Treasury gave the agency responsibility for enforcing the Bank Secrecy Act.

Approximately 16 million to 18 million pieces of financial  intelligence are filed with FinCEN each year, many of which include names, addresses, account numbers and other identifiers used to root out criminal  activity. Currency transaction reports filed with FinCEN for cash deposits or  withdrawals of $10,000 or more have approximately 150 data fields. Similar reports are filed for cross-border transport of cash or assets and large  business transactions at places such as car dealerships, real estate agencies,  jewelers and precious metals dealers.

Particularly during the war on drugs, bankers were considered the first line of defense against money launderers.

Bankers are supposed to know their customers. If they sense a customer's activity is inappropriate, they file a suspicious activity report. In addition to identifying information, the reports often contain narratives that detail suspicious activity. FinCEN receives around 1 million SARs annually, about half of which are generated from banks and half from money service businesses.

Thinking Small
Most financial intelligence is used reactively. A criminal  investigator or analyst assigned to solve a crime queries the financial databases seeking information that could prove useful, including information  about a subject's assets. While financial intelligence by itself does not  generally solve a crime, it often buttresses other investigative techniques,  such as interviews, informants, surveillance and undercover operations.

But analysis of financial intelligence also can be proactive when a crime has not yet occurred. In such cases, law enforcement officials examine data to identify anomalies, patterns and trends to intercept or prevent criminal activity.

Analytics add value to financial intelligence by combining it with other databases, including criminal records, immigration records, trade data, commercially available business information and social networks.  Connections spotted between individuals, companies, bank accounts and other  links, can uncover suspicious financial relationships and money flows,  expanding the money trail.

Financial reporting was originally intended to detect large amounts of dirty money related to the war on drugs, and it has helped uncover terror activity in the United States and overseas. It is difficult to detect  the small amounts of money used to finance terrorism. A plot in the Arabian Peninsula to send explosive devices to the United States in a printer, mobile  phones and other air freight cost about $4,500. When the scheme was intercepted by authorities, al Qaeda in the Arabian Peninsula proclaimed, "It is such a good bargain for us to spread fear among the enemy and keep him on his toes in exchange for a few months' work and a few thousand dollars."

In another recent attempt, the Pakistani Taliban used an  underground money transfer system - a crack in U.S. countermeasures - to finance an attempted bombing in New York's Times Square. That operation cost  approximately $12,000.

The Way Forward
Criminal and terrorist methodologies have evolved during the past 40 years. Law enforcement and intelligence communities need to do a better job of recognizing new threats and developing innovative countermeasures.

FinCEN and other government entities must employ state-of-the art analytics to effectively exploit financial intelligence. Advanced analytics help identify anomalies, outliers, typical versus atypical behavior and patterns, and apply early-warning detection, predictive modeling, data integration, entity resolution, sentiment analysis and social media analytics. And industries must develop robust programs to comply with Treasury's financial reporting mandates. Adversaries, criminal methodologies and threats do not remain static. They shift and change, yet money will remain the essential ingredient in crime and terror.Successfully collecting, analyzing and disseminating financial intelligence will be their nemesis.

Originally published November 1, 2011 by Government Executive.
Are We Winning the War on Terror Finance? 

A few days after the most successful terrorist attack in U.S. history, President George W. Bush stated, “Money is the lifeblood of terrorist operations. Today we are asking the world to stop payment.” Ten years later, has that request been fulfilled?

The short answer is both “yes” and “no.” Completely eradicating terror finance is impossible. There is no doubt that our financial countermeasures have not been as smart or efficient as they could be. However, after ten years of concerted effort, it is also now harder, costlier, and  riskier for terrorists to raise and transfer funds, both in the United States and around the world.

The learning curve has been steep. For example, in the years  immediately after September 11th, policymakers within the Treasury Department  were convinced that “financial intelligence” was the key to following the  terrorist money trail. They had misplaced faith in the approximately 18 million  pieces of financial intelligence that are filed annually with Treasury, and in  the countless million pieces of additional financial information filed by  members of the international community. The intelligence comes from a wide variety of sources, including banks, money service businesses, and individuals.  Financial intelligence was initiated during the early years of the “War on  Drugs,” when the enormous proceeds of the international narcotics trade  regularly sloshed around western financial institutions. The financial reports  were not originally designed to combat terror. Not one piece of financial  intelligence in the United States or overseas was filed on any of the 19  September 11th hijackers. The same dearth of financial intelligence has subsequently held true for major terrorist attacks from Bali to Baghdad.

Should we be surprised? Shortly after September 11th, when he was still located in the mountains of Afghanistan, Osama bin Laden was interviewed by a Pakistani journalist. He was asked about finance, and whether he was afraid the West would identify and seize al-Qaeda’s assets. He replied: “Attempts to find and freeze assets will not make any difference to al Qaeda or other jihad groups. Al Qaeda is comprised of modern, educated young people who are as aware of the cracks in the Western financial system as they are of the lines in their own hands. These are the very flaws in Western financial system which is becoming a noose for it.” And over the last ten years, our adversaries have proven time and time again that they have identified these “cracks.”

For example, after authorities intercepted a plot in the Gulf to send explosive-laden packages into the United States hidden in a printer, mobile phones and other devices aboard air freight flights, al-Qaeda in the Arabian Peninsula (AQAP) broadcast the following statement; “It is such a good bargain for us to spread fear amongst the enemy and keep him on his toes in exchange for a few months’ work and a few thousand dollars.” The operation cost the terrorists approximately $4,500. Simply put, it is very difficult for law enforcement and intelligence officers and analysts to detect small amounts of money that could be used to finance terrorism.

In another recent attempted terrorist attack against the United States, the Pakistani Taliban avoided financial transparency reporting requirements and financed an attempted bombing in New York’s Times Square. It  is estimated that the operation cost approximately $12,000.

Seizing terrorist assets has been another major “metric” used by Treasury officials to judge success in the War on Terror Finance. In fact, the 9/11 Commission’s Public Discourse Project awarded Treasury its highest grade, an “A-”, in large part due to the statistics of seized terrorist assets provided at the time. In reality, however, the government’s freezing/seizing efforts have been inconsistent at best, leading some to believe that Washington may be “cooking the books” and “hiding behind the  numbers.”

Indeed, despite earlier statements from Treasury that boasted of blocked and seized terrorist assets that total in the hundreds of millions of dollars, former Under Secretary Stuart Levey told the Senate Finance Committee in 2008 that only $20,736,920 in terrorism-related funds had been blocked (not forfeited) between September 2001 and December 2007. To put things in perspective, this number should be contrasted with the approximately $207 million seized during a March 2007 operation against a Mexican methamphetamine ring. In other words, a single drug bust yielded nearly ten times as much money in one day as did U.S. counterterrorist finance efforts in six years.

Not all the news is negative, however. The U.S. government is developing some innovative financial tools and procedures. Departments and agencies continue to be reorganized. Bureaucracies are becoming much better at  sharing information. Progress has been made in providing training and technical assistance and helping countries to help themselves. We are beginning to  understand that some of the money laundering and terrorist finance methodologies and techniques that governments around the world are confronting do not have realistic or cost-effective solutions.

For example, it has been nearly a year since the United States and its allies strengthened economic sanctions against Iran in an effort to force the Islamic Republic to abandon its nuclear weapons program. Thus far,  these measures have yielded positive results; more than 80 financial  institutions—including Credit Suisse and Deutsche Bank—have reportedly  completely cut off or significantly reduced their relationship with the Islamic  Republic. More specifically, major international financial institutions that  once provided credit lines to Iran’s commodities industry have reportedly  stopped. In particular, Iran is finding it increasingly difficult to get banks  to process oil and gas payments, which represent about 80 percent of the Islamic Republic’s export revenue. Additionally, the U.S. intelligence community has developed  robust geospatial and network analysis tools to attack various networks and  financial nodes. These types of advances make it easier to track the financial flows of terrorist financiers and operators alike.

Money is the necessary ingredient for both state sponsors of  terrorism and radical organizations. Simply put, without money there is no terrorism. Unfortunately, the bottom line ten years after the September 11th  attacks is that there is no doubt that terrorist networks retain access to financial sources, retain the ability to self-finance operations that do not  cost much money, and can move and transfer both money and value to bankroll the  next terrorist plot.

Originally published Fall 2011 by the Journal of International Security Affairs.
The Afghan Transit Trade: How AF/PAK Drug Lords and Terrorists Are Moving Money and Transferring Value  

In an area of the world that is hostile to our interests, much of the money that flows into terrorist coffers is generated by Afghanistan’s booming drug trade. According to the United Nations Office of Drug Control  (UNODC) statistics, Afghanistan accounts for more than 90 percent of the world’s opium production.1 Much of the production comes from Taliban strongholds in the southern part of the country. For example, the UNODC reported that poppy cultivation in Helmand province -a Taliban stronghold -increased by over 160% in 2006 followed by another 48% increase in 2007. But Helmand is not alone. Despite some recent improvement in the drug cultivation rate, in 2009 only 18 out of Afghanistan’s 34 provinces were free of opium production.2 Afghanistan is also the world’s largest supplier of cannabis. In fact, Afghanistan produces more narcotics than Colombia, Peru and Bolivia  combined.

Did You Know? 
While the aggregate value of the international trade in Afghan opiates is approximately $40 billion, the total value of exports of opium to neighboring countries is approximately $3 billion. Afghan farmers receive approximately $600 million from opium poppy production and Afghan traffickers and terrorists are estimated to receive over $2 billion. 

The increase in production overlaps with a sharp rise in Taliban attacks on coalition forces . Although there are reports that that the loosely unified Taliban receives large cash contributions from foreign donations and other diversified funding sources, according to open source information, a senior Afghan security official stated that captured Taliban have confessed that most of their funding comes from the drug trade.

While there seems to be international consensus on these  staggering numbers, this is where the discussion normally ends. Many years since the United States and its coalition partners entered Afghanistan, it is  essential to understand the money and value-transfer schemes if we wish to be  successful in beating the Taliban. 

