Human Trafficking 101.

How do we know we’re uncovering human trafficking from within Financial Institutions?

In this post I’ll detail some of the things to look for in a useful downloadable PDF document you can pin in your office to remind your teams what to look for to uncover Human Trafficking.


Trafficking is a pernicious crime.

It is estimated there are 40 million people in slavery today. That’s more than ever before. If you thought that slavery was a distant blot on humanity you are very sadly mistaken. The trade in people is very real and very evident in the most advanced economies in the world.

But what can AML operatives do about it? Download our easy guide of what to look for in financial transactions and what your frontline staff can do about it.

See it, say it, stop it!

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What AML Operators Need To Know About Illicit Trade.

Multiple forces are at play on the world stage to facilitate illegal trade globally. Many will say that human greed is at the heart of it, others will blame over regulation; these two factors influence nation states that struggle to compete and are held to ransom by major corruption or criminality. It’s not so much one for all as ‘one for one’ in those economies driving the economy ever downward as legitimate business flees.

Afghanistan is a case in point. At war for over 45 years with differing nations, an entire generation knows how to do little but survive. And if surviving means you look after your family and beggar everyone else so be it. USD flows in to support the fragile democracy, and flows out in corruption, drugs and laundered/smuggled cash.

Illicit trade is growing. In today’s globally connected systems, money, goods, services and people are traded as commodities across international lines. Technology attempts to control this but fails miserably as the mnemonic ‘GIGO’ abruptly demonstrates. If a human puts garbage in, it’s garbage that comes out. I refer here to the ease with which criminals can over or under invoice or over/under the volume of goods thereby transferring the value across international lines with ease.

And of course it is much easier to abuse invoicing for services as they aren’t a physical asset. Consider Paul Manafort and his multi million charges for ‘political advice’. Really?

The declining role of the ‘superpowers’ and democratization of commerce through increasing technological advances, shipping and skills in ‘third world’ states has hastened a gap that criminals, terrorists and insurgents have filled. The US and EU have been focused on their own economies watching manufacturing flow to China and India and this has hastened the populist movements on both continents (among other political moves, migration being one).

Make a difference – Act today.

Into the vacated space and the new world economy of ‘ship it’ criminals have flourished. Trading as legitimate businesses exchanging invisible goods and services from ‘political advice’ to ‘shell company finance’ the technology cannot keep up to identify laundering and tax evasion. Criminals rather than being stopped by technologies ever increasing advance, have harnessed it. Using technology to communicate, transfer value and trade illicitly via the dark web. Nefarious forces are benefiting more from technology than not.

This is somewhat concerning as ‘Regtech’ moves into the market in huge volumes of investment to ‘solve’ the problem that technology created in the first place. While the use of Artificial Intelligence is welcomed to streamline ‘false positive’ reporting of transactions and customer checks, it should not be seen as the answer. Technology will not solve the problem of illicit trade in any form. It is a false dawn being beckoned in.

The answers to solving illicit trade are within the gift of public policy makers. The sheer yawning gaps in nation state disparity, lack of understanding of the limits to growth and the growing necessity to control global warming are inextricably linked to criminality and terrorism. Of course these are huge global issues that aren’t solved on a banks shop floor but it is always wise to have an understanding of the problem as it relates to the macro not just micro world we live in.

It is not possible for individual states to control illicit trade or money laundering as the flows go ‘to and fro’ across borders . That is obviously why we have FATF, Wolfsburg and the Basel Committee to name but three geo-political organisations. Yet the responses from the global institutes focus the problem on the shop floor of banks. Guiding policy to focus on SARS.

Sar filling

Bringing in a RBA to global finance has merit, of course it does. Focusing that down to the micro environment has some merit. But the sheet volume of effort to create literally millions of alerts is folly. It is a huge waste of resource that could and should be spent on more effective means in a true public/private partnership that requires a more joined up approach to the problem. Even a street dealer knows the limit of a cash drop to avoid an alert. Not only are SARS ineffective, they are actually clouding the problem.

Elephant tusks.

Illicit trade has been around for centuries. From the real Silk Road, to Mesopotamia and the Aztecs through to intra-state micro level poaching on a royal estate. Nowadays, it isn’t technology driven, but aided. It is a human driven concept to ‘do the deal’ . Weighing risk to reward. The common global presence of stolen property, piracy, counterfeiting, human trafficking and laundering, in all corners of the globe is evidence of that. From the natural disasters causing the smuggling of food and shelter, harbouring it from Government requisition so it can be sold, to failed nation states and the PEPS raping and plundering assets, these are humans doing bad things to others.

Exert Your Influence – You Can Make Change Happen…

Yet the global focus on RBA boils down to micro actions within financial institutes that fail to deliver any meaningful results. I repeatedly quote that it is estimated just 1% of laundered value is recovered globally each year. That is the only figure that matters because it is ultimately the outcome of input.

Challenges outside the scope of individual institutes such as, a decline of the Earth’s resources, extreme weather disasters, conflict, displaced people and under employment are just five drivers of illicit trade. Humans escaping adversity. Add in to the mix a burgeoning world population to 7.4 billion, declining resources such as fish in the sea and the macro view isn’t rosy.

It is estimated (UN) that 68.5 million people are displaced globally. Be that through conflict, natural disaster or desertification (mainly due to palm oil trade). That’s almost 1% of the world’s population, the highest volume since records began. Again the rise of populism can be seen from this as migrants flooded Europe, and the US is building a wall on its Southern border. This for migrants, often means life and death situations. Poverty fueling human trafficking and abuse for example. People resorting to depraved acts to survive, abusing each other on a micro level while the profits go to those in influence. Inadequate aid and provision pushing people to do acts that wouldn’t be discussed over breakfast in a traditional western setting let alone contemplated.

In a South Sudan camp for displaced people a seconded British Police Officer was trying to set up ‘community’ policing. Basically get them to police themselves because there wasn’t enough ‘real cops’ to police the camp. He uncovered the retribution for rape was to tie the offender to a tree and castrate him. It is as feudal as that. This is human reality on the verge of survival.

Morocco disturbances

In Morocco a fisherman jumped into a garbage container after his illegally caught fish were seized. He was crushed in the machinery and died. Sustained rioting in Morocco ensued as the populous sought justice for a man who was trying to provide for his family, a man with little to his name, yet the authorities were failing to replace labour for the fishermen caught up with a reduced living. The protest wasn’t just about the fisherman but the corruption keeping those in power in a life that can only be dreamed of by the fishermen. Who do we prosecute the fisherman or the corrupt?

In India a parent will sell their child for a fixed number of years, forced to by abject poverty to afford medical bills to secure the rest of the family’s survival. These are daily choices faced by the vulnerable in our global civilization.

Contact us for a full report or read on…

In the neighbourhood that you reside in you may see these issues on a smaller scale. The lack of opportunity for today’s youth. The need for some to turn to criminality to survive; the same issues the Moroccan fisherman faced but in a contemporary suburban setting in New York, Paris or London.

But what does it all mean? The sheer size and complexity of the problem only serves to confuse. If you’re working as an AML officer in a bank, what does this mean to you? How can you make a difference? Are we, as an AML industry actually solving anything?

Smurfing

Without understanding the causes of illicit trade we can’t secure a resolution. This has been going on for centuries. AML should not be about catching a street dealer in Chicago trying to launder his cash. As much as that’s a problem and needs dealing with, it should not be a banks job to uncover that. Especially when you consider just because someone is structuring payments doesn’t mean they are laundering cash. It is highly suspicious but not criminal to make multiple drops of under threshold cash.

Illicit trade survives because states, companies and powerful individuals benefit from it. Illicit commerce has helped to build as well as destroy whole nation states. States can obtain competitive advantage through illicit trade, it’s as old as raids on the caravans of the silk road. Consequently, when states are involved there is a lack of political will to resolve it. Consider Great Britain at the height of her power using drug smuggling into China to undermine the power structures in the 1800s. Now consider the Chinese illegally produced fentanyl pouring across US borders.

Consider for a minute if sanctions cause more or less illicit trade. Iran selling oil through a Turkish bank or N Korea selling drugs through the US and Sudan surviving on smuggled gold sales. Sanctions cause economic hardship that should mean AML operations focus with a laser expecting movements in trade and value from traditional routes to others less so.

AML should be about laser focus. Criminals aren’t nice people but it is easy to understand why some are driven to crime. The police catch the easy prey., the visible prey, the street dealer. They don’t have the resources to pursue, in any detailed way, the significant money launderers at play across borders. There are significant structural issues to prevent them.

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AML needs to focus on the real launderers and terrorists. The real PEPs, criminals and terrorists who do it not to survive or live a ‘normal’ life. But do it to secure obscene wealth, privilege and power. Who abuse others, not even with their own hand but through convoluted webs of others/technology or shell businesses.

Criminal moving money
Criminal moving money

As AML operators you should have focus for the real criminals. They won’t present in a hoody. They won’t present as suspicious. But they will present because they have to use the financial system. And they will hide their criminality without a hand upon it. So digging is most definitely required. Report up what you see, maintaining an investigative mindset to follow the evidence. Don’t be dissuaded by others if you have a gut feeling. Experience has shown me that gut feelings are frequently well placed.

If you lead a team of AML operators listen when one of your team uncovers something. Follow the evidence and ensure it is investigated. Ensure you give time and space to allow a genuine inquiry into the activity. Report up what you are finding and do not be dissuaded from acting. Encourage collaboration with other institutes and public authorities. Maintain a network to support you and them. Set up networking events and conference calls. Talk to each other about what you’re seeing.

If you’re a policy maker consider for a minute this figure.

1%

If you’re setting policy you are being judged by all on that outcome. There is a dire need for global cooperation on investigation and prosecution of the significantly influential, powerful and wealthy. It isn’t about setting guidelines FATF style, as good as those are. It’s about setting requirements. A global system should have global power not just persuasion.

