Banks Behaving Badly or Brother Can You Spare A Billion (or Two)?

Remember when a billion dollars was real money? Over the past couple of weeks there have been some mammoth fines paid by financial institutions for conduct, which would appear to fall under the category of “Banks Behaving Badly”. Last week HSBC agreed to pay a fine of $1.92 billion for its transgressions involving money laundering. UBS is in the final stages of negotiations to pay $1.5 billion to resolve allegations that it tried to rig interest rate benchmark (i.e. ‘Libor’) to boost trading profits. Finally, on December 10, coming in at a paltry $327 million are our old friends Standard Chartered, which admitted processing thousands of transactions for Iranian and Sudanese clients through its American subsidiaries; subsequently to avoid having Iranian transactions detected by the US Treasury Department computer filters, Standard Chartered deliberately removed names and other identifying information, according to the authorities. All in all, it’s not been a bad couple of weeks for the US Treasury, given the current stalemate over the ‘fiscal cliff’ and the need to reduce the US deficit.

For those of you keeping score at home, we present our updated Banks Behaving Badly Box Score of Settlements

Banks Behaving Badly – Box Score of AML Settlements

Bank	Amount	Date of Settlement
Lloyds TSB Bank	$567MM	December 2009
Credit Suisse	$536MM	December 2009
ING Bank	$619MM	June 2012
Royal Bank of Scotland	$500MM	May 2012
Barclays	$298MM	August 2012
Standard Chartered – NY state	$340MM	August 2012
Standard Chartered – Federal	$327MM	December 2012
HSBC	$1.92 BN	December 2012
Total	$4.004BN

Banks Behaving Badly – Box Score of Libor Manipulation Settlements

Bank	Amount	Date of Settlement
Barclays	$450MM	June 2012
UBS	$1.5BN (proposed)	December 2012?
Total	$1.95BN (proposed)

If you do not have a calculator handy, for the 2012 banking season alone, that is $4,004,000,000 all going to the US Treasury thanks to our friends at Banks Behaving Badly. If you want to sneak-a-peak at what it might look like if the UBS settlement comes through just add on an additional $1.5 bn so that is over $6 billion in fines, penalties and disgorged profits from one industry sector in one year. And people have the temerity to complain about the energy industry being corrupt.

So what is the cause of ‘Banks Behaving Badly’? Back in June, at the time of the Barclays Libor manipulation settlement, the Financial Times (FT) wrote on its Op-Ed page in the piece entitled “Shaming banks into better ways” that “few have shone such an unsparing light on the rotten heart of the financial system” and then went on to say “nothing less than a long-running confidence trick played on the public for personal and institutional advantage” and even pointed out the “rotten culture at Barclays”. The FT editorial clearly focused on ethics when it said “But beyond the questions about legality there is a bigger worry about the wayward behavior of the financial sector.” The FT editorial concluded by telling banks that if “banker-bashing is to stop, the banks themselves must change.” Typical British understatement at its finest wouldn’t you say?

The HSBC settlement was announced by Lanny A. Breuer, Assistant Attorney General of the Justice Department’s Criminal Division. In the Department of Justice (DOJ) Press Release it was reported that HSBC received a Deferred Prosecution Agreement (DPA) which required, among other things, that it “committed to undertake enhanced AML and other compliance obligations and structural changes within its entire global operations to prevent a repeat of the conduct that led to this prosecution.  HSBC has replaced almost all of its senior management, “clawed back” deferred compensation bonuses given to its most senior AML and compliance officers, and has agreed to partially defer bonus compensation for its most senior executives – its group general managers and group managing directors – during the period of the five-year DPA.  In addition to these measures, HSBC has made significant changes in its management structure and AML compliance functions that increase the accountability of its most senior executives for AML compliance failures.” There will also be an independent outside monitor appointed to oversee the bank’s compliance efforts and report periodically to the DOJ.