During a 2006 trip to Kabul, one of the authors asked Afghan  bankers, hawaladars and businessmen how our adversaries launder narcotics proceeds and finance terrorism. Without exception, they said that illicit money  was not laundered via the licensed banks operating in Afghanistan. According to the Afghans, the value was laundered primarily through trade. While some value  transfer schemes are complex and intertwined with regional hawala/hundi  remittance system, it can also be as simple as a barter system whereby narcotics are exchanged for other commodities and services. 

This should come as no surprise in a country where an estimated 80-90% of economic activity is in the informal sector and where approximately 80% of the country’s population is illiterate.7 Trade is both a traditional way of doing business and a traditional way of transferring value. 

Today’s U.S. and international anti-money laundering and counter-terrorist finance countermeasures were created over a generation ago to fight the War on Drugs. Countermeasures, primarily financial transparency reporting requirements, focus on large amounts of dirty money moving through  western-style financial institutions. 

There is still a vast amount to learn about trade-based value transfer systems found in the AF/PAK region. The issue becomes increasingly important as the administration reviews AF/PAK policy and United States Central  Command (CENTCOM) seeks  creative means to challenge extremist funding.

The Afghan Opium Trade 
Opium is one of the few commodities Afghanistan produces that outsiders value. It is conservatively estimated that over one-third of Afghanistan’s (licit plus illicit) GDP is derived directly from narcotics  activities.8 Some observers believe the narcotics industry makes up as much as  half of Afghanistan’s economy. In a country of high unemployment, the  narcotics industry employs upward of one million laborers, from farmers, to  warehouse workers to truck drivers. 

Afghan opium is refined into morphine and heroin by production labs, more of which are being established inside Afghanistan’s borders. The narcotics are broken into small shipments, and smuggled across porous borders via truck or mule caravan for resale abroad. The ancient smuggling routes follow mountainous trails out of Afghanistan into Pakistan, Iran, Turkmenistan, Uzbekistan, and neighboring countries.  (Many of these very same trails were used by al Qaeda and terrorist forces when they fled coalition forces in the fall of 2001.) 

According to the United Nations Office on Drugs and Crime, approximately 60 percent of Afghanistan’s opium is trafficked across the Afghan/Iranian border. Some of the narcotics remain within Iran. Reportedly, Iran has an estimated 3 million drug users and the world’s highest rate of addiction. In order to get to the lucrative markets in Europe, traditional  smuggling routes continue through Iran into Turkey and the Balkans. More and  more Afghan narcotics are moving into the increasingly lucrative market of  Russia via the “northern route” that winds its way through many of the Central Asian states. 

In Afghanistan, opium gum itself is often used as a currency,especially by rural farmers. Opium stockpiles are a store of value in prime production areas. As a result, a type of barter trade has developed whereby narcotics are sometimes exchanged for commodities or services. A few grams of opium can be traded in rural areas for a meter of fabric or even a visit to a barber shop. In some areas in the region the going rate for a kilo of heroin is a color television set.  The same kilo of heroin smuggled to markets in Europe can be worth tens of thousands of dollars wholesale. Yet because of the dramatic rise in opium production, the price of heroin in Europe is going down. 

In another example of a “commodity for commodity” exchange, one of the authors during a trip to Kabul was told how stolen cars from Europe are being imported into Afghanistan and swapped for narcotics. here are also reports that the Taliban is pouring emeralds onto the world gem market that are mined and stolen from areas they control in Afghanistan and Pakistan. The gems are used to buy and exchange for weapons.

Links to the Taliban 
There have been reports over the years that the Taliban encourage farmers to import fertilizer from Pakistan and to build irrigation networks to increase their yields of opium. Wheat, formerly Afghanistan’s staple crop, no longer holds much appeal for local farmers. Opium is more lucrative and foodstuffs can be imported more cheaply from Pakistan. Thus, a farmer can earn almost ten times more raising opium poppy in comparison to what he would get for planting a hectare of wheat. The drug traffickers also operate as micro- financers; they offer farmers credit in advance for their poppy crops to see them through long winter months. 

The Taliban have imposed taxes of 10% (ushr) from farmers who grow poppy and other produce and in some cases they collect a 20% zakat, an Islamic levy, on opium shipments leaving the farm areas. Additional taxes and  fees can be levied on the processing, shipment, and sale of opiates. These funds undoubtedly help finance the Taliban’s terrorist activities. Additional  revenue streams for the Taliban and regional warlords come from extortion, “protecting” the opium shipments, running heroin labs, and collections from “toll booths” that are established on transport and smuggling routes. Some Taliban units reportedly collect financial “contributions” from drug  traffickers in areas they control.

It is not clear today whether or not al Qaeda benefits directly from the drug trade. Al Qaeda operatives in the region reportedly pay top dollar 
to local truckers and smugglers for their services. Some regional observers feel that today al Qaeda and the Taliban have overlapping business interests. Al Qaeda is paying the truckers to haul goods and perhaps people and the Taliban is collecting from the truckers and smugglers and narcotics traffickers in areas that they control. Both use many of the same routes and networks.

Payment via commodities Equals Value Transfer 

Given that narcotics are flowing out of Afghanistan, how do many of the trade goods that enter the underworld economies in Afghanistan and
neighboring countries – and that sometimes are offered as payment for the  narcotics – get into the area? 

The World’s Most Vulnerable Lifeline 
According to the Pentagon, “84 percent of all containerized cargo and about 40 percent of all fuel for U.S. and coalition forces operating out of Afghanistan passes through Pakistan.” Most of the goods enter Pakistan through the port city of Karachi and follow the same routes to Afghanistan as covered by the ATTA. 

Afghanistan is land-locked. Under a 1965 bilateral treaty signed by Afghanistan and Pakistan called the Afghan Transit Trade Agreement (ATTA),trade goods for import or export into Afghanistan that transit through the Pakistani port of Karachi are exempt from Pakistani duties or customs tariffs. The ATTA was subsequently expanded to include other neighbors of Afghanistan, including a 1974 agreement with Iran that allowed free transit through the Iranian port city of Bandar Abbas and in 2003 for transit through Chabahar. Access to the port cities through rail or vehicle provides Afghanistan direct access to the Arabian Sea and the opportunity to transport goods internationally by ship.

The majority of commodities, such as electronics, construction supplies, automobiles, foodstuffs, and even gold that are traded and smuggled in the region originate in Dubai. (Hong Kong, Singapore, and other international trading centers also are used but to a much lesser extent. Direct imports from China also appear to be increasing.)  The ATTA allows shipments of trade goods from Dubai to be off-loaded in Karachi, Bandar Abbas, and other regional ports. Avoiding Pakistan’s stringent taxes and customs duties, the goods are then transported to Afghanistan. Since the various brokers and middlemen involved in the trade operate on very small margins, the avoidance of taxes is a common measure to ensure profit. Once in Pakistan or Iran, the goods are sent into Afghanistan for sale, barter, or payment for narcotics and/or other goods and services. 

Many of the trade goods are broken down into smaller shipments and are distributed in Afghanistan or are smuggled back into Pakistan, Iran, and other countries in the region for resale on the black market. A Pakistani official told one of the authors, “Many times the only part of the shipments that actually leave Pakistan for Afghanistan is the paperwork.” While on paper the goods appear destined for Afghanistan via the ATTA, sometimes the goods never actually cross the border. Pakistani officials also related stories whereby goods are only taken a short distance across the border, literally just out of view. The shipments are then broken apart and transported right back into Pakistan and eventually can be found for sale on the streets.

Certainly, most of the Afghan Transit Trade involves legitimate commerce. But the trade goods that help pay for narcotics produced in the region and trafficked by trading syndicates and criminal groups with links to terrorists also enter the subcontinent via the ATT. Goods are paid for through a variety of methods including conventional bank-to-bank transfers via letters of credit, etc. Yet in most instances the goods destined for Afghanistan are purchased in the regional shopping center of Dubai, and a large percentage the funds are transferred via hawala (also known as hundi in Pakistan). Hawala is a traditional informal value transfer system that can best be defined as money transfer without money movement. It was developed centuries ago, long before the advent of modern banking. Hawala is safe, rapid, secure and almost immune to western-style financial transparency reporting requirements – one of the chief countermeasures promoted by the U.S. Department of Treasury to combat money laundering and terrorist finance. 

Hawaladars or hawala brokers are found throughout Afghan’s  provinces.24 The World Bank and UN calculate that hawala dealers in Helmand and Kandahar alone transfer more than $1 billion in narcotics money every year.  According to Gretchen Peters in Seeds of Terror, How Heroin is Bankrolling the  Taliban and al Qaeda, no less than 54 hawaladars in Helmand and Kandahar have  been identified as “specialists” in laundering opium money. The regional hawala network also incorporates surrounding countries.

Many of the hawala networks are family, clan, and tribal based that make penetrating their operations very difficult. Over time, deficits or surpluses accumulate between hawaladars so various methods are used to settle accounts or “balance the books.” Of course, bank-to-bank transfers various kinds of trade fraud, particularly and cash couriers are used. Regionally, over-and-under invoicing. however, trade is the most traditional method. This includes value transfer via various kinds of trade fraud, particularly over-and-under invoicing.

Although frustrating to western analysts that generally use  linear logic and search for a direct cause and effect, elements involved in the misuse of the ATT are intermingled; i.e. smuggling, fraud, corruption,  hawala/hundi, trade-based money laundering, legitimate commerce, etc. In  addition to the above techniques, exchange control credits are also used to  purchase goods. For example, some traders and brokers in the Subcontinent  report to exchange control authorities that imports cost more or exports less  than the actual price. The difference or credits can be held abroad and used to  pay for additional imports. Moreover, throughout Arabia and South Asia, cash in the form of “guest worker” remittances are also accumulated and purchased by  trading syndicates. Some of the accumulated foreign exchange and currencies  from various sources are used to purchase goods from souks and free trade zones  in the thriving regional trade and finance center of Dubai. 