The power to seize on suspicion until lawful and legitimate inquiries can be conducted with the acquiescence of the state, business or individual. Criminal sanctions should follow for any and all criminals uncovered with prosecutions and fines levied going deep into the system for those aiding and abetting criminality.

Heroin Trade

National Security’ is a phrase over used to protect PEPs from International scrutiny. It is a shroud used to protect the influential and should be legislated upon internationally to actually define it against a common global standard. This was evident when the US and its allies ignored the drug trading of the Karzai family in Afghanistan. Ignored for political expediency rather than the pursuit of natural justice.

It’s time for change. CYW play a minute part in this global picture. But we do aim to play a part as we pursue criminality at the highest level through all means. If you’re sitting in an office now, knowing you’re seeing flows of laundered money contact us. We are here to help. Our whistle-blowing app is coming which will allow you to report anonymously and through an end to end encrypted means. We look forward to hearing from you.

Preventing Money Laundering 101

Money Laundering Compliance

Preventing Money Laundering 101

Networks of people, businesses, accounts and transactions makes preventing money laundering very difficult.

Despite all the work globally the AML industry still only recovers an estimated 1% of laundered cash. Linking cash to crime as it cycles through the legitimate banking system is difficult, even if a bank suspects, having an element of proof to cause closure of accounts or reporting via SAR is a game of cat and mouse.

This is what makes preventing Money Laundering so difficult.

Now imagine being a Bank AML operative with only 10% of the picture. Because you can’t see beyond the transaction in and out, it’s like having an arm tied behind your back.

The current thinking is to build AML provision with a risk based approach but what if we expanded upon that? What if we developed a more advanced understanding of crime prevention?

See how we can help you prevent money laundering

In this article I’ll do a quick 101 on Preventing Money Laundering and how it can be applied to Financial Crime. I’m going to use a DMAIC model to process how a crime is committed, measure its impact, analysis the method, improve the response and then control the process with improved prevention methods.

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Define Money Laundering to Prevent it.

It is widely recognised that the prevalence of economically motivated crime in many societies is a substantial threat to the development of economies and their stability.
It is possible to divide financial crime into two essentially different, although closely related, types of conduct.

First, there are activities that dishonestly generate wealth for criminals engaged in the conduct. For example, the exploitation of insider information or the acquisition of another person’s property by deceit will invariably be committed with the intention of securing a material benefit. Alternatively, a person may engage in deceit to secure material benefit for another.

Second, there are financial crimes that do not involve the dishonest taking of a benefit, but that protect a benefit that has already been obtained or to facilitate the taking of such benefit. An example of such conduct is where someone attempts to launder criminal proceeds of another offence in order to place the proceeds beyond the reach of the law. It is this area we will focus on.

Measure the Impact

Preventing Money Laundering
Preventing money laundering is essential given the global impact.

This is a really easy bit.

  • Estimated $2 trillion laundered per annum
  • Estimated 1% recovered
  • 30 million enslaved via Human Trafficking
  • Global drug dealing is worth $500,000,000 per annum.
  • Millions caught up in failed states, vulnerability and poverty.

Preventing Money Laundering by Analysis.

  1. Organised criminals, including terrorist groups, are increasingly perpetrating large-scale frauds to fund their operations.
  2. Corrupt heads of state may use their position and powers to steal.
  3. Business leaders or senior executives manipulate or misreport financial data in order to misrepresent a company’s true financial position.
  4. Employees from the most senior to the most junior steal company funds and other assets.
  5. From outside the company, fraud can be perpetrated by a customer, supplier, contractor or by a person with no connection to the organisation.
  6. Increasingly, the external fraudster is colluding with an employee to achieve bigger and better results more easily.
  7. Finally, the successful criminal enterprise, serial or opportunist fraudsters in possession of their proceeds are a further group who have committed financial crime.

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There are essentially seven groups of people who commit the various types of financial crime:

What are the main types of Financial Crime ?

  1. fraud;
  2. electronic crime;
  3. money laundering;
  4. terrorist financing;
  5. bribery and corruption;
  6. market abuse and insider dealing; and
  7. information security breaches/hacking
Preventing money laundering and fraud
Cutting opportunities for fraud will help prevent money laundering.

Due to the often complex nature of financial services, detecting and preventing fraud within the financial sector poses an almost insurmountable challenge. The threats are both domestic and international. They may come from within the organisation or outside it. Increasingly, internal and external fraudsters combine to create global laundromats that are practically immune from prosecution due to their global/cross border nature.
The victims may be the financial sector firms themselves or the customers of those firms. The proceeds of fraud are rarely generated in cash. The funds that are the target of the fraud are generally already within the financial system but will undoubtedly need to be moved in order to confuse the audit trail.

What can the macro financial sector do about it?

  1. Enhance capacity for collecting data.
  2. Define priorities for, and support research on, the causes, consequences and costs in preventing money laundering.
  3. Promote primary prevention responses.
  4. Strengthen responses to suspected crimes in action.
  5. Integrate prevention into external political and social policy and internally into policies that reach corporate wide, and thereby promote awareness.
  6. Increase collaboration and exchange of information on financial crime prevention.
  7. Promote and monitor adherence to international treaties, laws and other mechanisms to protect the financial system.
  8. Seek practical, internationally agreed responses to global financial crime.

Understanding crime prevention isn’t hard. Implementing measures to achieve it is. Talk to us.

Several factors must come together for a crime to occur:

  1. Offender:
    1. an individual or group must have the desire or motivation to participate in a banned or prohibited behavior;
    2. at least some of the participants must have the skills and tools needed to commit the crime.
  2. Location:
    1. Unregulated or weak regulation jurisdictions;
    2. Areas of high corruption or criminality and weak law enforcement;
    3. Insecure bank premises or IT.
  3. Victim:
    1. There must be an opportunity to exploit the weak;
    2. High chance of obfuscation through volume of legitimate activity;
    3. Speed of trade;
    4. Ease of access to victim (both human/institution and system)
Crime analysis triangle reflects possible money laundering prevention tactics

The problem analysis triangle relates to more traditional crime but does have a place to cause AML professionals to think about the three concepts. Where is the crime likely to be taking place or originate from? Who are the likely offenders, what socio-economic group do they belong and how are they likely to exploit security weaknesses? Who or what is the victim (consider this a product/system/institute being abused to facilitate the crime through to the actual human victim at the end of the criminality). Let’s break these three areas down.

Offender

The key with offenders is to displace their activity. There are six ways to displace their crime.

  1. Temporal displacement, which involves criminal activity at different times of the day.
    1. An example of this is when a bank enforces CHAPS transfers to be made prior to 3pm. At 2.55pm an offender places a CHAPS transfer leaving the teller with no time to complete due diligence and the money is transferred and stolen.
  2. Tactical displacement forcing offenders to use different methods by closing opportunities.
  3. Target displacement, in which criminals select different types of targets because obstacles are devised.
  4. Type of crime displacement involves offenders choosing a new crime to commit.
  5. Spatial displacement is when offenders commit crimes in new locations.
  6. Perpetrator displacement is the replacement of apprehended criminals by new ones.

Creating difficult situations to help in preventing money laundering in the first place should be aligned to a mix of the six displacements. Thinking not only like a criminal but like a crime prevention strategist to identify prevention opportunities and possible loop holes in systems. Writing into policy actions and controls to prevent aligned to the six displacements. Considering ahead of time the business relationships that would cause an increase in ML risk. So you know it’s a risk geography, what do you do to lessen the likelihood of your bank becoming a target through that relationship?

Create a secure environment and market it. Ask us how.

Situational crime prevention for money laundering
Using SCP to prevent money laundering is an option.

Situational crime prevention may reduce opportunities for criminals to commit crime, making it more difficult (and riskier) to commit a criminal act and creating doubt in a criminal’s mind that they can get away with a crime. Consider the marketing approach to crime prevention. Getting messages out either overtly or through more subtle ways to deter criminals. Be those messages related to IT/Systems and processes or plain old environmental ques, it’s about influencing the criminals behavior.

Situational crime prevention uses the environment to create barriers to crime. For example, ‘target hardening’ bank premises (CCTV, Security guards, reinforced cash in transit vehicles). The basis of this theory is that crime can be prevented by altering situations, instead of changing a criminal’s disposition.

A factor that needs to be borne in mind however, is creating difficult environments may only displace not prevent crime. An organized criminal will surveil bank premises (physically or electronically/digitally) and find gaps in security provision to exploit. Nowadays this is frequently via IT security. So while the physical environment can be made difficult, AML professionals need to bring in IT security to make just as sure programming of solutions/products doesn’t just cater for fast business but secure business. Preventing loop-holes in provision.

How you can spot criminal surveillance. Talk to us

The ideas behind Crime Prevention stem from causing criminals to act in certain ways. Making them fear detection, and the consequence to reward matrix being weighted in ensuring they do not perceive the value in committing the crime.

Internal and external crime prevention messages are key
Crime prevention messages are key. Internally and externally.

The logic behind this is based on the concept of rational choice – that every criminal will assess the situation of a potential crime, weigh up how much they may gain, balance it against how much they may lose and the probability of failing, and then act accordingly. This is particularly relevant in Preventing Money Laundering, why you might ask? Because ML isn’t an impulsive or emotive crime. It is planned and executed activity with sophisticated criminals planning every move. So rational choice theory is critical to grasp so you can make changes to policy that reflect attempts to ‘change the decision making process of the criminal. ‘ If they perceive weakness they will exploit it. The image above is an interesting one. I recently advised a Police Service not to post ‘Thieves operate in this area’ as a warning to potential victims but to post ‘Police Operate in this area’ as a way to warn criminals. Same message, just delivered to a different audience.