Even with all the above and the fines, penalty and profit disgorgement, the DOJ has come under withering criticism for its failure to both let HSBC off so lightly, with a DPA, where “HSBC Bank USA failed to monitor over $670 billion in wire transfers and over $9.4 billion in purchases of physical U.S. dollars from HSBC Mexico” and no individuals were indicted. CNN reported that Sen. Charles Grassley, R-Iowa, sent a stinging letter to Attorney General Eric Holder, calling it “inexcusable” for the department [DOJ] not to prosecute criminal behavior by HSBC. Senator Grassley’s letter was quoted as saying, “What I have seen from the department is an inexplicable unwillingness to prosecute and convict those responsible for aiding and abetting drug lords and terrorists.” Further, “By allowing these individuals to walk away without any real punishment, the department is declaring that crime actually does pay,” Grassley asserted.

Halah Touryalai, in an article entitled “Final Thought On HSBC Settlement: How Much Bad Behavior Will We Tolerate?” in forbes.com, put it another way. Touryalai asked “What’s a bank got to do to get into some real trouble around here?” She went on to say, “So, let’s get this straight. A major global bank failed to catch activity that put our country’s security at risk and now it is sorry… The HSBC case brings to the forefront a big question for the U.S.: How much are we willing to tolerate from financial services companies? If we’re looking at the HSBC case then a lot, apparently.” Finally, Touryalai spoke for many when she said, “The scary part about the HSBC settlement is that U.S. authorities are essentially saying they couldn’t act on criminal charges because it would harm the larger financial system. That’s got many calling HSBC (and potentially others) too-big-to-jail.”

However, the DOJ had many data points to factor into its calculus on settlement. First, and foremost, (apparently) remains Arthur Anderson. If the DOJ had pushed for a criminal settlement, would it have debarred HSBC from doing business with the US government or its monies going through the US banking system? What would be the effect of such a remedy? What if the DOJ had pushed too far and HSBC felt it had no choice but to go to trial, would they have been Arthur Andersen’d out of business? Perhaps this is a variant of the “too big to fail” argument, called the ‘too-big-to-put-out of business’ argument.

But there is another reason for the specific terms of the HBSC settlement, which was discussed by Lanny Breuer during the news conference. He stressed the extraordinary cooperation by HSBC during the investigation in addition to the structural changes the bank put in place as noted above. If the DOJ wants to obtain the highest level of cooperation from a defendant during an investigation, turning around after such cooperation and indicting either the entity or a bunch of its employees will most probably end such a level of cooperation. My guess is that the DOJ wants to encourage as much cooperation as it can from parties under investigation. That would include greater compliance after the resolution in addition to extraordinary cooperation during the investigation. However this may not be enough to quell the critics. So the DOJ may be stuck in the position of damned if they do (indict) and damned if they don’t (indict).

But whatever your take on the DOJ’s position as to HSBC, it certainly has been a year of reckoning for “Banks Behaving Badly”.

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, 2012

After the White Whale – Enforcement of AML Laws Against Companies for Traded Goods

Whenever you look at the Top Ten Foreign Corrupt Practices Act (FCPA) settlements of all-time, the figures can look pretty high. However, this summer has seen some absolutely astronomical fines and penalties agreed to by financial institutions for violations of Anti-Money Laundering (AML) laws and regulations. Since May we have seen the following financial institutions agree to the resulting fines and penalties:

AML Penalty Box of Settlements

Bank	Amount (all in USD$ MM)	Date of Settlement
ING Bank	$619	June 2012
Royal Bank of Scotland	$500	May 2012
Standard Chartered	$340	August 2012
Barclays	$298	August 2012
Total	$1,757

So for all you sports fans keeping score at home that is $1.757 billion in fines and penalties. And this amount does not even include the grand-daddy of them all, HSBC, which has reserved $700MM for its own fine. Some commentators have speculated that the HSBC fine may exceed One Billion Dollars alone.