The U.S. Department of Treasury has estimated that the Black  Market Peso Exchange (BMPE) is one of the largest money laundering methodologies in the Western hemisphere. It is a perverse trade where drug  dollars in the United States and other countries are used to purchase  commodities and trade goods imported into the commerce of Colombia. One of the  byproducts of this money laundering scheme is that legitimate Colombian  businesses have been undercut by competition from the import of merchandise  purchased by drug dollars. Similar to the BMPE, the domestic Pakistani manufacturing sector has been severely harmed by the importation and smuggling of competing goods brought into Pakistan by the misuse of the ATT. As a result, the Pakistani manufacturing sector has pressured the government to put items with a high susceptibility to smuggling on a “negative list.” The list is constantly changing but has covered goods such as tea, tires, television sets,  refrigerators, etc. that are imported for delivery to Afghanistan but find  their way to Pakistan’s black market via the ATT. A few years ago there were  amusing examples of television sets and razor blades being “imported” into Afghanistan via the ATT even though televisions were illegal under the rule of  the Taliban and Afghan men were forbidden to shave. As described above, the Afghan “imports” were just on paper. The goods themselves that were routed via  the ATT and on paper destined for Afghanistan actually surfaced on the black  market in Pakistan.

It appears organized smuggling groups have found a way around the“negative list” by increasing their use of Iranian ports of entry. There is little data available on money laundering in Iran, but the underground economy in Iran is enormous, spurred in part by attempts to avoid corruption and restrictive taxation. Capital flight is a major problem for the Iranian  government and currency exchange restrictions also encourage the use of hawala.  Significant capital is sent across the Arabian Gulf, to Dubai in particular.  The ATT is a perfect vehicle for Iranian brokers to both circumvent currency  controls and export capital by using apparently “legitimate” trade with Dubai. Trade is often misused to provide counter-valuation in hawala transactions. 

Reportedly, there has been a long-standing offer by the  government of Pakistan to harmonize Afghan and Pakistani customs tariffs and facilitate their joint collection. Pakistan would undoubtedly benefit from such  an arrangement because harmonization would reduce incentives for smuggling and  increase revenues. Afghanistan would likewise gain needed revenue, and  adherence to harmonized customs standards would help foster the rule of law.  However, both governments are too weak to confront the regional warlords and vested interests that control the smuggling routes and revenue from the misuse of the Afghan Transit Trade. A significant share of smuggling revenues is reportedly still controlled by loosely organized special interests, including trucking and transportation unions, that work with corrupt Pakistani and Afghan customs officials to divert duty-free transit trade. 

Counter-valuation via trade: 
  • Money moved out of Afghanistan: By importing goods at  overvalued prices or exporting goods at undervalued prices 
  • Money moved into Afghanistan: By importing goods at undervalued prices or exporting the goods at overvalued prices 

Two Examples of the Afghan Transit Trade Scheme 
Military, law enforcement, and intelligence officials often do not understand the ATT. As a result, there is little official reporting on the 
transfer and exchange of the value of narcotics for the value of trade goods. The following are two simple scenarios based on the authors’ knowledge and interviews in The Nexus of Drug Trafficking and Hawala in Afghanistan. 

Example One: 
  • Payment for narcotics smuggled from Afghanistan to the United Kingdom via Iran and the Balkan Route is made via bank-to-bank wire transfer from the UK to Peshawar, Pakistan 
  • From Peshawar, continuing payment is fragmented. Part goes to a hawaladar in Helmand who credits the narcotics criminal/terrorist organization that supplied the narcotics. 
  • Other profits are used by the narcotics criminal/terrorist  organization to finance imports of commodities from Dubai via the ATT 
  • The goods directly remunerate the narcotics criminal/terrorist organization or they can be sold for further profit 

Example Two: 
  • A Peshawar-based hawaladar facilitates a deal between an Afghan drug lord and a Dubai-based businessman that wants to purchase the drugs 
  • The drug lord exports opium 
  • The drug lord prefers to receive payment in commodities 
  • Payment is made in vehicles imported into Afghanistan via the ATTA and entered into Iran at the port of Bandar Abbas 
  • The exchange is completed via partnerships in Pakistan, the UAE, Iran and Afghanistan 

Countermeasures and Implications 
In the years since September 11, government bureaucracies and policy makers have attempted to fight the war on terrorism finance using tools, techniques, and countermeasures that were originally developed for previous conflicts such as the Cold War and the War on Drugs. As a result, our War on Terrorist Finance is stalled. In a global struggle of hide and seek, we have been looking for dirty money in many of the wrong places. There are no ready and direct solutions. However, the following ideas are advanced for consideration: 
  • Progress in following the money or value trail that leads from the production of Afghan narcotics will depend on understanding regional ways of doing business. U.S. and coalition military, intelligence, law enforcement and development teams must be given training and insight into indigenous financial and value transfer systems that, to paraphrase one Pakistani involved in grey market business, “occur right under Western noses.”
  • Since most of the Afghan opium/heroin enters the European market, it only makes sense that our European partners become much more engaged.
  • It has been the authors’ experience that governments in the region are reluctant to face the implications of money laundering and terrorist 
  • finance. Too many special interests benefit from the status quo. However, they are receptive to countermeasures that lead to greater revenue. Since trade-based money laundering and value transfer are commonly based on customs fraud, it is actually in the interests of the regional governments to cooperate in order to recoup lost customs duties and tax revenues. By systematically comparing declared imports and exports, trade anomalies can be readily identified that could be an indication of customs fraud, value transfer systems, and/or trade-based money laundering. Trade transparency could be the back door to regional underground finance. 
  • Talking about money laundering and terror finance with our  regional partners has not been particularly productive. Rather, we should emphasize reforms that produce much needed revenue. It is time to promote a  regional dialog or conference about reforming the ATT in a way that adds  additional revenue to government coffers, provides greater transparency and  accountability, targets the pervasive regional corruption, and promotes real  trade and development. 
  • A core principal in diplomacy is to find something in common with adversaries. Narcotics are a shared concern. Talking to Iran directly about methods to reduce narcotics trafficking and money laundering could be an opportunity for positive engagement. 
  • We need to make it quite clear in the region that our  adversaries are nothing more than narcotics traffickers masquerading as jihadists. We should highlight the fact that the use of narcotics is anathema  to good Muslims and that narcotics are having a ruinous effect, not just on the  West, but on local society and culture. 
Originally published October, 2009 by the Foundation for the  Defense of Democracy
Where have the IMPACT Cases Gone?  

The 1980s and 1990s must have been heady times for compliance officers learning their craft. I’m sure they recall the excitement, and perhaps trepidation, of whispered rumors and then the jolt of headlines in the morning newspapers about a major anti-money laundering investigation. High-level staff meetings would be convened hurriedly. Everybody wanted to know where the chips were going to fall. What financial institutions and business practices could be impacted?   

As a criminal investigator/special agent in the Department of Treasury, I began my anti-money laundering career in that same era. If industry was excited about these cases, the feeling was even more intense for law enforcement professionals. The personnel directly involved with the operation, senior management, and prosecutors had to weigh myriad factors in deciding what would be the opportune moment to bring the long-term case to fruition. For the few insiders directly involved in shaping events, the professional stakes could be enormous. The investigations could be “career cases.” 

Although perspectives and the level of involvement between  industry and law enforcement differ, these complex, long-term,  headline-grabbing, difference-making investigations are generally known as impact cases.

Besides the arrests and seizures, the cases make an impact  because of the publicity they generate, both in the United States and around the world. News articles and television reporting are widespread. Congressional briefings and hearings are often held, and agency budgets can be increased.

Impact cases and their resulting publicity often deter or disrupt criminal behavior. After an impact money laundering case, law enforcement analysts and investigators generally observe a change in criminal behavior as these criminals search for new ways to place, layer and integrate illicit proceeds. Impact cases also sometimes result in new laws, rules and regulations that directly affect AML compliance standards.  

Once upon a time, AML impact cases occurred on a fairly regular  basis. It felt like every few years a new impact investigation would burst onto  the scene. Old-timers may recall such impact cases such as the Bank of Boston,  the Pizza Connection, the Magharian Brothers, Operation Polar Cap, Isaac Kattan, Operation C-Chase, Bank of Credit and Commerce International, the Geographic Targeting Order, Operation Casa Blanca, the Bank of New York, among others. 

A brief review of two of my favorite cases will demonstrate the nature of impact cases and what we are missing today.  

Measured by the amount of money laundered, Operation Polar Cap remains the largest and perhaps most complex money laundering investigation in history. The first phase of the multi-agency task force investigation into this criminal affair concluded in 1989. Although there were many schemes uncovered in the original Polar Cap investigation and in the follow-up inquiries, they revolved primarily around the buying and selling of real and fictitious gold to mask the laundering of over $1.2 billion in currency generated by the sale of cocaine in the United  States.   

The earliest phase of the operation involved bulk cash from cocaine sales being delivered to collaborating gold dealers and jewelry makers in New York City, Houston, and Los Angeles. Fake gold bars were shipped from  Uruguay (even though Uruguay does not produce gold) to gold manufacturers in the United States. The shipments gave the appearance of a legitimate import business and the justification for money sent abroad.  In addition, drug money was packed in boxes purporting to contain gold, and was then shipped to cooperating jewelry retailers. The principal suspect jewelry retailer in Los Angeles was called Ropex.  

A network of primarily immigrant Armenians in the Los Angeles jewelry district manufactured gold chains and jewelry for wholesale distribution and retail sale. Since gold is a high value item, it was the perfect cover to mask deposits (placement) of large sums of illicit money and to wire (layering) large sums out of the country for gold purchases (integration).    

Gold purchasing schemes to launder the money became increasingly sophisticated. A variety of schemes were introduced, including paper purchases and sales via fictitious invoicing, which replaced the purchase and sale of real, physical gold. My contribution to Operation Polar Cap came at the conclusion of the investigation when I traveled numerous times to the Middle East, attempting to track down much of the fictitious invoicing. This was my first exposure to what is now known as “trade-based money laundering,” and it launched a career-long interest in the misuse of the international gold trade, financial crime in the Middle East, and underground finance. 