Influence to prevent money laundering
Influence to prevent money laundering

Situational crime prevention in general, attempts to move away from the “dispositional” theories of crime commission i.e. the influence of psychosocial factors or genetic makeup of the criminal, and to focus on those environmental and situational factors that can potentially influence criminal conduct. Hence rather than focus on the criminal, SCP focuses on the circumstances that lend themselves to crime commission. Understanding these circumstances leads to the introduction of measures that alter the environmental factors with the aim of reducing opportunities for criminal behavior. Other aspects of SCP include:

  1. targeting specific forms of crime e.g. cybercrime
  2. aiming to increase the effort and decrease potential rewards of crime
  3. reducing provocative phenomena
  4. Safeguarding assets

Want to know what the dark web is saying about you? Talk to us.

What can be taken from this is the private and reputational aspect of banking. No one wants to admit attempts on their systems, yet by proving how successful the bank is at defeating attempts to commit cyber crime, it alerts criminal factions your bank is harder to crack and may persuade them to take their activity elsewhere.

Location

We can all think about obvious potential locations that ML originates from. The Russian Laundromats. The PEP’s from failed and dictatorship states. FATF risk regions or regions on a Sanction list. We could expand this to look at the Transparency International corruption lists and jurisdictions bordering risk geographies for example.

Target hardening
Location target hardening makes a difference.

The key with location is to cause additional scrutiny on funds coming from or going to the risk areas. Having risk based policies, processes and controls for these types of geographical risks will help to identify transactions once flagged by the monitoring system but we need to go further. We need to ensure front and second line staff are aware to go beyond the transaction to search addresses of beneficial owners, links between accounts or individuals/companies and focus on correspondent banking facilities. Searching all relevant material and being hyper interested and digging when something is found. All crime is about links. Be it a DNA link to a murder weapon or a respectable media link between two individuals, it’s about understanding the weight of the link and judging it suspiciously. Open mind but also enquiring. Building an ‘investigative mindset.’

A policy decision on who can be facilitated with Correspondent banking, for how much in volume and value and at what risk level based on the other banks AML programme and reputation. Going further we could cause additional scrutiny on states adjacent to the risk jurisdiction. Grading risk helps staff understand the level of detail required to not just submit a SAR but inquire into it with a focus aligned to the grading.

Build your crime prevention processes into a wider strategic AML threat assessment. Talk to us.

Secondary prevention uses intervention techniques that are directed at Financial Institutes and especially focus on those with increased risk profiles. It targets programs where crime is highly probable and causes additional levels of scrutiny including on site visits and audits on transactions/Beneficial Owners and other risk processes.

Tertiary prevention is used after a crime has occurred in order to prevent successive incidents. Such measures can be seen in the implementation of new security policies following acts of terrorism such as the September 11, 2001 attacks. This is why it is absolutely fundamental Financial Institutes have external reviews of policies, processes and controls, including IT and training to uncover why it happened and plug the gaps.

Crime prevention should focus on using techniques focusing on reducing the opportunity to commit a crime. Some of the techniques include;

  1. Increasing the difficulty of crime;
  2. Increasing the risk of crime; and
  3. Reducing the rewards of crime.

These three factors should be emphasized in policies and controls to make the criminal’s life harder to achieve success. Subtle marketing to advertise how difficult it is to commit crime and get by an institution to raise the stakes for the criminal and cause a displacement of their activity; Simple messages around volumes of checks and staffing, areas of focus and stringent audit can be heard by professional organised groups and will cause them to consider their options.

Market how secure you are – in subtle ways to deter. Talk to us.

Crime Prevention should focus on processes that are specifically aimed at identified forms of crime, include the management, creation or manipulation of the physical and cyber environment, in as organized and permanent manner as possible. The desired result is to make crime more difficult, more risky and less rewarding.

Victim

For this section I am focusing on the macro institutional concept of victim.

An organization can be a victim of crime
Reducing victims means preventing money laundering.

Another aspect of SCP that is more applicable to the cyber environment is the principle of safeguarding. The introduction of safeguards is designed to influence the potential offender’s view of the risks and benefits of committing the crime against the institutional victim.

A criminal act is usually performed if the offender decides that there is little or no risk attached to the act. One of the goals of crime prevention is to implement safeguards to the point where the potential offender views the act unfavourably.

Application to cybercrimes

Cybercriminals should be assessed in terms of their criminal skill, which include knowledge, resources, access and motives. Cybercriminals usually have a high degree of these attributes and this is why focus on this area is critical. Four areas to grasp are:

  1. Increasing the effort to commit the crime
    1. Reinforcing targets and restricting access- the use of firewalls, encryption, card/password access to ID databases and banning hacker websites and magazines.
  2. Increasing the Risk
    1. Coverage of penalties and examples of breaches of policy and the results from that.
  3. Reducing the rewards of committing the crime
    1. Removing targets and disrupting cyberplaces – monitoring Internet sites and incoming spam, harsh penalties for hacking, rapid notification of stolen or lost credit bankcards, avoiding ID numbers on all official documents.
  4. Reducing any provocation/excuses for committing the crime
    1. Avoiding disputes and temptations – maintaining positive employee-management relations and increasing awareness of responsible use policy.

Reduce your risk and increase theirs. Talk to us.

Many of these techniques do not require a considerable investment in hi-tech IT skills and knowledge. Rather, it is the effective utilisation and training of existing personnel that is key.

Prevent cyber enabled money laundering
Cyber enabled money laundering is endemic

The theory behind situational crime prevention may also be useful in improving information systems (IS) security by decreasing the rewards criminals may expect from a crime.

IS professionals and others could use the same techniques (five above) and consequently reduce the frequency of computer crime that targets the information assets of businesses and organisations.

Designing out crime from the environment is a crucial element and the most efficient way of using computers to fight crime is to predict criminal behaviour. Another advantage over other IS measures is not only focusing on the criminal’s viewpoint.

Many businesses/organisations are heavily dependent on information and communications technology (ICT) and information is a hugely valuable asset due to the accessible data that it provides, which means IS has become increasingly important.

While storing information in computers enables easy access and sharing by users, computer crime is a considerable threat to such information, whether committed by an external hacker or by an ‘insider’ (a trusted member of a business or organisation).

After viruses, illicit access to and theft of, information form the highest percentage of all financial losses associated with computer crime and security incidents. The fact 12% of crime on the Dark Web is financial indicates the levels. Businesses need to protect themselves against such illegal or unethical activities, which may be committed via electronic or other methods and IS security technologies are vital in order to protect against amendment, unauthorised disclosure and/or misuse of information.

What is your weakest Cyber link? Talk to us.

Computer intrusion fraud is a huge business with hackers being able to find passwords, read and alter files and read email, but such crime could almost be eliminated if hackers could be prevented from accessing a computer system or identified quickly enough.

Cyber enabled AML
Cyber crime

Criminal activities in cyberspace are increasing with computers being used for numerous illegal activities, including email surveillance, credit card fraud and software piracy. As the popularity and growth of the Internet continues to increase, many web applications and services are being set up, which are widely used by businesses for their business transactions.

In the case of computer crime, even cautious companies or businesses that aim to create effective and comprehensive security measures may unintentionally produce an environment, which helps provide opportunities because they are using inappropriate controls. Consequently, if the precautions are not providing an adequate level of security, the IS will be at risk.

Situational crime prevention and fraud

In computer systems that have been developed to design out crime from the environment, one of the tactics used is risk assessment, where business transactions, clients and situations are monitored for any features that indicate a risk of criminal activity.

Credit card fraud has been one of the most complex crimes worldwide in recent times and despite numerous prevention initiatives, it is clear that more needs to be done if the problem is to be solved. Fraud management comprises a whole range of activities, including early warning systems, signs and patterns of different types of fraud, profiles of users and their activities, security of computers and avoiding customer dissatisfaction.

Preventing card enabled money laundering
Credit card fraud

There are a number of issues that make the development of fraud management systems an extremely difficult and challenging task, including the huge volume of data involved; the requirement for fast and accurate fraud detection without inconveniencing business operations; the ongoing development of new fraud to evade existing techniques; and the risk of false alarms.

Generally, fraud detection techniques fall into two categories: statistical techniques and artificial intelligence techniques.

Important statistical data analysis techniques to detect fraud include:

  1. Grouping and classification to determine patterns and associations among sets of data.
  2. Matching algorithms to identify irregularities in the transactions of users compared to previous proof
  3. Data pre-processing techniques for validation, correction of errors and estimating incorrect or missing data.

Important AI techniques for fraud management are:

  1. Data mining – to categorise and group data and automatically identify associations and rules that may be indicative of remarkable patterns, including those connected to fraud.
  2. Specialist systems to programme expertise for fraud detection in the shape of rules.
  3. Pattern recognition to identify groups or patterns of behaviour either automatically or to match certain inputs.
  4. Machine learning techniques to automatically detect the characteristics of fraud
  5. Neural networks that can learn suspicious patterns and later identify them.

In closing, Preventing money laundering;

I have reviewed financial crime with a focus on Preventing Money Laundering. The take-aways are;

  • To consider Situational Crime Prevention
  • To consider Criminal displacement.
  • To market more effectively internally and externally to prevent money laundering
  • To market the risks internally and externally.
  • To ensure IS/IT are involved in broad crime prevention policies, processes and governance.
  • To base risk not only on what can happen but who can make it happen and where they’re from (region, internal/external) and build policies, processes and controls to prevent.
  • To be active in a Macro sense to influence policy makers and partners in the industry.

Talk to us to help you reduce your risk and improve your security.

Watch the Whistleblower who identified $240 billion ML scam.

Money Laundering Compliance

Howard Wilkinson appears unremarkable on first sight. Yet he is a remarkable man. Honest and resilient, he identified the biggest money laundering scam the world has ever known. Remarkable because the biggest banks with all their technology and professionals failed to identify it. Was that failure a complicit act or just staggering incompetence? I’ll leave you to decide.

