By Sam Sheen, Financial Crime Expert Adviser, Efficient Frontiers International (EFI) 

 Introduction

One thing I learnt as a child of British parents were the rules about queuing (or “waiting in line” as we would say in North America). Any place where you must wait and there are 2 or more people present, you are expected to form a line. And there are strict rules about how the line works. One of the major rule violations is to “jump the queue” (or again, as we say in North America, “not waiting your turn”) in order to bypass others ahead of you in line.

Sam Sheen

The rules about lines apply whether it is standing at a bus stop or waiting at the passport office. Sometimes, you are even given a number in case you forget your place in line. Here in the UK, people generally frown upon others receiving an unfair advantage, allowing them to bypass the inconvenience of having to wait in a line. Others will do their utmost to not play by the rules in order to get to the front of the line or even avoid having to wait in line altogether.

The queuing rules also apply to certain regulatory requirements. Obtaining a licence, authorisation or even an exemption from a government agency often involves an administrative process that is very similar to waiting in line. Sometimes, there are exemptions or expedited processes that can be accessed, but rules about accessing these are usually prescribed under the applicable regulation.

And there are still people who would prefer to either jump the queue or avoid going through these administrative processes altogether. They are even willing to pay others to help them to do so. A financial crime case I recently read is a good illustration of this practice, which also involves a tactic commonly used in trade-based money laundering.

Trade-Based Money Laundering and Invoicing

For those less familiar with this form of illicit activity, trade-based money laundering (“TBML”) is defined by the Financial Action Task Force (“FATF”) as the “process of disguising the proceeds of crime and moving value through the use of trade transactions in an attempt to legitimise their illicit origins”. John Cassara, author a book on the subject^[i], explains that in its primary form, TBML revolves around invoice fraud and associated manipulation of supporting documents.

One of the key tactics used in TBML is to “over-invoice”. This involves charging a value for goods or services above what they are worth. This tactic is used when one party owes money to another. The party who raises the invoice (seller) is owed money by the party paying the invoice (purchaser) for some sort of illicit activity.

So, for the sake of simplicity, imagine that Mary is a drug dealer and works for a distributor. The proceeds she raises from drug sales need to be given to the distributor. But Mary knows that going to the bank with cash could cause bank staff to ask questions. So, Mary needs a way to pay her distributor without raising red flags at the bank.

Let’s say that Mary needs to pay to her distributor £1000. The distributor operates, as one of his side business activities, a vegetable nursery. Mary also has a “side” business, or a front company that she has set-up to help her move drugs sales’ proceeds. She has told the bank when she opened a bank account for the company that it was as a small grocery store.

Mary tells her distributor that she has £1000 and deposits the money into the grocery store bank account. The distributor raises an invoice for vegetables that have allegedly been sold to Mary’s grocery store. In the ordinary course, the vegetables would be sold at a price of £20. However, to facilitate the payment of the £1000 drug proceeds, the distributor makes the invoice out for £1020.

When the invoice is paid by Mary from the grocery store account via bank transfer to the distributor’s nursery account, the drug proceeds are effectively transferred, with no direct exchange of cash involved between the distributor and Mary.

There has been a good deal of discussion amongst financial crime prevention professionals about how to detect TBML over-invoicing. But when the activities involve services (i.e. not goods such as vegetables), detection of this can prove to be more challenging.  While the average person might find it odd for a vegetable nursery to charge £1020 for a crate to cabbages, it might not be as easy to determine whether the fees charged for some professional services are reasonable and within market expectations.

The following case is an illustration of how a company offered services allowing customers to “jump the queue” to circumvent regulatory requirements, which were paid for using over-invoicing.

Case Snapshot

In this case a company, P, made illicit payments on behalf of customers that allowed them to circumvent customs and immigration requirements in several different jurisdictions. The scheme involved the payment of bribes totalling over $USD49 million. The company and several of its executives were sanctioned by the US authorities for this illicit activity.

Nature and Purpose of P’s Business

P and its subsidiaries essentially offered an end to end service for customers seeking to import and export goods around the world.

P provided intercontinental air and ocean freight forwarding and logistics and supply chain management solutions. The company was a member of a larger group of companies (“Group”). Overall, P provided these services to over 160 jurisdictions worldwide through several its subsidiaries that were in Nigeria, Angola, Brazil, Azerbaijan, Nigeria, Kazakhstan, Russia and Turkmenistan.

