[Joint House and Senate Hearing, 116 Congress]
[From the U.S. Government Publishing Office]
116th Congress } Printed for the use of the
1st Session } Commission on Security and Cooperation in Europe
======================================================================
Shady Shipping: Understanding
Trade-Based Money Laundering
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
May 24, 2019
Briefing of the
Commission on Security and Cooperation in Europe
------------------------------------------------------------------------
Washington: 2020
Commission on Security and Cooperation in Europe
234 Ford House Office Building
Washington, DC 20515
202-225-1901
[email protected]
http://www.csce.gov
@HelsinkiComm
Legislative Branch Commissioners
HOUSE SENATE
ALCEE L.HASTINGS, Florida ROGER WICKER, Mississippi,
Chairman Co-Chairman
JOE WILSON, South Carolina BENJAMIN L. CARDIN. Maryland
ROBERT B. ADERHOLT, Alabama JOHN BOOZMAN, Arkansas
EMANUEL CLEAVER II, Missouri CORY GARDNER, Colorado
STEVE COHEN, Tennessee MARCO RUBIO, Florida
BRIAN FITZPATRICK, Pennsylvania JEANNE SHAHEEN, New Hampshire
RICHARD HUDSON, North Carolina THOM TILLIS, North Carolina
GWEN MOORE, Wisconsin TOM UDALL, New Mexico
MARC VEASEY, Texas SHELDON WHITEHOUSE, Rhode Island
Executive Branch Commissioners
DEPARTMENT OF STATE to be appointed
DEPARTMENT OF DEFENSE to be appointed
DEPARTMENT OF COMMERCE to be appointed
[II]
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Shady-Shipping: Understanding
Trade-Based Money Laundering
May 24, 2019
Page
PARTICIPANTS
Paul Massaro, Policy Advisor, Commission on Security and
Cooperation in Europe 1
Danielle Camner Lindholm, Director of National Security Policy,
U.S. House Committee on Financial Services 2
David Luna, President and CEO, Luna Global Networks 2
John Cassara, Special Agent, U.S. Department of the Treasury,
retired 6
Lakshmi Kumar, Policy Director, Global Financial Integrity; 9
Shady-Shipping: Understanding
Trade-Based Money Laundering
----------
May 24, 2019
The briefing was held at 9:30 a.m. in Room 2360, Rayburn House
Office Building, Washington, DC, Paul Massaro, Policy Advisor,
Commission on Security and Cooperation in Europe, presiding.
Panelists present: Paul Massaro, Policy Advisor, Commission on
Security and Cooperation in Europe; Danielle Camner Lindholm, Director
of National Security Policy, U.S. House Committee on Financial
Services; David Luna, President and CEO, Luna Global Networks; John
Cassara, Special Agent, U.S. Department of the Treasury, retired; and
Lakshmi Kumar, Policy Director, Global Financial Integrity.
Mr. Massaro. All right, let's get this show on the road. Thank you
all for coming this morning. On behalf of our bipartisan and bicameral
leadership, I'd like to welcome you to this briefing of the Helsinki
Commission. The commission is mandated to monitor compliance with
international norms and standards in the European and Eurasian space.
This includes norms in the military sphere, in the economic and
environmental sphere, anti-corruption sphere--that's sort of the stuff
I advise on--and the human rights sphere and democracy sphere.
I'm thrilled to be hosting this particular event today with my
colleague Danielle Lindholm, right there, of House Financial Services
Committee. This is the first time that the Helsinki Commission and the
House Financial Services Committee have partnered for an event, but it
will not be the last because next week we also have an event. On May
29th we'll be looking at the British approach to anti-corruption. So
it's very exciting to have these two events in partnership.
I guess to broadly frame the issues we're going to be talking
about today, and Commission interest in these issues, I'd like to talk
about the threat posed by globalized corruption and kleptocracy to the
United States. I think that it comes as no surprise to many people in
this room that authoritarian kleptocrats are exploiting the global
financial system to hide their ill-gotten gains on our shores and those
of our allies, providing protection for their stolen assets and a
vector of influence into our political systems. Once established, these
kleptocrats set about hollowing out the rule of law institutions that
we hold so dear to better serve their preferences.
Much remains to be done to close the loopholes that enable this
malign influence, though Congress is taking action. And I'd like to
point out one piece of action recently taken by House Financial
Services with the passage of the Bank Secrecy Act amendment, that a
study in strategy on Trade-Based Money Laundering [TMBL] has come out
and will hopefully be passed by Congress to be completed by the
executive branch.