Mr Wilkinson how stands to receive 30% of whatever money is recovered from this scam under US whistleblowing rules. As anyone reading this website will know, CYW are building an application to allow the likes of Mr Wilkinson to report anonymously to an independent organization, relying on end to end encryption to protect their identity and information.

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CYW are a compliance specialist company operating globally with a focus on the offshore jurisdictions, like the Cayman Islands. Take a look at our upcoming AML Compliance Vacancies. AML Compliance Vacancies CYW are different. We specialize in collecting intelligence and...
Money Laundering Compliance

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Preventing Money Laundering 101 Networks of people, businesses, accounts and transactions makes preventing money laundering very difficult. Despite all the work globally the AML industry still only recovers an estimated 1% of laundered cash. Linking cash to crime as it...

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What AML Operators Need To Know About Illicit Trade.

By CYW-Admin / 29 June 2019 / 0 Comments
Multiple forces are at play on the world stage to facilitate illegal trade globally. Many will say that human greed is at the heart of it, others will blame over regulation; these two factors influence nation states that struggle to...

We all know that fraudsters and criminals operate within the banks. Just like in any other major organization, banks are not immune. It appears that the big scandals are almost always uncovered by a single whistleblower. CYW aim to protect them and bring the guilty to justice. That is in everyone’s interest. Including the banks.

But the application won’t stop there. It will map intelligence across the globe to provide aggregated risk products for the banks to help them see where the intelligence is suggesting Money Laundering. No guess work. Real aggregated intelligence from people within the risk institutions themselves. Banks just have to join our programme to access intelligence product that takes small bite size pieces of information, anonymizes it and groups it collating it into one big picture. This will stop reputational damage from poor risk based decision making and a slide in shareholder value of the kind Danske bank is suffering. 25% and dropping. Watch Mr Wilkinson’s story. It beggars belief no one conducted the KYC checks he did. So simple and obvious yet not completed by Danske bank.

How to Clean Billions in Dirty Money….

Criminal moving money

What does it mean to clean money?

Laundromats.

The term was coined to detail the industrial process of cleaning money over and over again in huge volumes. Doing so through a series of shell companies and by a business set up of ‘financiers’ able to hide the real location of the money through legitimate looking business.

Cleaning  dirty money
Cleaning dirty money

Azerbaijani, Russian and Troika laundromats have been operating hidden in plain sight drawing in even the large banks to the murky world of dirty money. But how have they achieved cleaning $250 billion without raising attention to their criminality earlier? How did they get away with it for so long and what can the AML industry and regulators learn from this?

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I am constantly frustrated with the governance and management of AML, locally and globally. Here’s why;

  • There is under investment in AML;
  • It is extremely bureaucratic;
  • Front-line staff have no criminal awareness or training to speak of;
  • Governance is politically motivated;
  • FI staff can still be corrupted and go undetected;
  • Focusing on small fry obfuscates the major criminals;
  • A global investigative function is needed;
  • A global legislative function is needed;
  • Coalescence around one governance body and process is needed globally.

While huge laundromats are operating in plain site, we cannot accept nor acquiesce to the status quo which is clearly failing spectacularly. It is clear the operators of such cleaning industries are intent on hiding their operations but the fact they are operating with virtual impunity through open legitimate channels indicates just how poor the AML fight is globally.

How to Blow the Whistle on Money Laundering and Tax Evasion

Corruption
Corruption

The laundromats use a range of processes to operate. They are operated by paid administrators who are employed to move money round and round the legitimate system, through complex set ups of shell companies in apparent trades across jurisdictions. They take advantage of different legal and corporate boundaries to create barriers to uncovering the operation.

Contact us for a full report or read on

But these guys are clever. They choose their prey very carefully and it is not beyond them to have analysis of weak areas of the system so they choose their prey ‘wisely’. They are, effectively, a professionally run criminal enterprise.

  • They choose small regional banks to avoid the more significant AML provision of the top tier banks – this to introduce the funds to the legitimate system. They do this because it is easier to ‘control’ elements in small banks than large tier one where there will be more levels of checks and more complexity to obtain control.
Regional Banks
Regional Banks
  • They create shell companies in legitimate regions like the UK, New Zealand and to a lesser extent, Cyprus and Hong Kong to commence a web of businesses to transfer the money between.
  • They choose ‘legitimate’ regions but then place beneficial ownership of the first tier of businesses in less transparent jurisdictions to provide a second layer of secrecy to the owner of the shell company.
  • Offshoring the Beneficial Ownership hides from subsequent investigators who it is that is behind the movement of money. Doing so as a second tier of the shell company creates a level of distance to the offshore locality that would potentially cause further enquiry into the shell company by account holding banks. Further layers like this are created, dividing up the beneficial ownership between different structures to again further complicate the network of ownership.
  • They then commence washing the money round and round the system, administrators employed to move the money in apparent legitimate cross border trading.
  • They use correspondent banking systems to move money across borders and back again. Cycling it through the network of bogus businesses and layers of beneficial ownership.
  • Movement of funds is rapid to prevent significant build up of credit balances that would raise potential suspicion.

Russian money moved through these industrial scale washing machines comes from a range of sources. Mafia, crooked business men, PEPs or simple traders and ‘normal’ people looking to move money out of Russia without notice.

Cash washing
Cash washing

International Sanctions can increase the level of activity. This is just one reason why global investigative and legislative control over AML needs to be in place. Operating from an intelligence led system, such a governance system would clearly ramp up activity around business transactions as they come out of sanctioned countries or individuals; especially as UN action is either imminent or actually in authority.

When cleaned the money is integrated into the legitimate economies with few globally escaping dirty money. Homes in New York, London and Paris. Yachts moored in Cannes, Monaco or the Caribbean. Jewelry around the necks of the ‘legitimate’ wealthy (at least in public). The ill-gotten gains are spread around the globe with apparently legitimate assets in open view and accepted as legitimate when held by the ‘respectable’ rich.

What is repeatedly coming to notice in these huge AML scandals is the apparent coalescence of AML and Banking staff within banking institutions. Either that or inadequate and/or ignorant banking institutions relating to their global responsibilities.

Prevent insider crime. Talk to us.

The subsequent investigations into these operations needs to go deep and be relentless holding individuals to account both civilly and criminally. This, again, points to our view that the time is right for a global investigative and legislative body capable of bringing to justice those caught with their hands in the till. With the sheer value of fines being levied it isn’t beyond possibility to fund such a global body from the fines enforced.

Intelligence led ‘policing’ of the Financial Markets/Industry would include a macro view of the industry and led investigators to cause action in politically active environments. Examples would be;

  • A focus on the Soviet Union as it dissolved;
  • Venezuela focus on PEPs;
  • Iran sanction focus;
  • You get the picture…

The current governance with ‘guidelines’ issued by FATF is clearly not working. The focus on ‘Risk Based’ programmes is not working. In fact, it’s causing utter bureaucracy that essentially covers the biggest frauds. There is too much political interference and ‘plays’ by nations looking after their own interests rather than those of the global market and vulnerable citizens in countries impacted by corruption.

Are you confident your RBA is working? Talk to us.

Understanding the level of this criminality isn’t difficult. Getting countries/regions to cooperate around a global body that has bite most definitely is. It’s the politics that causes the problem not grasping of the issues.

Contact us for a detail analysis or read on…

What does the AML industry take from these huge operations?

Banks need to understand beyond the layers of business. They need to identify how they can understand the transactions and activity between remitting, receiving and external accounts, identifying links to common ownership, common registrations/addresses, volumes of trade not just value, doing so in a recognized intelligence led system that isn’t ‘just’ monitoring transactions.

Smaller, regional banks need to understand they are targets for big dirty financiers. Especially those in close proximity to ‘risk’ jurisdictions and with correspondent facilities.

Banks need greater scrutiny of their staff. Legislative changes may be needed in some regions to allow banks to intrusively supervise their staff holding vulnerable positions. These professionals need remuneration that causes a consideration of the risk/reward matrix to reduce corruption potential. A more significant vetting process needs to be conducted that goes deep into the job holders background/connections/assets. Vetting needs conducting on them in a cyclical process with external record keeping.

C suite executives need to understand AML and be drawn in to decisions/information that effectively makes them criminally liable when scandals come out. A process/system to prevent a claim of ‘lack of knowledge’ of what is happening in their bank. A paper trail of decisions that puts them at the heart of prevention that is legally a requirement and criminally a responsibility.

Align your AML strategy to actual operational activity. Talk to us.

Lawyers, professional advisors and accountants need to have their ‘legal privilege’ removed during investigations to uncover paper trails and money movements through them. This could be achieved through a ‘middle’ way between them and the prosecuting body, only passed when the evidence of collusion is clear.

Integrating bodies/outlets into the real economy need drawing in to enforce inquiries via AML software providers that records the enquiry to enable tracking of assets post the uncovering of the laundromat. So whether you’re selling a yacht, a jet, a villa, jewelry or an investment product there is a legal requirement for you to record that sale and to enquire into AML via auditable recorded search. Those that don’t, need to be held accountable criminally.

Finally, there is need of a globally active whistleblowing application that allows individuals within banking institutions to report in complete anonymity. For those reports to be protected with end to end encryption. While some may see such a system as a threat, the industry needs to understand that in some jurisdictions standing up to be counted is significantly dangerous.

Better they report up than out. Talk to us.

A system to report internally in a jurisdiction that has corruption at it’s core can be a physically dangerous thing to do; especially when it’s likely elements of the legal/law enforcement system is involved in corrupt practice.

Talk to us about it.