In an article in the Financial Times (FT), entitled “We all must clean up our act on money laundering”, reporter John Cassara noted International Monetary Fund (IMF) estimates that world-wide money laundering can be as high as $3.5 trillion annually. While traditional criminal enterprises had used banks to wash dirty money into clean money, after 9/11, the US government saw money-laundering as a security issue. One of key issues in the Standard Chartered enforcement action by the New York state Department of Financial Services was its financial dealings with banks in Iran.

But the problem is simply beyond financial institutions. Cassara writes that there are three generally recognized ways to launder money: (1) via financial institutions; (2) bulk cash smuggling across borders; and (3) via traded goods. The US approach to fighting money laundering in financial institutions is to demand transparency and require due diligence not only on customers but on transactions as well. But money launderers will move to where they see the least resistance in the financial system. So if banks ramp up their internal compliance systems, criminal enterprises and terrorists will move to the old fashioned method of smuggling money across borders to money laundering via traded goods.

Indeed in an article in the Wall Street Journal (WSJ) last week, entitled “U.S. Seeks to Patch Laundering Net”, Jeffery Sparshott reported that the US Treasury Department’s Financial Crimes Enforcement Network, known as FinCen, “are proposing to enlist companies across the financial sector – and possibly beyond – as a front-line defense against money laundering.” These new rules “may eventually extend the rules to mortgage lenders, casinos, gemstone dealers and others…in a bid to deter criminal activity and terrorist financing and stop firms from taking on shell companies without knowing ownership details.” If FinCen extends the most robust regulations beyond traditional financial institutions, it would seem to me that the next logical step would be to extend such regulations to non-financial commercial operations.

However, we have recently seen examples of criminals using method three (3) above to engage in money laundering; that being via traded goods. One recent example is 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.”

Another scheme involved even more sophisticated tactics such as “overvaluing and undervaluing invoices and customs declarations.” There is even a new term “trade-based money-laundering” which is being 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 dollars and the million dollars in my bank account – it’s legitimate. It came from this here, see?”

What can companies do to protect themselves from inadvertently running afoul of AML laws?  Just as transactional based due diligence and internal controls are mandatory components of a FCPA minimum best practices compliance program; they should be used in transactions with customers or other third parties. 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. Know Your Customer (KYC) rings true not just for financial institutions but for companies engaged in other forms of commercial operations. If a new customer approaches your company, you should investigate them beyond simply running a Dun & Bradstreet Report to check their credit-worthiness. You need to investigate their background to see if they really are in a business which would use your products.

There is also the issue of how you will be paid for the sale of your widgets. 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. It would seem just as unlikely if a customer with a relatively low net worth would come to you and seek to purchase a high cost product with cash. If such an eventuality happened this should also raise a very large Red Flag.

Even if you are not being paid in cash, but are being paid via wire transfer, you should check the source of the wire funds. If the money comes from a bank or other financial institution which is on a sanctions list, you need to tread very carefully. In another article in the FT, entitled “Taken to the Cleaners”, the piece ended by comparing the problem of money laundering with a sucker fish which attaches itself to a whale. It may not be noticed as it is “submerged and discreet” but it is “hard to capture as it can just swim off elsewhere.”

So perhaps the white whale analogy may need to be reconsidered. Or perhaps, just as Captain Ahab kept searching for the white whale;  as criminals continue to probe for structural weakness to exploit in the area of money laundering; as regulators respond with more, greater and broader regulations; companies will need to increase and refine their own processes and procedures.

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, 2012

Earl Scruggs: Banjo, Bluegrass and the Fight against Corruption and Bribery

Last Thursday, Earl Scruggs died. He was one of the musician’s most responsible for my development in learning about, and appreciating, different styles of music. For musicians, he basically invented and then popularized the 3 finger picking style on the 5 string banjo. For popular culture, he is probably best known for his work with guitarist Lester Flats, including the timeless hit “Foggy Mountain Breakdown”, the theme song from the movie Bonnie and Clyde, and for “Ballad of Jed Clampett” from the 1960s television show, The Beverly Hillbillies. However, for me, it was after he split with Lester Flats and started the Earl Scruggs Revue, with his sons and several other musicians. In the Revue, he fused rock, country, blues, folk and jazz with bluegrass in a way that I still find fresh and powerful today.