So generally at the Helsinki Commission we try to work on some of
the issues that others aren't looking at, try to think about emerging
issues and think around the corner. And that's how we came to working
on TBML. Of course, with TBML, as John I'm sure will tell you, that the
issue's already arrived in many ways. It's sort of the USG [U.S.
Government] response that hasn't necessarily arrived in the way that it
has to.
I'll let the panelists get into sort of the nitty-gritty and talk
about the details surrounding TBML, but broadly speaking TBML is a type
of money laundering, one of sort of three major types of money
laundering, where trade transactions are mis-invoiced to illicitly move
ill-gotten gains. This type of money laundering, of course, next to the
one we're talking about quite a lot in Congress, that is the shell
company-type money laundering, is a growing concern as it's become a
favorite method for transnational criminals, autocrats, and terrorists.
So I'm very excited to welcome this distinguished panel today--very
distinguished panel. David Luna is going to kick us off. David is the
CEO and president of Luna Global Networks and Convergence Strategies,
LLC, a former senior U.S. Government official in the Bureau of
International Narcotics and Law Enforcement Affairs, INL, at State, and
a personal friend of mine. He will set the stage for our discussion by
sharing his insights on the dark side of globalization and how that all
fits into the TBML paradigm.
John Cassara will then discuss TBML in depth, which he is eminently
qualified to do as a former Treasury special agent and the author of
the book, ``Trade-Based Money Laundering: The Next Frontier in
International Money Laundering Enforcement.'' He is also on the board
of Global Financial Integrity, GFI, which is our last panelist, Lakshmi
Kumar, who is GFI's policy director. Prior to joining GFI, Lakshmi
worked for years as a lawyer and policy professional in India on anti-
money-laundering issues. GFI has been one of the most proactive
organizations where fighting TBML is concerned. We look forward to
hearing her thoughts and what she has to say about GFI's approach.
So before we begin, before I hand the floor to David, I'd like to
see if my colleague Danielle would just like to say a few words.
Unfortunately, you'll see we have a mic issue today. So if I you could
project and shout and use any theater experience you may have.
Thank you. [Laughter.] And I guess I just did, because my mic
wasn't on. [Laughter.]
Ms. Lindholm. No, thank you. Very, very briefly, just thank you to
the Helsinki Commission and its hardworking staff for its collaboration
on this event. This allows us to share the expertise of this fabulous
panel on this very important issue with our members, with our staff,
and with the public. And so we look forward to hearing your remarks.
Thank you.
Mr. Massaro. Thank you very much, Danielle. And, David, please take
it away.
Mr. Luna. Thank you very much, Paul. Good morning, everyone. And
thank you to Danielle as well for organizing and chairing this
important meeting with Paul.
I would like to thank the U.S. Helsinki Commission, House Financial
Services Committee, for their invitation to participate this morning in
this congressional joint hearing on trade-based money laundering. I
would also like to applaud the leadership of both the commission and
the committee for working in the bipartisan sphere to support important
legislation in this 116th Congress to empower law enforcement and
business communities to target organized crime, kleptocracy, and
terrorism and those bad actors who exploit our laws and corrupt our
institutions, markets, and communities, hide their criminally derived
assets, manipulate international trade and use their dirty money to
finance even more security threats.
I will focus my statement on the urgent need to sharpen our
understanding of the interconnections between illicit commerce and
money laundering across licit and illicit communities through a prism
of convergence crime. Money laundering and trade-based money laundering
are threat multipliers that help to finance greater harms that impact
all Americans. The reality is that dirty money derived from illicit
commerce remains the lifeblood of today's kleptocrats, criminal
organizations, and terrorist groups.
Trade-based money laundering and other illicit financial vehicles
and methods enable these bad actors to disguise and clean the dirty
money. By purchasing trade goods licit and illicit, moving such
merchandise across borders, falsifying its value, quality and quantity
in mis-invoicing or misrepresenting trade-related financial
transactions. A snapshot of the current global illegal economy brings
into clearer focus the magnitude of illicit trade, and why following
the money and following the value are critical if you're to
successfully expose illicit activities, and to disrupt and dismantle
the webs of corruption and criminality behind threat networks that are
harming U.S. national security and our global interest.