12% of Fraud on the Dark Web is Finance Related

A recent study of the Dark Web indicates 12% of all activity in the underground is financial crime related. A video by EMCDDA indicates how cryptocurrency is used to ‘cashout’

Of course Crypto criminals don’t have it all their own way. The average lifespan of a dark web market is now just 8 months with a range of reasons, some law enforcement related.

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By CYW-Admin / 1 June 2019 / 0 Comments
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By CYW-Admin / 22 June 2019 / 0 Comments
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By CYW-Admin / 29 September 2019 / 0 Comments
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By CYW-Admin / 29 June 2019 / 0 Comments
Multiple forces are at play on the world stage to facilitate illegal trade globally. Many will say that human greed is at the heart of it, others will blame over regulation; these two factors influence nation states that struggle to...

There are however some longer established markets. These tend to guard membership more securely making it more difficult for Law Enforcement to infiltrate them.

In an ironic twist it can be seen through the rules on some of the forums that hacking isn’t allowed amongst other criminal activity. Although the code of honour only goes so deep, with many markets, in the above diagram, seen to scam their users by closing down and running with the transactions.

For a deeper insight into the Dark web, download the EMCDDA report (link below).

[download id=”310″]

Cyber Money Laundering 101

There are many routes and many options to clean dirty money, it’s no wonder AML is such a difficult job. The sheer volume of SARS obfuscates criminals, it doesn’t help law enforcement.

The below helps to understand just a few of the tactics at play via the dark web. Forget smurfing. Forget structuring of cash. Those are small fry. If you really want to clean money get on the dark web. Read on for more…

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The drive for Artificial Intelligence to better understand AML trends and generate meaningful enquiries to Law Enforcement is the result of literally millions of false positives, clouding real criminality.

The dark web’s ecosystem is vast and well-coordinated, with a low barrier to entry for those with even limited technical knowledge. But digital crime by its typology leaves a trail for investigators – so what happens when a criminal succeeds in their criminality and turns a profit?

Contact us to help you prevent Cyber enabled gift card laundering.

Criminals are still only part way to spending their gain ‘mostly’ anxiety free. Any money secured through illegality where the origin of the gain cannot be explained is referred to in the underground as “dirty” money. This stolen gain is still relatively useless and comes with high risk in any legitimate financial transaction, such as buying goods. This stage is known as ‘Integration’ to AML compliance experts.

There are a plethora of different ML schemes, each with its own risks and benefits. From simple ones related to cryptocurrencies to more complex schemes involving services such as Uber, Airbnb, and even the occasional petrol station.

In today’s cybercriminal world, you either need to fully grasp the nuances of properly laundering money (so it can be integrated) – or trust someone who does.

ML on the dark web has become a criminal network industry, sometimes led by banking and financial experts who know the techniques to obfuscate criminal gain. In fact, a recent investigation shows that criminals have far more sophisticated methods of dealing with this issue.

At CYW we believe this reinforces our view that with ML, banks and investigators should be collecting intelligence and focusing on that, not overly focusing on SARS – to start with the criminal, not the transaction.

It’s worth noting that some of the ML processes used in the underground overlap with what we know from traditional crime. However, due to the nature of cybercrime, unique techniques exist specifically for use with dirty money obtained electronically. We will shed light on how these adapted cyber-schemes work which is essential intelligence for both security and law enforcement practitioners.

What Seems to Be the Problem?
One critical element of ‘cleaning’ money is accounting for the gain without raising the suspicion of law enforcement. ML is the answer to that problem.


Figure 1: The flow of money laundering

Placement, Layering and Integration…

ML has been around for as long as crime has and is considered an international problem. According to the UNODC (United Nations Office on Drug and Crime), the estimated money laundered world-wide in a year is two to five percent of global GDP, or $800 billion to $2 trillion US.

“Though the margin between those figures is huge, even the lower estimate underlines the seriousness of the problem”. UNODC

How do criminals launder money when using the dark web? The criminal underground relies on anonymity-focusing on cryptocurrencies in their illegal work. This offers a good start to obfuscate their gain. But, even using “anon” cryptocurrency doesn’t completely secure a criminal from law enforcement. The relatively simple mistake of using a wallet ID (a unique identifier) filled with stolen cryptocurrency to purchase online with delivery to an address could result in a knock from law enforcement not a delivery driver.

Figure 2: A cybercriminal with a mining botnet asking for ML assistance

Dark net request to launder…

If they have lots of money at stake, it’s obvious that even experienced malware developers need the help of criminal financial experts to not make expensive mistakes. The dark web is now facilitating solicitation for financial experts who have the ability to ‘clean’ money with less risk than ever before.

Figure 3: Another post on an underground forum asking for money laundering help

Main Idea: Break the Chain
The key is to break the chain. The criminal network’s solution to cleaning cryptocurrency uses features specifically built into digital currency to retain anonymity but unfortunately uses them for criminal ends. The fact that they can create as many cryptocurrency wallets as they wish and these do not require any identity allows cybercriminals to create a fog to obfuscate their criminal transactions in. This is called a “cryptocurrency tumbler,” or more popularly “bitcoin mixer” (or sometimes just “mixer”):


Figure 4: Advertisement for an underground mixer service

Mixers are a well used way of anonymizing and cleaning dirty bitcoins. The concept is to divide the cryptocurrency among multiple accounts, transfer them between several more accounts, and then eventually collect the total amount (minus a fee) to one external, newly created clean account. Doing this across exchanges and country boundaries further complicates the transactions.

Figure 5: Illustration of the bitcoin mixing process

‘Mixers’ provide an infrastructure so that as a “customer” criminals simply provide the dirty funds and receive a wallet with clean funds when the process is complete. The process is to break the starting amount to smaller, unequal pieces of currency to confuse investigators. The final payout will be smaller than the initial because the Mixer requires a percentage for his work. Due to the volume of small transactions made every day within the blockchain, “mixed” transactions are obfuscated in the sheer noise of legitimate activities, making tracing more difficult. Add in cross border exchanges and it creates another layer of difficulty for investigators, especially in non-cooperating countries who do not have an MLAT (Mutual Law Enforcement Treaty).

Figure 6: Underground money laundering service offering

The aim of breaking-the-chain is to side step direct connection between the two ends: placement into the system and integrating it as ‘legitimate’ cash/gain. The objective is to transfer currency from one region to another, more likely numerous times. It bears a resemblance to the “droppers” , in which goods bought with a stolen card are transferred to a final destination – not directly but through a chain of droppers. The purpose of droppers and how they help launder money is shown below.

Figure 7: Simple and advanced money laundering schemes involving droppers

In a dropper scheme, a cybercriminal will use illegal funds to buy goods in an online shop. The money will potentially be discovered as illegal/stolen/carded, and so the delivery address would be checked during any investigation (most cybercriminals will also change drops and addresses occasionally to avoid being caught).

The person receiving the goods on behalf of the criminal is called a dropper (red line). This dropper, having broken the money trail by converting it into goods, will then send the goods to the actor. More advanced cybercriminals or services in this field will use a chain of droppers (blue line) to further obscure the process of tracing the goods back to the dirty money.

Underground ML specialists have developed this scheme even further by adding into the chain an unaware, legitimate buyer:

Figure 8: An advanced ML scheme involving a legitimate buyer

The process works in the same way but now involves actual real buyers. These buyers are lured to an online shop promising unbelievable deals, via adverts on DarkWeb search engines. The shop customers think they’ve landed on a big sale, with goods selling as low as 50% discount compared to the brand’s RRP. A legitimate buyer paying for the items will transfer money to a legal shop created by cybercriminals and considered “clean.” But, the customer receives items bought with illegal funds sent to them by one of the droppers , if they receive anything at all…

Figure 9: iPhones sold on the underground at low prices, with bulk discounts

It is highly likely that the shopper will see neither electronics nor their money.
The same concept is used to break the chain with financial droppers as well. Cybercriminals around the world are ready to assist the transfer of stolen funds to (clean) their pockets:

Figure 10: An underground forum post offering ‘cash-out’ in the UK

Figure 11: Another of the huge number of underground offers for help with ML

Financial droppers are ready for any type of transaction through accounts that are functional and have a wide array of credit options. This is achieved by recruited bank workers who help facilitate some of this infrastructure, for example by modifying an account’s limits so that more money can be cashed out at once. This is another indication of how CYW target ML. By understanding employees within institutions and securing intelligence from within to uncover this type of criminal.

Converting the money into cash alone is not enough, as the trail can still be traced back to its criminality. However, with cash the criminal can proceed to use the more common ML methods used in traditional crime.

Nowadays, cash has no geographical boundaries, a fact leveraged by ML experts. With huge volumes of currency constantly in flux, illegal money is extremely difficult to stop. Cybercriminals can easily convert bitcoin to different currencies and use money transfer services to send it to a dropper as part of an international ML chain.

Figure 12: International money laundering offerings in the underground

Other Money Laundering Techniques:


Anti Money Laundering Gift Cards

Cybercriminals are constantly seeking ways to withdraw cash in ways that are both easy to execute and difficult to trace by law enforcement. Gift cards are one such method.

The process uses stolen credit card data to buy gift cards and then immediately pass the gift cards to the criminal market or purchase legitimate goods with them for reselling. There are also dark web transactions where the ‘customer’ could place an order for a gift card – a sort of gift card-on-demand. This is attractive to the customer because they can buy gift cards for significant discounts, sometimes 70 to 80% off.

13: Gift cards being sold

The gift card scheme does carry risk for both the cybercriminal and purchaser. Gift cards must be used quickly because it is inevitable the store will find out and invalidate them for being fraudulent.

Reduce your risk of cyber money laundering. Talk to us

Figure 14: Walmart gift cards for sale on the dark web

In the above image, the advert explains that it can take six hours to deliver the card. This implies that the process employs dark web form fillers who only buy the gift cards once an order has been placed to decrease the risk of the cards being invalidated. Some sites ask for several days to deliver gift cards. This lengthy time may be due to a longer verification process on the legitimate website, but it cannot be ignored the high chance that it is simply a scam, criminals are after all, trading with criminals.