Even though it is highly unusual for legitimate jewelry  transactions in the United States to deal in the large volume of cash generated by Ropex gold “sales,” in the late 1980s with the exception of Wells Fargo  bank, no other bank in the Los Angeles jewelry district seemed concerned about  the origin of the funds. It was a form of willful blindness by the financial institutions involved. Hundreds of millions of dollars were going through Ropex-controlled bank accounts, and the banks involved with the transactions were obviously making hefty profits.  

Although the banks did fill out the mandated Currency Transaction Reports (CTRs) governing cash deposits of over $10,000, they never reported the transactions as suspicious, and the money laundering schemes went undetected for about two years. It was partially the result of this impact case and the failure of banks to report suspicious transactions that later led the Department of Treasury to propose the creation of Suspicious Activity Reports (SARs) to be filed by financial institutions. SAR reporting was formally implemented in 1996.   

The inability to recognize anomalies in the CTR data also caused Treasury’s Customs Service and the IRS to explore early forms of BSA data mining, and it contributed to their proposal to create Treasury’s Financial Crimes Enforcement Network (FinCEN) in 1989.   The result was the world’s first Financial Intelligence Unit. 

Operation Casablanca is another example of a notable impact case. Today’s headlines describe the escalation of Mexican narco-trafficking. We should not be surprised: In 1998, approximately 60 percent of the estimated 176 tons of South American cocaine was smuggled into the United States through Mexico. Mexico was also a lead smuggler of heroin, marijuana and  methamphetamine. During this time frame, Mexico’s seizures of these drugs fell substantially. Mexico’s anti-drug force, the Center for Anti-Narcotics  Information, was permeated with corruption and often only pretended to cooperate with U.S. law enforcement. Basically, many politicians were in bed with the narcotrafficantes.   

Operation Casablanca opened a window into this insidious network. Over the course of three years, the U.S. Customs-led undercover money-laundering investigation resulted in the arrest of 167 individuals, the seizure of over $103 million in U.S. currency, and tons of marijuana and cocaine. Most importantly, 26 Mexican bank officials and three Mexican banks were charged with laundering the drug money. The investigation revealed that officials from 12 of Mexico’s largest 19 banking institutions were involved in money-laundering activities. Bankers from two Venezuelan banks were also charged in the money-laundering scheme.  

The undercover operation lured the suspects into the United States under the pretense that they were attending a conference. They were arrested. Before the “takedown,” the operation was not shared with either the top Mexican or some ranking U.S. officials to protect the undercover agents. Politically, there were a lot of ill-feelings.  

Operation Casablanca was significant because it uncovered a  systematic scheme to knowingly launder money via a large number of primarily  Mexican institutions. Instead of targeting individual criminals, Operation  Casablanca focused on trying to penetrate -- and then dismantle -- a money-laundering system or infrastructure exploited by the cartels. Shortly after Casablanca, law enforcement would take this concept to a new level by attempting to attack the Colombian Black Market Peso Exchange – the largest money-laundering methodology in the western hemisphere. 

Admittedly, these cases and others like them occurred years ago; so what about today?

According to the International Monetary Fund, the magnitude of international money-laundering is estimated at approximately 3 to 5% of the world’s gross domestic product. Certainly, we have not eradicated the laundering of the proceeds of  crime. The economic downturn notwithstanding, there is probably more “dirty” money today than ever before.  In theory, the actual volume of laundered money, combined with increasing financial  transparency reporting requirements and other countermeasures should equate to  more arrests, seizures and impact cases.  

Yet impact AML cases have ceased to exist in the United States. There are multiple reasons why, including:  

After September 11,  the bureaucratic priority for financial crimes investigations has been terror  finance – with limited results.

The former U.S. Customs Service boasted many innovative  anti-money laundering programs and investigations. With the creation of the Department of Homeland Security, U.S. Customs ceased to exist. The Secret  Service and the Bureau of Alcohol Tobacco and Firearms also left the Department  of Treasury, resulting in Treasury's loss of a financial crimes investigative  arm. (The Internal Revenue Service is focused primarily on tax issues.)

Criminals adapt  faster than law enforcement.  For  example, law enforcement is challenged to keep up with criminals’ growing use of the Internet to launder money, virtual-world laundering, stored value cards,  trade-based money laundering, mobile-payments, etc.  

There is a glaring lack of financial crimes enforcement expertise at the federal, state and local levels. 

In law enforcement parlance, a common expression is a “big case means big problems.” Management in these agencies is often risk-adverse and does not want the bureaucratic headaches involved with large-scale cases. 

Law enforcement agencies are statistics-driven. A quick arrest from a “buy-bust” statistically can look the same as an arrest generated from a long-term complex undercover money-laundering investigation.  

Over the last few years, financial rules and regulations have been emphasized at the expense of enforcement, and AML legislation has effectively transferred some of the traditional investigative activities of law enforcement into financial institutions’ compliance and supervisory  functions.   

The original idea behind FinCEN was to support law enforcement agencies by analyzing and disseminating applicable information contained in BSA reporting. In my opinion, it is unfortunate that Treasury and Congress have let FinCEN drift away from this mission.

There is a glaring lack of accountability. Review the 2005 and 2007 National Money Laundering Strategies and various “strategic plans” by concerned departments and agencies. There is a considerable gap between  articulated plans and results. (The 2007 National Strategic Plan can be found  at http://www.treas.gov/press/releases/docs/nmls.pdf) 

The good news is that the law enforcement community at all levels is populated with some dynamic individuals that work hard under sometimes adverse conditions. Many are committed to following the money trails. Thanks to partnerships in the industry, more financial intelligence is available than ever before. I remain optimistic that I will read headlines once again that announce a major money-laundering investigation having dramatic and far-reaching impact.

Published in Complinet
Following the pirates' money? Here we go again  

On Wednesday, April 15, Secretary of State Hillary Clinton pushed for the arrest and prosecution of 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." 

Others can debate the success of the former tactic. However, I predict that just like the War on Terror Finance, efforts to successfully track and freeze pirate assets and financing will be minimal. 

As a former financial crimes investigator who has tried to follow money and value trails in areas similar to where the pirates operate, the challenges are daunting. Somalia is a lawless and failed state. The country has no financial institutions that are recognized in the West. There is little  traditional financial intelligence and less nexus to the United States. Its law  enforcement and intelligence assets are minimal. Sorting out bureaucratic venue  and competency issues will be challenging.

Kidnapping and piracy are serious crimes and will serve as  predicate offenses to charge money laundering in almost any jurisdiction. However, reliable information is lacking about what pirates do with the large  ransoms that they have received from governments, individuals, and shipping  companies. It is highly unlikely that the pirates purchase luxury homes and  vehicles like the typical narcotics traffickers. Obviously, they do not keep their assets in Somali banks. Similar to today's terrorists, pirates are diffused and operate within cells. This makes it even more difficult to follow the money and freeze their assets.

Similar to the way terrorists operate in parts of the Middle East, the Horn of Africa, and South Asia, pirates use culturally indigenous, underground, ethnic-based systems with which their members are familiar. These include cash, gold, and trade-based value transfers. It often involves hawala – an informal, underground value transfer system based on trust. A working definition of hawala that has been used in a court of law is "money transfer without money movement."

As we learned in the War on Terror Finance, policymakers'  understanding of these underground systems is lacking, and effective countermeasures do not yet exist. For example, only a few years ago many  officials in the United States were concerned about Al Barakaat, a worldwide money-remitting and hawala business primarily serving the expatriate Somali community. Al Barakaat and other hawala networks filled a banking need for those who had fled Somalia, which did not have any viable financial institutions during and after the long-running Somali civil war. As a Somali banker once told me: "Hawala is the poor man's banking system." 

However, the intelligence community reportedly developed  information that Osama bin Laden had contributed money to Al Barakaat and that it was also possibly associated with Itihaaad al Islamiya (AIAI), Somalia's largest radical Islamic group.

After September 11, Al Barakaat's assets were frozen and its records were seized. Investigation disclosed that most of Al Barakaat's funds were transferred via the regional hawala hub of Dubai, one of seven emirates in the United Arab Emirates (UAE). The government of the UAE provided unprecedented cooperation and access to financial records. 

However, the criminal investigation failed to establish a link between Al Barakaat and any terrorist organization. Most of the assets frozen in the United States under executive order and in other countries acting under UN resolutions were released. I fear the same results will occur if clumsy attempts are made to go after the pirate money trail.

As we have learned in the War on Terror Finance, hawala is an attractive mechanism for terrorist and criminal exploitation due to its lack of transparency and the highly resilient nature of the system. Today, hawala is the financial system in Somalia and pirates undoubtedly use it. And similar to the Al Barakaat example, regional hawala transfers are still consolidated and settled in Dubai.

In 2003, reacting to concerns regarding Al Barakaat and other allegations involving September 11 financing, the UAE Central Bank issued new regulations to help improve the oversight of hawala, including the registration of hawala brokers (hawaladars). The new regulations required hawaladars to submit the names and addresses of all originators and beneficiaries of funds and to file suspicious transaction reports on a monthly or quarterly basis. Unfortunately, these efforts have not been successful. 

According to information in the Department of State 2009  International Narcotics Control Strategy Report (INCSR) Volume II on Money Laundering, as of April 2008, the Central Bank had registered 265 hawaladars,  with an additional 104 applicants working to complete their registration requirements. Yet this is probably just a fraction of the number of hawaladars  operating in the UAE. 

There is no penalty for failure of hawaladars to register with the Central Bank. And since the inception of the registration program, reportedly there have not been any suspicious reports filed by hawaladars and no investigations. Since pirates use hawala, and Dubai is the regional hawala hub, and efforts to counter hawala have not been successful, we cannot expect to successfully "track and freeze" pirate money in the UAE. 

Obtaining financial information from Somalia's neighbors such as Ethiopia and Djibouti are just as fanciful. There are long running political and military disputes in the region. 