Make no mistake, the global illegal economy is booming. According
to a 2015 report from the World Economic Forum, the global value of
illicit trade and transnational criminal activities is estimated
between 8 to 15 percent of gross domestic product. In 2017, the World
Bank projected the world's [GDP] at U.S. 80 trillion [dollars]. Even if
you take the conservative 8 percent estimate from the cited WEF report,
it is fair to assume that today's global illicit markets generate
several trillion dollars in every year for numerous threat networks.
The types of criminal activities involved include the trafficking
of narcotics, arms, human[s], counterfeit, and pirated goods; illegal
tobacco and alcohol; illegally harvested timber, wildlife, and fish;
pillaged oil, diamonds, gold, and other natural resources and precious
minerals; and other commodities that have value and are sold on our
Main Street, on social media, marketplaces, and the Dark Web.
Let me break down some of these illicit trade numbers based on the
data provided by various international organizations, including GFI.
Every year at least $2.6 trillion gets laundered globally.
Transnational crime generates between $1.6 trillion to $2.2 trillion.
Bribery, up to a portion of $1 trillion. Narcotics trafficking
generates between $750 billion to $1 trillion. And I will discuss
counterfeit and pirated goods shortly, but other illicit activities
generate tens of billions of dollars every year.
These are simply staggering amounts and are of great concern to the
U.S. Department of Treasury and U.S. law enforcement agencies, as we
heard earlier this week at a U.S. Senate hearing on illicit financing.
Given that hundreds of billions of dollars in illegally concealed
proceeds are moving through the international system and our economy
across U.S. industries, the enforcement challenge is monumental. A few
weeks ago, in the new report that I authored for the FACT [Financial
Accountability & Corporate Transparency] Coalition, we examined how the
trafficking and smuggling of counterfeit and pirated goods is a very
profitable illegal activity for many of today's criminals and illicit
networks that rely on the secrecy provided by anonymous entities to
launder their ill-gotten gains and escape detection.
Evidence-based research recently conducted by the OECD
[Organisation for Economic Cooperation and Development] and the
European Union IPO [Intellectual Property Office] estimated the value
of fakes worldwide at $509 billion in 2016, or up to 3.3 percent of
world trade. Of this $509 billion in import fakes worldwide the top ten
product categories in terms of values of fakes were electronics,
jewelry, optical photographic and medical equipment, clothing and
textiles, footwear, toys, foodstuff, handbags, perfumes, and cosmetics
and watches. The joint analysis by the OECD and EU IPO showed that
China is the top producer of counterfeit goods in 9 out of 10 of these
categories. While Hong Kong, Singapore and the UAE are global transit
hubs for trade in counterfeits.
Brands suffering the most from counterfeiting were largely from the
OECD and EU member States, although U.S. companies suffered the most at
20 percent. More alarming is that this illicit trade in counterfeit and
pirated goods will more than double in 5 years' time alone, reaching
close to U.S. $3 trillion by 2022. In the United States, the threats
posed by counterfeiting internet pirates directly harm critical
national industries, regional and local economies, and the reputational
value of American companies and brands. It also puts the safety and
health of all Americans in jeopardy and in danger when criminals inject
opioids, counterfeit medicines, food, automotive and airplane parts,
apparel, footwear, and fast-moving consumer goods into our distribution
networks and supply chains, including pharmacies, workplaces,
hospitals, schools, grocery stores, restaurants, and online
marketplaces.
In addition to illicit trade activities, legitimate commerce and an
enormous volume of trade flows also enable criminals to obscure
individual transactions to transport value across borders, and between
exporting and importing jurisdictions, thereby hiding illicit cash
within seemingly legitimate uses. For example, at the licit-illicit
continuum, according to the FBI, criminals will often dump imported
goods bought with dirty money into a market at a discount to accelerate
the money laundering process, putting legitimate merchants at a
competitive disadvantage.
Let me just share a few cases where the convergence of illicit
commerce and money laundering come together.
Anonymous companies and money laundering, including trade-based
money laundering, have helped criminals across the United States sell
in recent years several billion dollars in fake and counterfeit luxury
bags and apparel accessories, including those sportswear and gear from
the NFL, NBA, and Major League Baseball, branded as Nike, Adidas, Under
Armour, and many others.