Figure 15: Illustration of the gift card laundering scheme

The adverts for buying gift cards are commonplace in the dark web. Costs vary hugely based on the seller’s confidence in the cards’ validity- the dark web does have a ‘review’ process on some sites so ‘customers’ can base their decisions on an ‘element’ of external trust. Different cards are purchased using different schemes because some methods to illegally acquire cards are more reliable than others. Gift cards less likely to be invalidated are generally sold at a higher price.

Figure 16: A dark web forum posts shops of interest to gift card scammers

Figure 17: A dark web site selling gift cards for various shoes and clothing stores

The wide variety of shops and goods is impressive. Dark web dealers cover any and all shops that a legal consumer might purchase from.

Coupons and cards are not limited to just online purchases. Offers for food and lodging can also be found on the dark web. These cards/coupons are then used at actual physical shops/garages so cybercriminals will buy these for personal use or to resell as part of a different scheme. This is an example of how physical law enforcement can track criminals in the real world. Suspected criminals found with these cards in their possession while having high net worth status doesn’t add up and should identify a suspicion for the law enforcement agent.

Figure 18: Dark website selling gift cards for various restaurants

These cards are even used in gas/petrol stations.

Figure 19: Dark Website selling gift cards for gas/petrol stations.

Gift card fraud/schemes are successful ML techniques, however once a scheme is running smoothly they immediately look for ways to increase profit.

Figure 20: A dark web forum member suggests trying reddit to exchange gift cards

Lots of legitimate web platforms exist where people can trade gift cards they do not want. These are good places for a cybercriminal to try and sell their gift cards quickly – at a great discount.

There is a vast net of droppers around the globe that pose as legitimate sellers. They post illegally sourced gift cards and coupons on legitimate venues. These schemes involve verified cards. They can be sold to unsuspecting buyers for a much higher profit margin.

Figure 21: Gift card schemes

As the gift card industry matures so do the security mechanisms built by online shops. The dark web community watches these trends closely to develop new ways to take advantage.

Legitimate” Companies
A new ML technique we are beginning to see is elaborate and involves the creation of a real company.

Figure 22: A job offer on the dark web to become the director of a ML company.

Figure 23: A dark web post looking for a company they can use to launder huge sums.

The criminal is looking for a specific LLC with a history of real operations, but with a turnover of $3 million and profit at least $45,000 pa, it must be a legitimate company with no criminal history or ML suspicions. These dark web criminals are buying real companies – which exist only on paper in most cases – and appointing directors to make the money path more obscure, with the goal of confusing law enforcement.

“Employees” at Legitimate Companies
Service companies have not escaped the attention of cybercriminals. Worldwide services are increasingly being used to facilitate illegal operations. They continue to evolve over time.

Figure 24: Dark web forum post selling a guide to becoming a fake Uber driver

Since this post, Uber has made many changes and updated their system, preventing these schemes. The dark web responded by leveraging the human need for growth, whether illegal or not.

Figure 25: Dark web forum post looking for real Uber drivers to help ML

This method preys on people’s greed, recruiting real Uber drivers to accept and “complete” fake drives on behalf of the cybercriminal, accepting criminal payment and transferring some of their earnings (which are clean funds) back to the criminal.

The same scheme can be applied to other online services. The following example uses Airbnb.

Figure 26: Dark web post looking for real Airbnb hosts to help ML

This recruits people who register as Airbnb hosts, and the cybercriminal will send fake visitors to their housing. The visitors will never arrive, but they will pay for their “stay” to Airbnb using illegal funds. The funds will then go through Airbnb’s systems, being paid to the host in clean money with the criminal taking his cut.

This shows the dark webs ability to adapt using the human factor to recruit people who are not involved in the dark web to be the public face in their illegal activities.

ML is essential for maintaining cybercrime, we see a variety of tactics emerge and evolve. It is equally essential efforts to prevent ML encompass operators understanding the deeper elements of how criminals operate.

CYW believe it is a fundamental requirement of all AML operators, no matter in what field of AML to understand trends and have a working knowledge of ML tactics being deployed globally. It is simply fruitless focusing on SARS with an expectation law enforcement can keep pace with the volume or complexity of them. The key for law enforcement agencies is to focus on the criminal, identified through intelligence; not the transaction from a SAR.

To that end CYW are building a network of agents to provide direct intelligence on criminality. To access it, contact us…

Reform of Beneficial Ownership at UK Companies House

The UK is planning the biggest overhaul of its official corporate register in 170 years following criticism that it is being used by criminals around the world to launder ill-gotten gains through shell companies. Companies House is to be given more power to check information and the identities of people setting up businesses, as well as the individuals who control them. The move is part of a shake-up of the UK’s registry of more than 4m companies, including boosting Companies House staff, digital capabilities and other resources, amid concerns that criminals are taking advantage of a system that does not have the power to verify even basic details but which gives scammers and kleptocrats the imprimatur of a UK business.

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Nearly 3,000 companies list their beneficial owner on Companies House as a company based in a tax haven, even though this is against the rules, according to research from Global Witness, the anti-corruption group. It also spotted over 2,000 persons of significant control behind companies on the registry who were disqualified directors. Even more worryingly, 76 beneficial owners in the registry share their name and date of birth with individuals on the US sanctions list. The hope is to deter scammers by enabling Companies House to challenge the information it is given and carry out identity checks on key people behind companies.

The revamp, largely welcomed by anti-corruption campaigners and industry, comes after previous attempts at tightening up the rules fell flat because Companies House could not police the measures. The National Crime Agency estimates that hundreds of billions of pounds of dirty money is laundered through London every year.

“All legitimate traders would prefer the system to be much tougher than it is.”

The reforms planned by the Department of Business, Energy and Industrial Strategy, which oversees Companies House, are the latest attempt to galvanise the official registry, which is one of the most transparent in the world: last year it was accessed 6.5bn times. BEIS said late last year that it wanted to tighten century-old rules around corporate structures known as limited partnerships, which are blamed for facilitating money-laundering.Global Witness welcomed the move but said: “the devil will be in the detail”. The group’s anti-corruption campaigner, Nienke Palstra, said: “Unless Companies House is given full statutory powers to check the information it receives, as well as the resources to do so, money launderers will be given a free pass to continue to use UK companies for their crimes.”

Meanwhile, more than 10,000 people have complained that their legitimate details on Companies House have been stolen by fraudsters. This problem is also to be addressed by BEIS’s consultation, with proposals to give directors more control over personal information such as home addresses.“Companies House is worse than useless,” said Alexander Wilson, a former stockbroker who now owns and runs a 150-tenant commercial property in Leeds whose address he complains has been used fraudulently. “By not doing basic checks, they’re aiding and abetting fraud. All legitimate traders would prefer the system to be much tougher than it is.”

            

Beneficial Ownership Debate


In the UK, a joint parliamentary Committee has commented on the draft Registration of Overseas Entities Bill. The Bill aims to establish a publicly-accessible register of overseas companies and individuals who own property in the UK.


The Committee said, “there are still some loopholes in the draft Bill which, if unaddressed, could jeopardise the effectiveness of this important piece of legislation”. These ‘loopholes’ include the lack of verification checks to prevent criminals from submitting false information. In addition, the legislation doesn’t cover trusts which could be used to circumvent the law, whilst MPs are concerned about enforceability, industry groups have said it violates basic privacy rights.

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This is another piece to the ongoing debate around registries of beneficial ownership, and the question around the powers of registers like Companies House to validate the information submitted to them.


In the US, the Senate Banking Committee held a hearing on Tuesday about combating money laundering and illicit financing by anonymous shell companies. Acting Deputy Assistant Director of the Criminal Investigative Division of the FBI, Steven M. D’Antuono, gave a great summary of the problem which you can find here.
According to Transparency International, in 2018 suspicious offshore shell companies and similar entities put more than £4 billion ($5.1 billion) into real estate in London and elsewhere in Britain.

FBI testimony on Beneficial Ownership

Steven M. D’Antuono
Acting Deputy Assistant Director, Criminal Investigative Division
Federal Bureau of Investigation


Statement Before the Senate Banking, Housing, and Urban Affairs Committee
Washington, D.C.
May 21, 2019


Combating Illicit Financing by Anonymous Shell Companies
Statement for the Record

Chairman Crapo, Ranking Member Brown, and members of the committee, I am pleased to appear before you today to discuss the usefulness of beneficial ownership information to our nation’s law enforcement. This hearing is an important step forward towards developing the laws needed to effectively combat illicit financing through the use of anonymous vehicles, such as shell companies, and the Federal Bureau of Investigation (FBI) appreciates being consulted on these incredibly important matters.

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Overview
The U.N. Office on Drugs and Crimes estimates that global illicit proceeds total more than $2 trillion annually, and proceeds of crime generated in the United States were estimated to total approximately $300 billion in 2010. For an illegal enterprise to succeed, criminals must be able to hide, move, and access these illicit proceeds—often resorting to money laundering and increasingly utilizing the anonymity of shell and front companies to obscure the true beneficial ownership of an entity.


The pervasive use of shell companies, front companies, nominees, or other means to conceal the true beneficial owners of assets is a significant loophole in this country’s anti-money laundering (AML) regime. Under our existing regime, corporate structures are formed pursuant to state-level registration requirements, and while states require varying levels of information on the officers, directors, and managers, none require information regarding the identity of individuals who ultimately own or control legal entities upon formation of these entities.


Not only does the state-level regime lack beneficial ownership information, no federal-level system exists to consolidate or supplement the information that is collected under the various state regimes. Moreover, except in very narrow circumstances, current federal laws do not require identification of beneficial owners at account opening with financial institutions.