So what is the lesson of Earl Scruggs for the compliance practitioner? It is this, even if you develop a completely new style that makes you one of the foremost experts in an area, you can still evolve. Further, the style you use may have significant effects on other styles, even in the fight against bribery and corruption. For the compliance practitioner, this comes to mind with some news out of the world of anti-money laundering. We began the week with the notice from the UK Financial Services Authority of the agreed upon penalty with Coutts, a UK private banking entity. As reported in The Telegraph, in an article entitled “Coutts agrees to settle FSA fine for reduced fee”, Coutts was fined £8.75m (just over $14MM) “and severely censured by the UK’s Financial Services Authority (FSA) for failing to undertake sufficient anti-money laundering checks on their customers.” The Telegraph reporter Mike Goldman, quoting from the FSA report, wrote “The failings at Coutts were serious, systemic and were allowed to persist for almost three years,…Coutts was expanding its customer base during the Relevant Period and staff were incentivised in part to increase the number of customers taken on. As such, it was important that there were appropriate systems and controls in place, including with respect to the risk of money laundering. The weaknesses in Coutts’ controls resulted in an unacceptable risk of handling the proceeds of crime.”

On the heels of this enforcement action, the FSA followed last Thursday with the release of a report that included a review of 15 British banks who lacked sufficient anti-corruption and bribery checks. In an article in the New York Times (NYT), entitled “British Banks Called Weak In Checking Corruption”, Julie Werdigier reported on a FSA report which reviewed certain British banks during the second half of 2011. The review is a part of the FSA’s ongoing efforts “to improve the controls of ethical business behavior among financial institutions with offices in London.” The selection of the banks for review was based upon the high risk nature of the countries in which they were operating.

The FSA Director was quoted in a statement as saying, “Despite the high profile of the issue, the investment banking sector has been too slow and too reactive in managing bribery and corruption risk.” Further, the FSA found policies and procedures for gifts and entertainment were found to be lacking as well as the capacity for checking the backgrounds of prospective employees. The FSA also noted that gifts were not always correctly recorded and that it found instances of inappropriate hospitality.

The importance of having a robust anti-money laundering program was once again made clear last week when the Milan Branch of JPMorgan Chase closed a Vatican-held bank account based upon the suspicion of money laundering. In an article in The Daily Beast, entitled “JPMorgan Chase Closes Vatican Bank Account”, reporter Barbie Latza Nadeau discusses Chase’s decision to close the account “on speculation that the account is being used for less-than-immaculate financial deeds…after Vatican bankers were “unable to respond to a series of requests about questionable money transfers.” This was a continuation of bad news for Vatican banking as early this month, the US Department of State listed the Vatican as a “jurisdiction of concern for its money-laundering practices.”

Lastly, we take note of a French effort in the fight against global corruption. As reported in the Wall Street Journal (WSJ), in an article entitled “French Seize Assets of African Official”, France’s “top court allowed Transparency International to proceed” with a lawsuit against the son of the President of Equatorial Guinea. The son, while employed as the Minister of Agriculture of the country with an annual salary of $100,000, had the following items seized, “valuable paintings, vintage wines and multimillion dollar cars.” When his home was raided earlier in the year, the French officials found “a sauna, a movie theater, a nightclub, a beauty parlor, a spacious bathroom with gold-plated faucets, a wine cellar, and several other rooms decorated with marble statues and Fabergé eggs, according to court documents. Investigators seized all of the furniture that could be carried out, added a person familiar with the matter.” Ominously, the government of Equatorial Guinea warned the group’s lawsuit would “rupture relations” and that French companies would pay the price “from this situation.”

Just as Earl Scruggs led a musical revolution, first in bluegrass with his new picking style, then in expanding the boundaries of the genre, the fight against bribery and corruption is widening. If you are a compliance practitioner, you should take note of these international developments and have your company ready to respond.