If the pirates use financial networks based further south in  Kenya and Tanzania, they will also be resistant to US efforts to track and freeze assets. According to the INCSR, recent investigations illustrate Kenya's vulnerability to money laundering, showing that criminals have been taking advantage of Kenya's inadequate anti-money laundering regime for years by evading oversight or reportedly paying off enforcement officials, other government officials, and politicians.

Reportedly, Kenya's financial system may be laundering over $100m each year. There were not any money laundering–related arrests, prosecutions, or convictions for 2007 or 2008. Similar to most countries in the region, Kenya lacks the institutional capacity and investigative skill to conduct complex investigations. 

The INCSR also notes that effective anti–money laundering controls in neighboring Tanzania are problematical. The State Department report suggests that: "Tanzania should examine vulnerabilities that it has not yet addressed, in particular the inherent vulnerabilities of alternative remittance systems and trade, and any additional weaknesses posed by less–regulated Zanzibar."

In both history and myth, the spice island of Zanzibar is  synonymous with the pirates of yesteryear. 

In her recent remarks on piracy, it is ironic that the Secretary of State said, "We may be dealing with a 17th century crime, but we need to bring 21st century solutions to bear." 

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.

Published in Complinet
March 26, 2009 

US shell companies and beneficial owners: It's time to end the hypocrisy  

Over the last few years, I have worked in approximately one dozen developing countries helping police, customs, and security services recognize and investigate money laundering and terror finance. During discussion periods, I am inevitably asked the following question. "Mr. John, my agency has a financial crimes investigation and the money trail leads to the American state of Delaware. We can't get any further information and don't know what to do. Can you help us?" As a former criminal investigator representing the United States, this question is, frankly, embarrassing.

From a money laundering and tax evasion standpoint, Delaware is not the only American state that has troubling incorporation and limited liability company (LLC) structures. In 2006, the US General Accountability  Office (GAO) issued a report, "Company Formations: Minimal Ownership  Information Is Collected and Available." (pdf) The report reviewed the legal requirements in all 50 states to set up corporations and LLCs, and found that most states failed to request beneficial ownership information. The GAO found that the absence of ownership information impeded law enforcement investigations of suspect corporations.

Some states seemingly compete against each other to see which can offer less accountability, less transparency, the most secrecy and, as a result, attract the most business and fees. Websites that offer incorporation services worldwide are touting US corporate secrecy. In transactions that can be completed over the internet in a few hours and for a few hundred dollars, corporations and LLCs can be formed in the US that provide many of the same secrecy provisions featured in traditional international tax and offshore havens.

US Senator Carl Levin (D-Michigan) has followed the issue  closely. According to Senator Levin, "States allow persons to form nearly two million corporations and LLCs each year in this country without knowing – or even asking – who the beneficial owners are behind those corporations. Right now, a person forming a US corporation or LLC provides less information to the state than is required to open a bank account or obtain a driver's license."

The United States routinely points to other countries' anti-money laundering/counter-terrorist finance (AML/CFT) shortcomings. It has played am major role over the years in identifying "uncooperative" countries and jurisdictions and placing these countries on formal and informal "blacklists." Yet the proliferation of defacto shell corporations on American soil spotlights hypocrisy and undermines US policy.

For example, as noted in the recently released 2009 State  Department International Narcotics Control Strategy Report (INCSR) Volume II on  Money Laundering, the British Virgin Islands and Hong Kong each have nearly  500,000 international business companies (IBCs) registered in their jurisdictions. The INCSR states the Dominican Republic, Grenada, Jamaica, Trinidad and Tobago plan to open "international financial centers," most of which offer the same services as offshore financial centers. In Panama, approximately 46,178 IBCs were registered in Panama in 2007. The INCSR continues that, "Panama has no requirement to disclose the beneficial owners of any corporation or trust; bearer shares are permitted for corporations; and nominee directors and trustees are allowed. The result is that illicit funds can be laundered and taxes evaded with little fear of detection and prosecution."

I am not an attorney skilled in the intricacies of international law, taxes, or finance. I don't understand the differences between LLCs, IBCs, IFCs, off shores, shell companies, and tax havens. Maybe I am missing something.However, I know as a criminal investigator that following a dirty money trail to Delaware is about as difficult as following it to those jurisdictions criticized above by the US State Department.

When I was assigned to Treasury's Financial Crimes Enforcement Network (FinCEN), I witnessed many requests for assistance from Egmont Group partner international Financial Intelligence Units (FIUs) that had  investigations focusing on Delaware. There was not much we could do.

Domestic law enforcement agencies are equally stymied. For  example, according to 2006 Congressional testimony, Immigration and Customs  Enforcement (ICE) reported that a Nevada-based corporation received more than  3,700 suspicious wire transfers totaling $81m over two years. However, the case  was not prosecuted because investigators could not identify the corporation's  owners.

In 2008, Department of Homeland Security Secretary Michael Chertoff wrote to a Senate Subcommittee, "In countless investigations, where criminal targets utilize shell corporations, the lack of law enforcement's ability to gain access to true beneficial ownership information, slows, confuses, or impedes the efforts by investigators to follow criminal  proceeds."

The Financial Action Task Force (FATF) has repeatedly criticized the United States for failing to comply with a FATF standard requiring beneficial ownership information.

Undoubtedly because company formations can be lucrative, nothing has been done. Perhaps things are about to change.

In March 2009, Sen. Carl Levin, D-Mich., Sen. Chuck Grassley, R.-Iowa, and Sen. Claire McCaskill, D-Mo., introduced the Incorporation Transparency and Law Enforcement Assistance Act to help law enforcement stop the misuse of U.S. corporations. Among its provisions, the bi-partisan Act (S.569) would require states to obtain a list of the beneficial owners of each corporation or LLC formed under their laws, ensure this information is updated annually, and provide the information to civil or criminal law enforcement upon receipt of a subpoena or summons. The Act would also require corporations and LLCs with non-US beneficial owners to provide a certification from an in-state formation agent that the agent has verified the identity of those owners.

As the Group of 20 prepares for a meeting in early April to try to improve global financial rules, there are reports that financial and tax havens of all sorts may receive scrutiny. As part of the process, I hope the  United States is called to lift the veil of states' secrecy when it comes to corporate beneficial owners.

The current financial meltdown and a dangerous laxity in financial crimes enforcement should have taught us that we can no longer afford business as usual.

I suggest the American delegation at the Group of 20 headed by President Barack Obama should be guided by the following quote from then Senator Obama; "It's time for the United States to meet its international anti-money laundering commitments, and that means getting beneficial ownership information for US corporations."

Published in Complinet
March 5, 2009  
Back to Basics  

As a former financial crimes investigator, I will tell you a  secret: currently, money launderers have little chance of being caught and less chance of being convicted.

Over the last few months there has been a steady stream of  headlines demonstrating weaknesses in the law enforcement and regulatory communities both in the United States and around the world. For example, lax  enforcement has been apparent in the Bernie Madoff ponzi scheme, the  importation of tainted toys and pharmaceuticals, the melamine scare, the  manufacture and distribution of peanut butter laced with salmonella, political corruption, mortgage fraud, etc. What is even more frightening is that there  are undoubtedly additional examples that do not make headlines because we  simply do not know about them.

The overarching theme in all of these cases is GREED, which is also the common denominator for those involved with money laundering.

The International Monetary Fund (IMF) estimates the magnitude of money laundering is about 3-5 percent of the world's Gross Domestic Product (GDP). Using 2007 World Bank data, global GDP is approximately $72.3trn. In other words, international money laundering can be estimated at between approximately $2.17 and $3.61trn a year. The very magnitude of approximately $3trn suggests that dirty money is found in every country in the world - both developed and developing alike. Greed is universal. For some jurisdictions to claim otherwise they are kidding themselves. Furthermore, experts feel the $3trn total is probably about evenly divided between criminal tax evasion and specified unlawful activities or predicate offenses for money laundering such as narcotics trafficking.

So in examining this massive amount of global dirty money, isn't it fair to ask how much money is recovered and how many criminals pay a price?

The US government likes "measureables." Unfortunately, there are few meaningful statistics that measure the effectiveness of our anti-money laundering enforcement efforts.

Let's use a few you probably never heard about before.

The Office of National Drug Control Policy estimates that Americans spend approximately $65bn per year on illegal drugs. Yet according to the Drug Enforcement Administration (DEA), only about $1bn is seized per year  domestically by all federal agencies combined. The approximately 1.5 percent  successful seizure rate is actually even more depressing because identifying  bulk cash related to drugs is probably the most straight forward anti-money  laundering investigation. So we can infer the seizure rate is much worse for  other kinds of money laundering in the United States that collectively total in  the hundreds of billions of dollars.

Of course, the true measure of success is prosecutions and  convictions. It is not, as some misguided policy makers claim, increasing the number of sanctions and designations or suspicious transaction reports (STRs) filed with a financial intelligence unit (FIU).

The United States has one of the world’s strongest and most  aggressive anti-money laundering and counter-terrorist finance enforcement programs. It has skilled and dedicated law enforcement professionals. As good  as America is, however, a study a few years ago showed that money launderers in  the United States face a less than five percent risk of conviction. While  methodologies and statistics of this nature can be open to question, sentencing  guidelines change, and undoubtedly many criminals plea bargain to lesser  charges, the bottom line is that for money launderers to be caught and  convicted, they have to be either very stupid or very unlucky.

Globally, a few countries such as the United Kingdom, Spain, and Italy boast impressive financial crimes enforcement programs. Yet as measured in the recently released US State Department's International Narcotics Control Strategy Report Volume II on Money Laundering, overall there is a worrisome lack of effective enforcement.

For example, according to the Russian FIU, in 2008 an estimated $370bn was laundered by Russian citizens. Although corresponding enforcement statistics are lacking, measured against the amount laundered the statistics cannot be good.

In 2007 Japan had the second highest Gross National Product in the world. Despite the prevalence of narcotics, other predicate offenses and  organized crime, Japan has a horrible record of prosecuting and convicting  money launderers.