The FBI has countless investigations, spanning criminal and national security threats, in which illicit actors, operating both domestically and internationally, use shell and front companies to conceal their nefarious activities and true identities. The strategic use of these entities makes investigations exponentially more difficult and laborious.

The burden of uncovering true beneficial owners can often handicap or delay investigations, frequently requiring duplicative, slow-moving legal process in several jurisdictions to gain the necessary information. This practice is both time consuming and costly. The ability to easily identify the beneficial owners of these shell companies would allow the FBI and other law enforcement agencies to quickly and efficiently mitigate the threats posed by the illicit movement of the succeeding funds.


In addition to diminishing regulators’, law enforcement agencies’, and financial institutions’ ability to identify and mitigate illicit finance, the lack of a law requiring production of beneficial ownership information attracts unlawful actors, domestic and abroad, to abuse our state-based registration system and the U.S. financial industry. Many of the United States’ closest partners require beneficial information in order to detect illicit finance and protect their financial systems. The nations with the most effective AML and counter-terrorist financing (CFT) regimes require documentation of beneficial owners for “legal persons,” generally referring to corporations, trusts, and property, held in a centralized database easily accessible by government agencies. If corporation, trust, and real property owners in the United States were required to disclose beneficial ownership, and this information was made available to regulators and law enforcement through a central repository, the United States would more vigorously be able to identify and mitigate illicit actors and protect the U.S. financial system.


Nature of the Problem
In recent years there have been multiple assessments, undertaken by the Financial Action Task Force (FATF), as well as the Department of the Treasury, which highlight the vulnerabilities faced by the United States as a result of a near complete lack of transparency into beneficial ownership.


Financial Action Task Force (FATF)
The FBI is part of the Treasury-led U.S. delegation to FATF. The FATF is an independent inter-governmental body that develops and promotes policies to protect the global financial system against money laundering, terrorist financing and the financing of proliferation of weapons of mass destruction. The FATF Recommendations are recognized as the global AML and CFT standards.


FATF’s Guidance on Transparency and Beneficial Ownership, found in FATF Recommendations 24 and 25, states that countries should take measures to prevent the misuse of legal persons [such as shell companies, corporate structures, and other entity structures] for money laundering and terrorist financing by ensuring that legal persons are sufficiently transparent. The fundamental principle is that countries should ensure that there is adequate, accurate, and timely information on the beneficial owner or owners that can be obtained or accessed in a judicious fashion by competent authorities without impediments.


In its 2016 Mutual Evaluation Report (MER) of the United States’ anti-money laundering and counter-terrorist financing regime, the FATF highlighted the lack of beneficial ownership information issue as one of the most critical gaps in the United States’ compliance with FATF standards. Specifically, the MER stated that “serious gaps in the legal framework prevent access to accurate beneficial ownership information in a timely manner,” and that “fundamental improvements are needed in these areas.”


FATF noted that this issue can significantly mitigate law enforcement’s and regulators’ ability to combat illicit finance in the United States. Determining the true ownership of bank accounts and other assets often requires that U.S. law enforcement undertake a time-consuming and resource-intensive process, providing ample time for movement of funds or additional layering to conceal the ownership or location of funds. For example, investigators may need grand jury subpoenas, witness interviews, or foreign legal assistance to unveil the true ownership structure of shell or front companies associated with serious criminal conduct. The lack of a current legal requirement to collect beneficial ownership information also undermines financial institutions’ ability to determine which of their clients pose compliance risks, which in turn harms banks’ ability to guard against money laundering.


Furthermore, in a 2018 report titled Concealment of Beneficial Ownership, FATF found that, “the lack of [available beneficial ownership in select] countries is a major vulnerability, and professionals operating in countries that have not implemented appropriate regulations […] represent an unregulated “back-door” into the global financial system.”


2018 US National Money Laundering Risk Assessment
This risk assessment, authored by the Department of Treasury, in consultation with the many agencies, bureaus, and departments of the federal government that also have roles in combating illicit finance including the FBI, identifies the money laundering threats, vulnerabilities, and risks that the United States currently faces. The risk assessment noted that law enforcement agencies observed that misuse of legal entities posed a significant money laundering risk and that efforts to uncover the true owners of companies can be resource-intensive, especially when those ownership trails lead overseas or involve numerous layers. The assessment further noted that the lack of obligation for certain financial institutions to identify the natural persons who control or own a corporate customer had allowed individuals to access financial services anonymously by acting through shell companies.


Specifically in the section on vulnerabilities and risks, the risk assessment noted that, “bad actors consistently use shell companies to disguise criminal proceeds and U.S. law enforcement agencies have no systematic way to obtain information on the beneficial owners of legal entities. The ease with which companies can be incorporated under state law, and how little information is generally required about companies’ owners or activities, raises concern about a lack of transparency.” Though the assessment went on to state that the impediment merely slowed down rather than thwarted law enforcement investigations, it later noted that “complex ownership structures featuring layers of corporate entities, trusts, or nominee owners—punctuated by the involvement of foreign natural or legal persons—also present challenges.”


Challenges for Law Enforcement
There are numerous challenges for federal law enforcement when the true beneficiaries of illicit proceeds are concealed through the use of shell or front companies. A number of these challenges are outlined below. It is important to note that while the FBI and other federal law enforcement agencies may have the resources required to undertake long and costly investigations and thus mitigate to a small degree some of the challenges, the same is often not true for state, local, and tribal law enforcement.


The process for the production of records can be lengthy, anywhere from a few weeks to many years, and this process can be extended drastically when it is necessary to obtain information from other countries, which may require a mutual legal assistance treaty (MLAT) requests to those countries. If the beneficial ownership information being sought pertains to an entity which is registered in a jurisdiction with which the United States has no bilateral MLAT, obtaining records may be impossible.


Finally, if an investigator obtains the ownership records, either from a domestic or foreign entity, the investigator may discover that the owner of the identified corporate entity is an additional corporate entity, necessitating the same process for the newly discovered corporate entity. Many professional launderers and others involved in illicit finance intentionally layer ownership and financial transactions in order to reduce transparency of transactions. As it stands, it is a facially effective way to delay an investigation.

Potential Solutions to Mitigate Challenges
A significant number of the challenges described above could be mitigated by requiring legal entities to disclose beneficial ownership information, and by creating a central repository of that information which would be available to law enforcement and regulators. There are numerous examples of such requirements around the world, including by some of our closest partners.


The Fourth Anti-Money Laundering Directive required European Union (EU) member states to ensure that legal entities incorporated in their territory obtain and hold accurate and current information on beneficial ownership. This beneficial ownership information was held in a central register in that member state, but the registers were not required to be public until the European Parliament adopted the Fifth Anti-Money Laundering Directive in 2018. Section 25 of the directive deals directly and unequivocally with the requirement that member states acquire and retain corporate beneficial ownership:
(25) Member States are currently required to ensure that corporate and other legal entities incorporated within their territory obtain and hold adequate, accurate and current information on their beneficial ownership. The need for accurate and up-to-date information on the beneficial owner is a key factor in tracing criminals who might otherwise be able to hide their identity behind a corporate structure. The globally interconnected financial system makes it possible to hide and move funds around the world, and money launderers and terrorist financers as well as other criminals have increasingly made use of that possibility.


The Fifth Directive requires public access to data on the beneficial owners of most legal entities, with the exception of trusts, through the use of a central register. The access to data on the beneficial owners of trusts will be accessible without any restrictions to authorities, financial intelligence units, banks and other professional sectors subject to anti-money laundering rules, as well as other persons who can demonstrate a legitimate interest in the trust data. The directive also addresses the necessity to share the information between member states, in order to ensure the effective monitoring and registration of information on beneficial ownership. EU Member States have a January 2020 deadline to implement the direction into national law.


The United Kingdom (UK) has enacted perhaps the most robust beneficial ownership legislation to date. The UK has registers of beneficial ownership for three different types of assets: companies, real property, and trusts. Information on the beneficial ownership of companies is publicly available. For property owned by overseas companies and legal entities, the public beneficial ownership database is set to launch by 2021. The register for trusts is not public, but is available to law enforcement.
In July 2017, bilateral agreements between the UK and the Crown Dependences and Overseas Territories related to the sharing of beneficial ownership information went into effect. These Crown Dependencies and Overseas Territories include the Isle of Man, the British Virgin Islands, the Cayman Islands, and many others. Under the terms of these agreements, UK law enforcement has access to company beneficial ownership information in support of investigations. This information must be made available within 24 hours of a request. Our colleagues at the UK’s National Crime Agency have continually noted the immense value of such information in their investigations.


These frameworks can provide valuable insight into the critical aspects of a successful system for maintaining, accessing, and sharing accurate beneficial ownership information.


Examples of Cases Hindered by Obscured Beneficial Ownership Information
As referenced above, the FBI continues to have a plethora of investigations, spanning criminal and national security investigations that have been impacted by the use of shell or front companies by bad actors. Examples of several such instances can be found below, categorized by crime problem:
Kleptocracy
Recently, in a joint FBI and Internal Revenue Service – Criminal Investigations (IRS-CI) investigation, the Department of Justice filed civil forfeiture complaints aggregating to $1.7 billion brought under the Kleptocracy Asset Recovery Initiative related to the 1Malaysia Development Berhad (1MDB) investigation. From 2009 through 2015, more than $4.5 billion in funds belonging to 1MDB was allegedly misappropriated by high-level officials of 1MDB and their associates. 1MDB was created by the government of Malaysia to promote economic development in Malaysia through global partnerships and foreign direct investment. The associated funds were intended to be used for improving the well-being of the Malaysian people. However, using fraudulent documents and representations, the co-conspirators allegedly laundered the funds through a series of complex transactions and shell companies with bank accounts located in the United States and abroad. These transactions allegedly served to conceal the origin, source and ownership of the funds, and ultimately passed through U.S. financial institutions to then be used to acquire and invest in assets located in the United States and overseas.


