FCPA Compliance and Ethics Blog

December 29, 2011

Fruit, Teddy Bears, Checking Accounts and Compliance

Filed under: Anti-Money Laundering,compliance programs,Due Diligence,FCPA — tfoxlaw @ 1:48 am

I recently opened a new business checking account at my local bank. To open the account, I visited with the bank officer I have done business with over the past couple of years. She asked how my law practice was doing and then inquired into why I wanted to open up another checking account. After reviewing the corporate documentation and EIN that I brought along with me, she approved the new account. As we discussed my compliance practice she related that her bank has new procedures to screen for money laundering issues and one of the preliminary assessments is an interview with the bank officer who opens up each back account. In other words, the process I had just gone through to open up my new checking account.

I was pondering the level of inquiry that my bank now uses in its Anti-Money Laundering (AML) program when I came across an article in the December 19, 2011 edition of the Los Angeles Times (LAT)  entitled “Cartels use legitimate trade to launder money, US and Mexico say” by Tracy Wilkinson and Ken Ellingwood. They described a process whereby teams of money launderers working for cartels use dollars to purchase a commodity from the US and then export the commodity to Mexico or Colombia. A key is that “Paperwork is generated that gives a patina of propriety” which means that drug money is given the appearance of legitimate proceeds from a legitimate commercial transaction. One Immigration and Customs official interviewed said, “It’s such a great scheme. You could hide dirty money in so much legitimate business, and they do. You can audit their books all day long and all you see is goods being imported and exported.”

The key is that the commodities being purchased are so innocuous that large bulk purchases will rarely, if ever, draw any official scrutiny. The goods purchased can be red tomatoes or bolts of cotton fabric. In either case, the commodity itself does not matter, as the simple fact of purchasing in the US, shipping into, and reselling in Mexico allows the drug cartels to “transfer earnings back home to pay bills and buy new drug supplies while converting dollars to pesos in a transaction relatively easy to explain to authorities.”

There have been some interdictions in this system, however. In 2010, US authorities arrested several executives of Angel Toy company, who the government alleged were conspiring with Mexican drug cartels to launder drug money through a scheme to purchase Teddy Bears (of all things), for shipment back to and for resale in Mexico. The plan was straightforward, just under $10K of cash for each shipment of Teddy Bears, which were then resold in Mexico.

However, now money launderers use even more sophisticated tactics such as “overvaluing and undervaluing invoices and customs declarations.” There is even a new term “trade-based money-laundering” used to denominate the schemes. It was reported that in another recent operation, which was estimated to launder over $1MM every three weeks, money launderers were exporting from the US to Mexico polypropylene pellets that are used to make plastic. However, the money-launderers inflated the value declared on the high-volume shipments and this eventually attracted suspicion of US bank investigators, “who shut down the export operation by discontinuing letters of credit that the suspected launderers were using.”  One official noted, “You generate all this paperwork on both sides of the border showing that the product you’re importing has this much value on it, when in reality you paid less for it. Now you’ve got paper earnings of a million dollar and the million dollars in my bank account — it’s legitimate. It came from this here, see?”

Transactional based due diligence and internal controls are mandatory components of Foreign Corrupt Practices Act (FCPA) minimum best practices compliance program. In addition to due diligence on agents, distributors or others in the sales distribution chain, companies need to perform due diligence on those to whom they sell. If someone from Mexico suddenly comes to your business and wants to buy widgets with cash, this needs to send up a huge Red Flag.

And what about my little new business checking account? The transaction and process drove home to me that there are many ways to perform the various levels of due diligence required. In my case, it was a bank officer questioning me on why I needed a new checking account. In other words, why did I need to transact the business of her company, namely a checking account at a financial institution? It was not an intrusive interview, asking impertinent or difficult enquiries, they were basic questions performing a basic level of due diligence. If you inculcate compliance in your organization everyone works towards the same goal, doing business in a compliant manner. The bottom line is that there are many tools and many ways to protect your business, follow that law and do business in an ethical manner.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2011

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