Outside of one or two possible exceptions, I am not aware of any money laundering convictions in the entire Middle East that deal with those  countries own citizens.

Although there has been some recent improvement in Mexico and Canada, there is a conspicuous lack of money laundering convictions. Unfortunately, their internal enforcement challenges exacerbate the situation  in the United States.

I could list many other examples of lax enforcement. The point is that although a few jurisdictions can point to real progress in their anti-money laundering programs, most have poor enforcement records as measured in prosecutions and convictions.

In the current economic downturn, more people finally seem to understand that enforcement is necessary to keep both individuals and financial  systems honest. There are even hollow cries for accountability in Congress.

In 2005 I wrote Hide & Seek: Intelligence, Law Enforcement and the Stalled War on Terror Finance. I was very concerned about troublesome signs that the United States was moving away from effective anti-money laundering and financial crimes enforcement. As a corollary, I felt our "war on terror finance" was "stalled." Years ago I suggested that a new emphasis be placed on enforcing the laws, rules and regulations that are already on the books. I urged that Congress and regulatory agencies do a better job of oversight. Most important, I argued that real progress requires a different philosophical and bureaucratic emphasis. Simply put, we have to get back to the basics of enforcement.

Published in Complinet 
September 16, 2008 
Each FinCEN analyst reviewed 4 SARs an hour?

The US Treasury Department recently provided the Senate Finance Committee with responses to questions that were posed when under secretary Stuart Levey was testifying at a hearing in April. Interestingly, it appears Treasury would have one believe that each of its analysts scrutinizes scores of suspicious activity reports every hour. Treasury's Financial Crimes Enforcement Network is the US government's Financial Intelligence Unit and the entity responsible for receiving, analyzing, and appropriately sharing financial intelligence, including SARs. During FY2007, US financial institutions filed1,157,468 SARs.

According to figures Treasury provided to the Senate Finance  Committee, FinCEN's Office of Law Enforcement Support currently employs eight  analysts who are "devoted to the study of SARs for the express purpose of  identifying and evaluating trends and patterns." An additional seven analysts reportedly are involved in various "tactical analytical" activities that "have the potential of identifying trends and patterns in SARs or other Bank Secrecy Act data".

So, by its own admission, FinCEN has approximately 15 analysts studying SARs. If we divide the total number of SARs filed in 2007 (1,157,468) by the number of purported analysts, it becomes apparent that each analyst must have examined 77,164 SARs last year. That translates to approximately 350 SARs a day or approximately 44 SARs each hour if they work eight hour days! With this in mind, it is difficult to believe Treasury's claim that FinCEN "does not have a 'backlog' of SARs."

That statement appears even more far-fetched when one considers that FinCEN claims it is no longer conducting simple, old-fashioned analysis, but is using technology to heighten the value of each report. Treasury told the Senate Finance Committee that "advances in technology and analytic practices have heightened the importance of BSA data in overall efforts to fight crime and protect our financial systems by providing enhanced mechanisms for manipulating and linking data."

However, since the late 1990s, FinCEN's repeated attempts to develop effective "data mining" and link-analysis systems have all failed. The latest system to collapse was FinCEN's vaunted "BSA Direct", which was years in development and wasted tens of millions of dollars. Moreover, when I left FinCEN in 2002, the articulated policy at the time was that "pro-active" analysts could only concentrate on SARs that have a nexus with terrorism. I had a severe philosophical disagreement with that policy which I understand has not changed.

According to the information Treasury provided to the Senate Finance Committee, in 2007, financial institutions filed 2,312 SARs with a terrorist financing nexus. So, it would seem that is the number of SARs that were closely examined by FinCEN's "pro-active" section. The only logical conclusion is that the remaining one million SARs that do not have an obvious nexus to threat finance are for the most part ignored.

Treasury will argue that increasingly it "empowers" its law enforcement "customers" so that they can do their own analysis. FinCEN disseminates SARs to these customers at the federal, state, local and increasingly international level. "SAR review teams" are now found in most large cities in the United States. From a local and tactical analytical standpoint, these developments are encouraging.

However, the reality is that an interagency SAR review team in Chicago is going to focus on SARs that involve the greater Chicago area. The Secret Service that is given a download of SARs in Los Angeles is going to focus on SARs that deal with its area of jurisdiction; for example, counterfeit  currency in Los Angeles. As a result, financial intelligence is not adequately  exploited. Big picture strategic analysis is often lacking. Crucial links are  missed.

It has been apparent to many observers that over the last few years FinCEN has moved away from its original mission of "supporting law enforcement." It has turned itself into a regulatory agency. If there was any doubt, the numbers speak for themselves.
September 15, 2008 
Is the US Treasury Department cooking its CFT Books?  

US Treasury Department statistics regarding the amount of funds frozen as part of the so-called "War on Terror Finance" are an important metric to help us gauge the success of our government's crucial efforts. The problem is which set conflicting statistics do we believe? The US Treasury's Office of Terrorism and Financial Intelligence recently provided one such set of statistics to the Senate Finance Committee in response to a question posed to under secretary Stuart Levey during his April testimony. Between September 11, 2001 and December 31, 2007, a significant amount of terrorist funds have been frozen, according to TFI.

"US persons had reported $20,736,920 as blocked pursuant to the Terrorism (31 CFR Part 595), Global Terrorism (31 CFR Part 594), and Foreign Terrorist Organizations (31 CFR Part 597) sanctions regulations administered by [OFAC]. OFAC does not have access to the amount of terrorist-related funds that have been blocked worldwide. Furthermore, seizures are not reported to OFAC," TFI claimed.

On the surface, this is a straightforward answer. However, as the magician says, "There is more here than meets the eye." Consider for a moment the seemingly contradictory figures Treasury announced in 2006. According to those numbers, $112m in terrorist assets had been blocked or seized around the world by the end of 2001. At the end of 2005, the amount of assets frozen globally had grown to a little more than $150m, roughly $43.9m of which was blocked in the United States.

Confusion abounds
So, which figure is accurate? Do we believe the $20.7m number given in 2008 or the $43.9m number proffered two years earlier? Do we accept Treasury's 2008 statement that there is no information on terrorist assets blocked worldwide or do we use Treasury’s 2006 numbers that by the end of 2005 approximately $150m was frozen? Do the numbers indicate successful strategy or do they disclose that the war on terror finance is stalled? The answer is that we need additional data, common definitions, and a complete breakdown of Treasury statistics for accurate analysis. Still, the newest metrics and apparent discrepancies are and both insightful and important.

First of all, the numbers are important because in the years  following 9/11, Treasury made them important. In 2001, 2002, and 2003, Treasury  and the administration touted the numbers as evidence of their success in the  War on Terror. Then, a few years later, the numbers were not favorable. Perhaps  that is why Treasury refused to release updated figures until they were pointedly asked to do so by the Senate Finance Committee. Treasury cannot have it both ways. They can't use financial metrics when they are perceived as favorable and then be slow to disseminate them when they are unfavorable.

Putting figures into perspective
The numbers are also insightful because whether we use Treasury's 2006 or 2008 metrics the amount of terrorist assets blocked and seized is quite small. For example, the largest money laundering seizure in history took place on March 16, 2007, when more than $205m in cash was seized by the Mexican police. In comparison, Treasury's 2008 statistics for cumulative terrorist assets blocked between 2001 and the present is a paltry sum indeed. Likewise, Treasury's $64m for cumulative worldwide terrorist related assets seized since 9/11 is paltry to say the least. However, the casual observer, or even the Senate Finance Committee, may not be aware of this.

In regard to Treasury's statement that it does "not have access to the amount of terrorist-related funds that have been blocked worldwide," I refer Treasury to the country summaries in the Department of State's annual International Narcotics Control Strategy Report on Money Laundering. Although the reported numbers are not always comprehensive, data from selected countries has been reported via US embassies.

Not-so-smart sanctions?
Assets blocked and frozen are also an integral part of Treasury's often-touted "success" applying financial pressure on rogue regimes with "smart" sanctions and designations. A close examination reveals Treasury's figures on that front also are underwhelming. As I have been urging for years, we should be questioning the effectiveness of the strategy.

For example, in mid-June, Iran announced it was withdrawing $75bn in assets from European banks in the face of tightening international sanctions over its disputed nuclear program. A large part of the Iranian assets were converted into gold, which is impervious to financial asset seizures. Should we really be surprised? If you were a terrorist or a targeted Iranian mullah, would you keep your assets in locations and in a form subject to asset seizure, sanctions and designations? The answer apparently is obvious to all but US policy makers.

Investigations and law enforcement are the keys to combating  money laundering and terror finance. Unfortunately, there are no longer Treasury metrics for such efforts because with the creation of the Department  of Homeland Security, the result was an emasculation of Treasury's enforcement capabilities.

In his testimony before the Senate Finance Committee, Under  secretary Levey recalled that in December 2005, the 9/11 Commission's Public  Discourse Project awarded its highest grade, an A-, to the US government's  efforts to combat terrorist finance. Certainly, there have been successes in  the War on Terror Finance. However, that A- grade was given in response to  statistics that we must now question. A more meaningful grade would be based on  true indicators of success and the reality hiding behind the numbers.
April 1, 2008
Statement Before the Senate Finance Committee

The Stalled War on Terrorist Finance 

Without money, there is no terrorism.

It is an axiom in the U.S. intelligence, law enforcement and  military communities that successfully following the money trail in the War on Terrorism is potentially more important than any tactical battlefield victory.  However, a few years ago I spoke with a South Asian businessman with ties to  underworld finance. In a damning statement about our efforts on the War on  Terrorism’s financial front he told me, “Don’t you now that the terrorists are moving money and value right under your noses? But the West doesn’t see it.  Your enemies are laughing at you.”