The services provided by P’s subsidiaries included customs clearance and ground shipment services. Representatives of a subsidiary office would often interact directly with local customs officials and arrange for the payment of customs duties, fines and other related fees levied on shipped goods, on behalf of P’s customers.

Nature of Customer’s Activities

P’s customer base was broadly divided across several different industries. They operated in the oil and gas, healthcare technology, retail, telecommunications and chemical sectors. Their engagement of P required that the company essentially act as their agent and broker and ensure that their goods were shipped in a timely manner to the intended destination.

The Queuing Problem and P’s Solution

Some of P’s customers often faced delays in the shipment of their goods. Reasons for these delays included delayed departures from the point of origin or transfer, insufficient or incorrect documentation, the nature of the goods themselves or local officials who refused to provide customs and clearing services without first receiving an illicit payment (i.e. bribe). These problems appeared to have arisen more frequently in specific jurisdictions.

The services provided by P assisted in mitigating some of the causes for these delays but did not eliminate all of them. Some of P’s customers wanted to find a way to “jump the queue”, avoid any delays and have their goods shipped to the intended destination as quickly as possible.

How the Scheme Worked

P agreed to implement a scheme to try and solve the delay problem for their customers. So, think of this as waiting to gain entry to a popular nightclub – you could wait in the queue with everyone else or you can jump the queue by paying the doormen a “tip” to let you to go in to the club and not wait in line. In the P case, the company paid this “tip”, on behalf of its customer to customs and immigration officials in various jurisdictions.

The scheme worked as follows: P would arrange for its subsidiary office in the relevant jurisdiction to pay a cash bribe to customs officials. In exchange, those officials would allow goods to pass customers sidestepping normal administrative processing delays or to accept falsified documentation that would allow more questionable goods easier passage through the inspection process.

Now as the saying goes, there is no such thing as a free lunch and so P’s customers needed to reimburse the company the bribe payments its subsidiaries had made. But this needed to be done so that it was not apparent that the payment was linked to the bribed paid.

So, to be reimbursed for the bribe payments, along with the legitimate services provided, P adjusted the invoices issued to its customers to incorporate the amount paid for the bribe.

P and its subsidiaries used a wide variety of terminology in the invoices to describe the portion of the invoiced amount that related to the bribes. In total, P used approximately 160 different terms to falsely describe the bribes it paid on behalf of its customers. These included “CPC Processing,” “Customs Intervention,” “Evacuations,” “Export Formalities,” “Local Handling,” “Manifest,” “Operational Expenses,” “Pre-releases,” “Special Handling,” “TI Bond Assessment,” and “TI Bond Cancellation.”

In addition to customs arrangements, P also facilitated bribe payments to Angolan immigration officials on behalf of some of its customers. These bribes were paid to circumvent visa and immigration requirements. The bribes allowed the customers avoid fines or deportation of their employees who had overstayed their visas.  Bribes were also paid to permit customers to use Angolan military cargo aircraft so that their goods could be transported more quickly to their end destination goods.

P’s subsidiaries who facilitated the bribe payments would raise an invoice combining both fees for legitimate activities and the bribes paid. This invoice would be delivered to the Group’s billing affiliate.  The affiliate would then invoice the customer for the total amount, and use the terminology noted above in the line item related to the bribe payment.

Relevance to Customer Due Diligence (“CDD”)

Gone are the days when simply verifying the name and address of a company’s directors will suffice. Financial institutions are now expected to clearly understand the “nature and purpose” of a customer’s business and its expected use of the products and services provided to it. (See paragraphs 4.46- 48 of the Joint Money Laundering Steering Group Guidance – Part I)

The above case provides a useful example of the importance of establishing a clear risk profile about a customer’s business activities, how they are undertaken, and the chain of parties relied upon in delivering its products and services.

Concluding Thoughts

If I were to identify one key take-away from this case it would be this: Sometimes CDD procedures must be customised to properly assess the potential financial crime risks of a business relationship. Without doing so, a business could be exposed to the risk of undertaking business with a customer who is indifferent to financial crime risks or considers the complying with regulations designed to mitigate those risks to be someone else’s problem.

And at the end of the day, customers who are inclined jumping the queue are often more trouble than they are worth.

^[i]Cassara, J. (2015) Trade-Based Money Laundering: The Next Frontier in International Money Laundering Enforcement (Wiley and SAS Business Series) [Hardcover].