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, 2012

Transaction Monitoring: Fighting Corruption and Protecting National Security

In an article in the Tuesday Wall Street Journal (WSJ), entitled “More foreign banks probed for sanctions violations”, Brett Wolf reported that the New York County District Attorney’s Office will shortly announce additional enforcement actions against banks for sanctions violations regarding Iran and Syria. In a speech made on November 14, Manhattan District Attorney Cyrus Vance talked about payments made to persons associated with sanctioned countries as constituting a threat “to US national security.”

This reminded me of the ideas that my “This Week in FCPA” colleague Howard Sklar often speaks about; that being ‘compliance convergence.’ One of these areas where there is convergence with anti-corruption and anti-bribery compliance programs is anti-money laundering. While many persons discuss the techniques used in anti-money laundering as techniques which can or should be used in banking and other financial institutions’ compliance programs, there is one area which companies should adopt from anti-money laundering directly into their anti-corruption and anti-bribery compliance programs and that is transaction monitoring.

For some time now banks have been required to monitor transactions of Politically Exposed Persons (PEPs). Generally speaking this effort includes requiring banks to apply enhanced due diligence to bank accounts and transactions by PEPs; requiring financial institutions to assess and evaluate risk so that it can be more carefully managed; promoting transparency in all transactions and monitoring transactions which might be termed suspicious. This means more than single transaction monitoring and is a more sophisticated approach which allows cataloguing and cross-referencing transactions.

Banks begin with the need for enhanced due diligence that they can determine when dealing with a foreign governmental official. This due diligence must include procedures “reasonably designed to detect and report transactions that may involve the proceeds of foreign corruption.” Banks make some or all of the following list of inquiries: identify the stakeholder and any beneficial owners; from this identification, determine the PEP status; obtain employment information and evaluate for industry and sector risk of corruption; review the stakeholder’s country of residence and evaluate for level of corruption; check references; obtain information on immediate family members to determine PEP status; and make reasonable efforts to review public sources of information.

Although not couched in terms of the compliance lingo “Red Flag”, anti-money laundering requirements make clear that simply identifying a stakeholder as a PEP does not disqualify the candidate. It means that additional investigation must be performed. Therefore, if a PEP comes up in your Foreign Corrupt Practices Act (FCPA) compliance program due diligence investigation, as an owner of a Foreign Business Partner, additional investigation must be performed to determine the relationship of this governmental official; the transaction at issue;  and any potentials for conflicts-of-interest or self-dealing. The promotion of transparency requires actual knowledge of the parties who are involved in all transactions. In addition to identifying those owners and any beneficial parties as indicated above, care should be taken to identify any shell companies which a PEP might have ownership or interest in. This is a critical analysis which companies should take as part of their overall due diligence effort.

While many compliance programs do a good job of the above due diligence and attendant analysis; companies do not take the next step, that being transaction monitoring, and integrate it into their compliance function.

Generally the Treasury Department, or some other functional group in a company has a policy preventing payments to locations other than (1) where services are delivered or (2) the home country of the payee. However, this other functional department rarely works in concert with the Compliance or Legal Department, in terms of notifying other company groups of a suspicious payments or even providing documentation of such suspicious payments and storage of such information in a mutually accessible database. Contrasting this, situation most companies will have a policy regarding the retention and contracting with agents or other foreign business representatives or partners but how often are such policies found for vendors in the Supply Chain. The next step in this transaction monitoring process is monitor each transaction to determine if it is ‘suspicious’, that is the term generally recognized by banks in the anti-money laundering context. How many companies have systems in place to perform the same suspicious activity analysis in the normal course of transacting business? Further, there are software program and other tools which a company can utilize which will automate this monitoring process.