In 2005, I retired after a 26 year career as a Case Officer for the Central Intelligence Agency and as a Special Agent for the U.S. Department of Treasury. My final assignment was in the Department of Treasury’s Office of Terrorism and Financial Intelligence (TFI). I have tremendous respect for TFI and Under Secretary Stuart Levy. In today’s testimony, Under Secretary Levy is correct noting that we have had some success in on our War on Terror Finance. We also have many challenges ahead of us. In large part this is because we have spent an enormous amount of time and resources attempting to follow the terror finance trail in many of the wrong places and emphasizing tactics and countermeasures that were developed for previous conflicts. Because I feel passionately about the importance of “following the money” in combating  terrorism, I wrote a book, Hide & Seek – Intelligence, Law Enforcement and  the Stalled War on Terror Finance; Potomac Books, 2006. The following are a  number of observations and facts in our War on Terror Finance that have been largely ignored.

Shortly after the most successful terrorist attack in history, a Pakistani journalist located Osama bin Laden in the mountains of Afghanistan. Bin Laden was asked if he was afraid the West would move to identify and seize al Qaeda’s assets. He was quoted as saying that attempts to find and freeze such assets “. . . will not make any difference to al Qaeda or other jihad groups. Al Qaeda is comprised of modern, educated young people who are as aware of the cracks in the western financial system as they are of the lines in their own hands. These are the very flaws in the western financial systems which are becoming a noose for it.” The funding for September 11 and other terror attacks worldwide demonstrate that al Qaeda has identified many of those flaws.

Unfortunately, as has happened repeatedly throughout history, decision makers initially persist in fighting new wars using tactics and procedures developed for previous conflicts. In the new War on Terror Finance, our bureaucracies and decision makers insisted that the Bank Secrecy Act’s financial transparency reporting requirements and sanctions and designations would be our primary financial countermeasures. The results have been disappointing.

After September 11, financial investigations confirmed that the terrorists identified the “cracks.” The operation cost al Qaeda approximately $300,000-$500,000. None of the tens of millions of financial transparency forms filed in the U.S. or the countless millions of similar forms filed overseas captured the movement of funds to finance the attacks by the 19 hijackers. Moreover, in subsequent terrorist attacks from Bali to Baghdad, financial intelligence reports filed primarily by financial institutions and money service businesses have not proved particularly helpful. Simply put, terrorists use inconspicuous amounts of money in ways that do not trigger the financial reporting requirements that were designed primarily for the large amounts of money laundered in the War on Drugs.

Why the emphasis on outdated countermeasures such as those that were developed during the War on Drugs and the Cold War? After September 11, I watched as entrenched managers and government bureaucracies moved to preserve their turf, vested interests, reputations, and budgets. For example, Treasury’s Financial Crimes Enforcement Network (FinCEN) was reluctant to look past the BSA data it was mandated to analyze and regulate.

FinCEN should be the U.S. government’s premier financial crimes resource. Unfortunately, it has never lived up to its early promise and potential. Annually, FinCEN receives approximately 18 million financial intelligence reports, including about one million Suspicious Activity Reports (SARs). Yet FinCEN’s attempts to systematically analyze this massive amount of financial intelligence have been disappointing. For example, repeated attempts at “data mining” financial intelligence including the successive “Artificial  Intelligence,” “Component Analytical System,” and “BSA Direct” programs have  all failed. The combined monetary cost of these failures is in the multi-tens of millions of dollars but the real cost is the waste of precious time while we  are fighting the War on Terror. (FinCEN management was never held accountable  for the repeated failures.)

There is now serious discussion about FinCEN receiving  cross-border wire transfer data from financial institutions. If FinCEN cannot analyze 18 million financial intelligence reports a year, what in FinCEN’s  track record suggests that it will be able to efficiently process and analyze  exponentially more information?

Moreover, FinCEN only dedicates a very small number of analysts to “pro-actively” examine SAR filings for criminal purposes. And management has told the analysts to only examine SARs that are linked to terror finance. How does one know that other forms of suspicious activity are not possibly linked to terror? And if in the course of reviewing SARs for terrorism, if the analysts find unrelated signs of criminal activity that should be brought to the attention of law enforcement the information is ignored. The bottom line is that pro-active analysis of financial intelligence at FinCEN is extremely weak for law enforcement – as opposed to regulatory – purposes.

Today, FinCEN believes that it can best serve law enforcement by “empowering” state, local, and other federal agencies by granting them access to BSA information and letting them do their own financial analysis. However, the results have also been mixed. As noted, FinCEN’s attempt at establishing “BSA Direct” failed and it’s Project Gateway that grants access to BSA data has changed little from the mid-1990s. I have spent a lot of time over the last two years teaching state and local law enforcement about money laundering and terrorist finance and I know first hand that there is a continued need for access to BSA financial intelligence that is not currently being met. Meaningful “strategic analysis” and insight into new money laundering and terror finance methodologies are also in short supply. Perhaps this is because FinCEN suffers a continuing “brain drain” and a hemorrhage of expertise. It has also suffered a revolving door syndrome of departing directors.

Financial institutions and money service businesses spend enormous amounts of money and resources complying with government mandated  financial reporting requirements. The industry would be shocked to learn the  true extent of the under utilization of their reports. There is a growing movement to subject a long list of “dealers” to financial-transparency  reporting requirements. Although I have seen first-hand the utility of financial intelligence, before we propose additional regulations and the commensurate reporting requirements, we should insist that the current data is properly exploited.

When FinCEN was originally created, its mission was to “support law enforcement.” Moving away from that mission, FinCEN has now turned itself into more of a regulatory agency. The results are also mixed. For example, the United States currently has few safeguards against abuse of “new payment methods” (NPMs) sometimes also called e-money, digital cash, or m-payments. NPM service providers in the United States are classified as money service businesses and, in theory, must register with FinCEN. (Most small-scale money service businesses do not comply with registration requirements and there is little enforcement of the regulations.)

The NPM issue is briefly mentioned in the 2007 U.S. National  Money Laundering Strategy:

“FinCEN, in coordination with the federal banking regulators and the industry, will issue guidance and develop regulatory definitions and requirements under the BSA for stored value products and payment systems.”Unfortunately, there has been little progress in formulating and disseminating  guidance and our traditional money laundering countermeasures are not adequate  to address the looming threat posed by abuse of m-payments to today’s e-banking  and cashless system. In my opinion, we must begin to take action soon on the NPM front. A true partnership will be required between regulators, industry,  and law enforcement.

In addition to our over reliance on BSA reporting requirements to combat terror finance, there has also been a misplaced emphasis on financial blocking orders and designations.

By the end of December 2001, the United States, acting in concert with the United Nations, was able to document the freezing of $112 million of terrorist assets around the world. This money was primarily “fruit of the low-hanging tree,” or easy pickings. By 2005, the Department of Treasury  reported that 47 countries worldwide have frozen a total of approximately  $150,000,000 of terrorist assets since September 11. Of that amount only  $64,600,000 has been seized, a figure that has remained virtually unchanged since 2002. In the global contest of hide and seek, we have been spending an  inordinate amount of time and resources looking in many of the wrong places.  Using the government’s own benchmarks, the numbers by themselves demonstrate  the War on Terrorism Finance is stalled. Perhaps that is why the Department of  Treasury, despite numerous requests, would not forward current freezing and seizure statistics to the Department of State in preparation for the  congressionally mandated 2007 International Narcotics Control Strategy Report – Volume II on Money Laundering and Financial Crimes.

Slowly recognizing that the financial “measureables” are not  favorable and that there has been a paucity of successful investigations and prosecutions, some observers and policy makers say that the numbers do not  matter. They argue that our efforts have forced the terrorist financiers to use  cash and underground financial systems such as hawala to escape the  international financial transparency reporting network. However, I witnessed  the use of bulk cash and indigenous, culturally unique methods of money and  value transfer in areas where our adversaries operate long before September 11.  They are still being used. And current countermeasures and regulatory “solutions” that lack enforcement are powerless to stop them. 

“Smart” sanctions and designations are increasingly attractive to policymakers, particularly in the stalled War on Terrorist Finance. As former Treasury Secretary John Snow noted: "When the U.S. is confronted with a threat that is unreceptive to diplomatic outreach and when military action is not an option, [financial] tools are often the best authorities available to exert pressure and to wield a tangible imact."

Weapons have, however, been known to backfire. Sometimes the rule of unintended consequences comes into play. For example, some believe that the sanctions imposed on the former regime of Saddam Hussein led directly to present day Iraq’s systematic corruption, entrenched smuggling networks, and underground finance. Today, the break down of law and order and crime for profit directly fuels the terrorists and civil strife.

Last year I was in Belgrade discussing corruption with Serbian officials. They emphasized that the same sanctions that helped bring Slobodan Milosevic to Dayton hurt the common people the most. Similar to Iraq, the Serb officials told me that criminal groups were apparently the biggest winners, thriving in a corrupt environment fostered by sanctions. Fraud and smuggling networks do not simply disappear when embargoes and sanctions are removed or the conflict ends. Organized criminal networks and the vested interests that bolster them become entrenched. Embargoes often encourage smuggling, an efficient network of front companies, money laundering, underground finance, and tremendous profits for those involved in the black market. Law enforcement has seen time and again that whenever a regulatory barrier is put up, the unscrupulous will circumvent it. Additionally, sanctions often have the unfortunate side-effect of forcing previously monitored activity underground. We should remember this lesson when there are political cries to use increasingly stringent sanctions and designations against Iran.

It also took far too long for analysts and decision makers to understand the basic principle that terrorists, like money launderers, like private investors, d i v e r s i f y. In this new war, the dirty money is not  going to be found in the proverbial Swiss bank account. As bin Laden said, our  jihadist adversaries are smart and know the value of spreading risk. They also  use “systems” or investment and finance strategies that they are familiar with.  In contrast, at FinCEN during the years surrounding September 11, upper  management was fixated on western style financial institutions and BSA data and  literally prohibited staff from examining indigenous and ethnic-based alternative remittance “systems” common in areas where our enemies are found.