Included in the forfeiture were multiple luxury properties in New York City, Los Angeles, Beverly Hills, and London, mostly titled in the name of shell companies, as well as paintings by Van Gogh, Monet, Picasso, a yacht, several items of extravagant jewelry, and numerous other items of personal property. The investigation into the location and holders of the assets associated with the alleged 1MDB scheme was made much more difficult by the shell companies with connections in foreign destinations.


Drug Traffickers, Political Corruption, and Tax Evasion
Perhaps the most public revelation into alleged illicit actors’ use of shell companies to conceal ownership was the former Panamanian law firm Mossack Fonseca. Documents from the firm were leaked by an anonymous source to the International Consortium of Investigative Journalists (ICIJ). These documents, referred to as “the Panama Papers,” purport to show how Mossack Fonseca engaged or facilitated international financial crimes, including alleged money laundering and tax evasion, using shell companies and nominees. Several prominent foreign politicians were identified as clients of Mossack Fonseca, leading to multiple heads of state resigning. Mossack Fonseca opened thousands of shell companies for their customers, for whom they could many times not even identify. These customers, at times, allegedly included known international narcotics traffickers.


Mossack Fonseca was not just for international clients. A significant number of their clients were allegedly Americans or individuals involved in U.S.-based commerce. When a regulator or law enforcement official looked up the names of the shell entities in state-held registries, they would find the registered Agent as the law firm or one of its subsidiaries, not a true owner or anyone actually associated with the entity. In many instances, a U.S. regulator or law enforcement entity was precluded from identifying the beneficial owner even via legal process as Mossack Fonseca could not or would not provide the information. These anonymous shell companies allegedly used the U.S. financial system for their anonymous owners’ benefits.


Mossack Fonseca also had U.S.-based subsidiaries that established thousands of U.S.- based shells in Nevada, Florida, Wyoming, and likely other states. When officials scrutinized a shell company created by one of the Mossack Fonseca subsidiaries, all that the investigator could learn was that the agent was “MF Nevada” or the like. Thereafter, the subsidiary Mossack Fonseca entities made it difficult to obtain any additional information. This, of course, made investigating the shell entities extremely time-consuming, inefficient, and difficult.


Sanctions Evasion
Another example of note is the Karl Lee investigation. Li Fangwei, a/k/a Karl Lee, and several of his Chinese shell and front companies were designated by the Department of the Treasury’s Office of Foreign Assets Control (OFAC) as the principal supplier to the Government of Iran’s ballistic missile program. He owned a graphite and metallurgical production factory in Dalian, China and was supplying Iran with various military and metallurgical items. Lee used his Chinese shell and front companies to surreptitiously exploit the U.S. financial system to supply weapons of mass destruction to Iran. Lee was indicted on seven counts of International Emergency Economic Powers Act (IEEPA) violations, money laundering, and related schemes. Approximately $7 million was seized from U.S. based correspondent bank accounts associated with Lee’s foreign based accounts. Some of Lee’s attempted sales involved U.S. businesses, who were unaware of the Lee’s role as beneficial owner of the concealed Chinese shells.


During the Karl Lee investigation, the FBI faced numerous hurdles due to the litany of overseas shell corporations. Attempting to unravel Lee’s shell network that had penetrated the U.S. financial system delayed the investigation many months and nearly proved insurmountable. One major challenge was that most of the U.S. based correspondent banks did not collect basic “know your customer” information for the shell corporation accounts and permitted transactions to be blindly conducted. Thankfully, one bank did collect this information, which enabled the FBI to start to unravel Lee’s illegal proliferation and use of the U.S. financial system. This fundamental information proved crucial to the investigation but only existed by chance, not by legal requirement.

Crimes Against Children/Human Trafficking
In April 2018, the Department of Justice announced the seizure of Backpage.com, the Internet’s leading forum for prostitution ads, including ads depicting the prostitution of children. In 2018, seven defendants were charged with 93 counts of prostitution related charges, money laundering, and transactional money laundering. Eventually, the government seized over $140 million worth of USD and bitcoin.


Approximately 97 percent of Backpage’s revenue came from selling ads related to prostitution, which included children and victims of human trafficking. In approximately 2015, major credit card providers stopped allowing transactions with the site and almost no banks would provide banking serves for Backpage. The owners and operators of the website turned to opening shell companies in the United States, Europe, Asia, and South America in order to continue to operate as a company. Eventually, Backpage’s entire revenue stream was predicated on concealing the receipt of money from people purchasing advertisements. The owners opened shell companies in order to obtain bank and merchant accounts. Backpage also accepted prepaid gift cards and digital currency, which it then sold and exchanged for cash, then moved into bank accounts of the shell companies in order to fund its operation.
Unwinding these shell companies and their bank accounts took many months due to the lack of readily available beneficial ownership information. Additionally, had the banks known who the beneficial owners of the shell companies were, they likely would not have provided banking services and the revenue platform would have been eliminated. Thus, the criminal activity could have been starved of income and the abuse of children and human trafficking victims could have been halted years earlier than it was.

Health Care Fraud
On April 9, 2019, FBI and Department of Justice officials announced the disruption of one of the largest Medicare fraud schemes in U.S. history. An international fraud ring allegedly bilked Medicare out of more than $1 billion by billing it for unnecessary medical equipment—mainly back, shoulder, wrist, and knee braces, as part of durable medical equipment (DME) orders. The alleged illegal activity in this scheme included medical equipment companies that paid a firm in the Philippines to recruit individuals, who were Medicare patients and may or may not have had a medical need for the braces. The companies then allegedly paid doctors kickbacks to telemedicine companies that arranged for doctors to prescribe unnecessary braces “without any patient interaction or with only a brief telephonic conversation with patients they had never met or seen.” Some of the telemedicine companies concealed these kickbacks by using fraudulent invoices and having the payments made to shell companies, which were located in foreign countries and established in the name of nominee owners. Some of the 130 DME companies associated with the investigation also were valueless shell companies used to conceal the true owner-operators of the businesses. The DME companies at times hired legal counsel and some of the owners used straw individuals to establish new DME companies when Medicare would perform audits of their illegitimate DME business practices. The DME owners would merely move its existing business into the new DME company and establish new bank accounts under the new DME name. During its operation, DME representatives provided banks with the names of the straw individuals, purporting to be the owners of the business. By doing this, the financial institutions were unable to easily flag the routine fraudsters as such.
The proceeds of this fraudulent scheme were allegedly laundered through international shell corporations and used to purchase exotic automobiles, yachts, and luxury real estate in the United States and abroad. The massive, months-long investigation known as “Operation Brace Yourself” spanned 20 FBI field offices and involved several partner agencies, including the IRS Office of the Inspector General, the Department of Health and Human Services’ Office of the Inspector General, Center for Medicare and Medicaid Services, U.S. Secret Service, and the Department of Veterans’ Affairs.

Investment Fraud
In a joint FBI, IRS-CI, and U.S. Postal Inspection Service case, six individuals were ultimately charged in 2009 for their part in running a $168,000,000 hard-money lending Ponzi scheme. The scheme involved the use of opaque corporate structures and shell entities to conceal fraud and self-dealing. Duane Slade, Guy Williams, and Brent Williams were the primary executives that created complicated investment structures and used shell companies to divert investors’ assets. Money was siphoned from the primary investment fund into related shell companies, which were actually owned by the executives of the primary investment firm, unbeknownst to the investors. These executives were then able to convince multiple investors to purchase equity into what amounted to valueless shell entities. The executives even contrived a loan of investors’ money from the primary investment to one of the shells. Though no money actually changed hands, the executives paid themselves a $400,000 fee for arranging the loan. Due to the convoluted nature of these interrelated shell companies and investment products, dozens of citizens were defrauded out of their life savings. Had either the citizens or the banks which provided banking services had a clearer picture of who owned which entities, the fraud may have been prevented. Finally, the multi-year, multi-agency investigation took countless days and hours of investigation, during which the subjects continued to dissipate assets unknown to law enforcement.

Drug Trafficking and Money Laundering
The Trevino-Morales brothers, alleged to be the head of the Los Zetas Mexican drug cartel, were indicted in Texas for their roles in using the race horse industry and shell companies to launder millions of dollars in drug proceeds. Miguel Trevino-Morales, the alleged head of Los Zetas, claims to have killed 385 U.S. citizens during his association with the cartel. The brothers structured drug proceeds into anonymous or straw shell company bank accounts within the U.S. financial system. The Trevino-Morales brothers would then purchase vast numbers of race horses from auctions on behalf of the shells, then sell the horses between the shells in order to make the deposits of vast sums of drug proceeds into their bank accounts look legitimate. Finally, if one of the race horses started winning money, they would back-date a sale of the horse into the known entity of the brother not outwardly associated with the Los Zetas, who would then deposit the winnings in furtherance of the drug enterprise.
The wide use of shell companies, in both the United States and Mexico, made it nearly impossible for banks and investigators to associate the drug cartel with horses and bank accounts. If not for solid witness testimony and extremely diligent forensic accounting, it would have been difficult to prove the case. In total, 10 defendants were found guilty of money laundering related charges, a money judgement of $60 million was rendered, 522 race horses were seized (and sold for $12 million), two U.S.-based horse ranches were seized as well as two airplanes used by the cartel.

Conclusion
I want to thank the committee for holding this hearing and for calling attention to the threat posed by obscured beneficial ownership. The United States needs effective legal tools to directly target these types of fraudulent schemes and protect the integrity of the U.S. financial system from similar schemes. Together with our domestic and international law enforcement partners, the FBI is committed to continuing this conversation with Congress and looks forward to developing and strengthening beneficial ownership laws.