Wolf reported that Manhattan District Attorney Vance said that payments out of certain financial institutions had “stripped wire transfer payments of information that would have revealed that sanctioned parties were engaging in US dollar transactions.” How many companies could monitor that type of information for payments they may have made to vendors in the Supply Chain or agents in the Sales Chain for that matter? Near the end of his speech, Vance said that his office was “well positioned” to pursue such claims.

As banks and other financial institutions become more robust in their anti-money laundering programs, many nefarious individuals may move their activities to companies with less robust procedures and back-up systems to detect, record, store and share any such activity with the appropriate group within a company. This may well be the next US government target for inquiry.

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

Some Red Flags

Most compliance practitioners have heard the term “Red Flags.”  Red Flags are generally defined as circumstances which could place a reasonable person on notice that illegal or improper conduct has or may occur. A Red Flags does not mean that an action or transaction should immediately be terminated. It does mean that you should engage in an appropriate level of additional due diligence and investigation before moving forward.

In his blog posting yesterday entitled “On Anti-Money Laundering“, our colleague Howard Sklar, discussed a new anti-money laundering initiative from the Asset Forfeiture and Money Laundering Section of the Department of Justice. Howard has previously spoken of “compliance convergence” or the merging of control programs such as anti-bribery and anti-corruption with anti-money laundering. Inspired by Howard’s post and his use of “compliance convergence” this post will list some possible Red Flags that you should consider in three control areas: anti-bribery and and anti-corruption; anti-money laundering and with a nod towards the ever changing economic sanctions being levied against Libya, Red Flags regarding international economic sanctions.

I. Anti-Bribery and Anti-Money Laundering

• Doing business in a high risk county
• Allegations that the party has made facilitation payments to government officials.
• Refusal to warrant compliance with the FCPA or other recognized anti-bribery or anti-corruption law.
• Reluctance to participate in due diligence.
• Allegations of illegal or unethical conduct.
• Convictions for illegal conduct.
• Any suggestion that laws or regulations or company compliance policies need not be followed.
• Any suggestion that unethical conduct is custom or the norm in  country.
• Refusal to follow your code of conduct.
• Use of shell companies.
• Ownership by or close relationship to a governmental official
• Refusal to identify a principal of beneficial owner.
• Recommendation of use by a governmental official
• Refusal to sign a contract.
• Lack of experience in the field.
• Requirement of an usually high commission.
• Insistence on payment in cash.
• Insistence on payment in third party country or to an unrelated third party.
• Request for advances.
• Sharing of compensation with undisclosed parties.
• Refusal to provide adequate invoices.
• Offering to provide false invoices.

II.       Anti-Money Laundering

• Named as a Designated Party, SDN or on any similar list.
• Connections to countries identified as non-cooperative with international efforts against money laundering.
• Providing false or misleading information.
• Refusal to disclose the nature and source of assets.
• Refusal to identify a beneficial owner.
• Acting as the agent for an undisclosed principal.
• Company address is not a physical site but a PO box.
• Use of a shell company.
• Lack of concern regarding risks or transaction costs.
• Structuring transactions to avoid reporting requirements.
• Offering to engage in transaction with no or little business justification.
• A request that funds be transferred to an undisclosed third party or in another jurisdiction.
• Any transaction designed to evade taxes.

III.    International Economic Sanction

• Connections to US or UN sanctions or embargoes, including SDN, Denied Persons, Entity and Debarred Lists.
• Requests that goods be exported to countries on an international boycott list.
• Inaccuracies in any shipping documentation and invoicing.
• Abnormal packing, marking or routing of goods.
• Inconsistencies between goods and services of that usually offered by the company.
• Declination of routine installation or training services.
• Promised delivery dates and locations are vague or out of the way location.
• A freight forwarding firm is listed as the final destination.
• Shipping route is out of the ordinary.

As no one list of Red Flags can be exhaustive or final, you may wish to add Red Flags more specific to the risks appropriate to your company, such as those based upon the industry in which you conduct business, the locations where your company does business or other risk factor. If there are any additional ones you feel our readers should be aware of please list them in the Comments Section.

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