Underground banking sometimes also known as “alternative  remittance systems” or “informal value transfer systems” has many variables. Underground financial systems are almost all based on trust and are common  among family, ethnic, tribal, and clan groups. Systems such as hawala are  sophisticated, efficient, and effective. There is little or no paper trail for  western criminal investigators to follow. They evade BSA reporting requirements  in this country and financial transparency countermeasures around the world.  Culturally and historically, most of the informal systems use trade to provide “counter valuation” or a means to balance the books.

Any commodity can be used in trade-based money laundering and value transfer including gold, natural gas, textiles, toiletries, electronics, 
foodstuffs, etc. A very simple method of money laundering via trade is over invoicing. For example, if a shipping container of electronics is worth $50,000, but is over-invoiced for $100,000, the subsequent payment of $100,000 will cover both the legitimate cost of the merchandise ($50,000) and allow an extra $50,000to be remitted or laundered. The business transaction and accompanying documentation disguise the illicit transfer of $50,000, and washes the money clean. This type of fraudulent trade and money laundering is very effective and 
found around the world. In fact, some academics studying U.S. trade data have estimated that up to 70% of the money laundered in the United States takes place via trade. (It is estimated we are also losing billions of dollars in lost customs revenues but we do not know for certain because we have never systematically examined the problem).

Barter trade is also effective in laundering and terrorist  finance. In certain areas of Afghanistan and Pakistan, the going rate for a kilo of heroin is a color television set. Afghan drug lords exchange narcotics  for stolen European cars that often are brought into the country through Iran.  In South Africa, diamonds are exchanged for the synthetic drug mandrax. In  Pakistan, religious schools known as madrassas have laundered cash donations  via over-invoicing animal hides. The proceeds were then given to jihadist  groups. These types of transactions are obviously not captured by financial  transparency reporting requirements that have been our primary countermeasure. They are examples of what bin Laden called “cracks” in the western financial  system and off our financial radar screens.

In 2003, I successfully introduced the concept of “Trade  Transparency Units” (TTUs). Seeking to exploit the “back-door” of trade, the concept was designed to examine trade anomalies that may be indicative of money  laundering, underground finance, or perhaps even terrorist finance. In an  excellent example of interagency cooperation, the TTU initiative was backed by  the Departments of Treasury, State, and Homeland Security. Prototype TTUs are now being developed overseas. TTUs are an “imaginative” initiative in counter terror finance and one that deserves continuing Congressional support and funding.

Other indigenous financial “systems” employed by our adversaries includes the use of gold. For example, in May 2004, in one of the very few public pronouncements by al Qaeda about finance, Osama bin Laden himself offered a reward for killing coalition forces’ commanders. The reward was offered in gold. In 2005, cartoons of the prophet Muhammad were printed in a Danish newspaper. The resulting publicity caused outrage in the Muslim world. In February, 2006 the Taliban offered 100 kilograms of gold to anyone who killed the individuals responsible for the “blasphemous” cartoons. Why are terrorists attracted to gold?

Due to its unique properties, gold can act both as a commodity and as a defacto bearer instrument. Historically, gold has been the commodity of choice in balancing the books in hawala transactions. In Arabia and South Asia, gold is an intrinsic part of the cultures. Gold is part of the way Save of life and a way of doing business. Traditionally, calculating wealth in Zakat – charitable contributions and one of the five pillars of Islam – has been based on gold. However, both before and after September 11, senior management at Treasury’s FinCEN actually imposed a gag order on any discussion involving gold. How can we win a war if facts and ideas are censored? Similarly, those that tried to talk about hawala and trade-based money laundering at Treasury’s FinCEN were discredited and chased away. As a result, in the months and years after September 11, valuable time was lost in the War on Terrorism Finance as the bureaucracies debated and struggled to adopt common frames of reference in “newly discovered” terrorist finance schemes.

However, the schemes were not new. In fact, they have been around for generations. As a result of my intelligence gathering and investigations overseas, I had been trying desperately to call attention to these systems. But for too long they were off the radar screen of our western-centric bureaucracies where management could relate to bank checks, wire transfers, and ATM machines but not the equally sophisticated ways of transferring value found around the world that are not part of our traditional culture.

Beginning in the early 1990s, I began to travel frequently to the Middle East. Prior to September 11, I probably had more investigative experience and contacts in the Middle East, particularly in the area of trade  transshipments and money laundering, than any other U.S. law enforcement  official. It was readily apparent that Dubai in the United Arab Emirates was  developing into a laissez-faire commercial and money center. Everything goes  through Dubai. The trails of transnational crime that I followed eventually led  to Dubai. Despite the obvious, U.S. intelligence was not looking at Dubai  itself but only used Dubai as a vantage point to focus on nearby Iraq and Iran. My continuous and documented appeals in 1993, 1994, 1995, and 1996 to open a  U.S. law enforcement office in the Middle East and particularly Dubai were  ignored.

Decision makers in Washington D.C. were too slow to recognize that they needed to move away from their focus on the U.S. law enforcement “Attache” network in Europe that was put in place to help combat the Cold War. It was only after the investigation into the financing of September 11 and the realization that most of the terrorist funding passed through Dubai, coupled with the findings that A.Q. Khan, the Pakistan nuclear scientist and “father of the Islamic nuclear bomb” used Dubai for many of his front companies and laundering network, that official Washington took action and in 2004 placed permanent FBI and DHS/ICE investigators in the United Arab Emirates. We lost too much time. In my opinion, Dubai is still at the cross roads of illicit trade and finance in the Middle East and South 
Asia.

According to recent reports from the United Nations, poppy  cultivation in Afghanistan soared almost 60% in 2006 and another 17% in 2007. Afghanistan produces over 90% of the world’s supply of opium. Much of the  recent rise in production is coming from Taliban strongholds in the southern  part of the country, particularly Helmand province. Trafficking in narcotics  produces billions of illicit dollars every year in an area of the world that is  quite hostile to western interests. Much of that illicit income is findings its  way to terrorists.

Sadly, over six years after the U.S. and coalition partners  entered into Afghanistan, we have made virtually no progress in understanding and identifying some of the entrenched South Asian money and value trails  employed by our enemies.

During a 2006 trip to Kabul, I asked Afghan bankers, hawaladars, and businessmen how our adversaries were laundering narcotics proceeds and financing terrorism. Without exception, they told me that dirty money was not being laundered via the 13 licensed banks then operating in Afghanistan – the focus of our efforts against terrorist finance. According to the Afghans, the value was laundered primarily through trade.

Opium poppy is one of the few things that Afghanistan produces that outsider’s value. In fact, opium gum is often used as a currency, especially among rural farmers. Trading networks with sinister ties are also  involved. While construction materials, foodstuffs, electronics, and necessities for rebuilding Afghanistan are flooding into the country via  transit trade agreements with neighboring Pakistan and Iran, the hope and  progress they bring are too often offset by the exchange for drugs flowing outside the country.

Most of the trade goods that enter Afghanistan are purchased in the regional shopping center of Dubai. Dubai has a liberal trading sector, modern infrastructure, transportation facilities, and efficient financial and  business services. Dubai is also the regional hawala center. Trade is the  primary means to transfer value in settling accounts between regional  hawaladars. Trade fraud and over-and-under-invoicing are common and are often employed to launder money and transfer value. Moreover, Dubai has demonstrated direct ties to terrorist finance.

Regional misuse of trade acts as a kind of a laundering wash cycle. The cycle is creating a culturally unique South Asian-Arabian mix of business, finance, and drugs that – as a whole – is little understood but presents a clear and present danger to the region and our interests.

Unfortunately, our bureaucracies have not yet learned the lesson that traditional money laundering countermeasures that focus on large amounts of illicit money moving through banks will not prove effective in combating underground networks. Trade-based laundering of Afghan drug proceeds is another major “crack” that regional jihadists are exploiting.

The bottom line on measuring progress in traditional money  laundering is best measured in successful prosecutions and convictions. Unfortunately, the record is not good. According to the State Department’s 2008  International Narcotics Control Strategy Report, Volume II on Money Laundering  and Financial Crimes, “Far too many countries that boast solid anti-money  laundering/counter terrorist finance (AML/CTF) standards and infrastructures  are still simply not enforcing their laws. This is true in all corners of the world and for both developed and developing countries alike. A review of recent  data demonstrates that some jurisdictions are having trouble converting their  anti-money laundering policies and programs into investigations, prosecutions,  and convictions. In some cases, the lack of enforcement is due to lack of  capacity, but in far too many others it is due to a lack of political will. In  addition, too many jurisdictions are getting caught up in the AML/CTF process  and losing sight of the objective.”

In the United States, prosecutorial statistics on AML/CTF are open to debate. However, there is no question that since the creation of the Department of Homeland Security, there has been a sharp drop-off in significant money laundering investigations as compared to the 1980s and 1990s. Why have noteworthy investigations disappeared? Since global money laundering is currently estimated at approximately $3 trillion a year, the logical conclusion is that there has been a lack of enforcement.

On May 13, 2003, a memorandum of agreement between the Department of Justice and the newly created Department of Homeland Security was signed, giving the FBI unprecedented control of investigations and operations related to terrorist finance. The FBI won its long standing rivalry with the Department of Treasury for primacy on terror finance. However, almost five years later, the non-results speak volumes about the wisdom of this policy.

In my opinion, the creation of the Department of Homeland  Security and the simultaneous emasculation of the Department of Treasury’s Office of Enforcement was the single most grievous mistake in our War on Terror  Finance. Treasury (particularly, legacy Customs) boasted criminal investigators  skilled in finance, smuggling, trade, fraud, and cross-border crime; the very  elements involved in terror finance. When Customs was incorporated into the Department of Homeland Security, the accumulated expertise rapidly disappeared. 

Over the last few years, the mandate given to the new Immigration and Customs  Enforcement (ICE) has been immigration. The Department of Treasury no longer  has an enforcement arm. Particularly since September 11, we have emphasized  regulatory “solutions” at the expense of enforcement. I believe this is the  primary reason why our government is so dependent on countermeasures that may sound impressive in testimony but have precious few real-world results.

Our War on Terrorist Finance is stalled It is time to re-assess our efforts.
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