Criminals also imported and sold to American consumers through
internet pharmacies counterfeit medicines from India and China worth
hundreds of millions of dollars, including fake versions of medicines
to fight breast cancer, cholesterol, high blood pressure, and other
medications to cure other ailments and diseases. Criminals also sold
knock-off parts to the Pentagon that have cost the U.S. military tens
of millions of dollars and put our soldiers' lives in greater risk and
danger.
Some comments on free trade zones and online marketplaces. As
consumer goods and fakes make their way from provenance jurisdictions
to demand markets, overall trade can also get very complicated in
transit, through the exploitation of free trade zones by criminals and
corrupt actors. Free trade zones are used to launder illicit proceeds,
especially in the areas that have inadequate oversights and customs,
weak anti-money-laundering, weak anti-corruption and anti-illicit trade
regulations and enforcement.
For example, as reported by the U.S. Department of State in last
year's Country Report on Terrorism, the free trade zones in Panama and
the tri-border area of Argentina, Brazil, and Paraguay remain regional
nodes for money laundering, including related to illegal tobacco and
counterfeit trade, and are vulnerable to the exploitation by corrupt
officials and sympathizers to terrorist groups.
Regarding online marketplaces, as more shopping has moved to the
internet criminals are profiting immensely from selling illicit
commodities across global e-commerce platforms. As reported by
cybersecurity ventures, estimates of the financial cost from cybercrime
will double from 3 trillion [dollars] in 2016 to 6 trillion [dollars]
by 2021, especially as the world population grows exponentially and as
tens of billions of people gain new access to the internet every year.
According to the Better Business Bureau in their report last week,
a massive number of deceptive web sellers illegally use copyrighted
pictures of brand-name goods to lure consumers to buy and then send
fake items, low-quality substitutes, or dangerous and toxic products.
Many unsuspecting consumers can also find themselves at risk from
malware from accessing or using illicit devices to stream down pirated
film and television content, defrauding the American industries of
millions of dollars every year.
In closing, trade-based money laundering and the use of trade
transactions help criminals to disguise and legitimize the illicit
origins of goods, value, and their filthy money. In many cases the
profits generated through trade-based money laundering finance other
converging criminal activities. Let me suggest some practical actions
that I believe can be effective to combat trade-based money laundering
and convergence crime.
The U.S. Congress must pass legislation to end the abuse of
anonymous companies by requiring the collection of beneficial ownership
information at the point of corporate formation. The U.S. Government
should continue to deny safe haven and entry to the United States to
complicit and corrupt actors and their facilitators, including
criminals engaged in the illicit commerce that harm Americans. Congress
must strengthen U.S. anti-money-laundering laws by making all felonies
predicate offenses for money laundering. We must implement and enforce
more robustly the president's executive order on transnational
organized crime, including forfeiture of the proceeds of the criminal
activities.
On the president's commitment for his administration to conduct a
national assessment of the harms posed by counterfeits and pirated
goods, including online markets, I hope that the interagency working
group preparing the study consults with the OECD and also takes a
convergence approach to include related matters such as corruption,
trade-based money laundering, money laundering, anonymous companies,
and the role of free trade zones, that they play, in contributing to
the illicit commerce. We should continue to build a global network of
trade transparency units. We should also impose sanctions on bad and
risky free trade zones that enable and facilitate or sustain
corruption, money laundering and illicit trade within the
jurisdictions.
Finally, more evidence-based research is important. I am proud to
announce this morning that I will be working with Dr. Louise Shelley at
the Terrorism, Transnational Crime and Corruption Center at the Schar
School of Policy and Government at George Mason University to launch a
new Anti-Illicit Trade Institute to examine the threats posed by trade-
based money laundering and other converging threats to national
security.
Congress must do all in its power to create the types of
authorities, tools, and capacities needed so that our law enforcement
agencies can decisively prosecute the fight against today's bad actors
and threat networks and confiscate their ill-gotten gains.
On this Memorial Day weekend, when we celebrate our patriots who
have made the ultimate sacrifice in defense of our country, that
through such congressional leadership we can safeguard our national
security, protect the American economy and our businesses, and secure
the welfare and safety our citizens.
Thank you.
Mr. Massaro. Well, thank you very much, David, for sharing those
really truly staggering numbers, as well as for taking an approach
where you're really looking at what kind of solutions can be
implemented, specifically with regard to a couple of things that stuck
out to me--FTZ abuse and the use of utility of trade transparency
units.
So with that, let's turn to John Cassara. John, take us away.
Mr. Cassara. Good morning. First of all, I'd like to thank Paul and
Danielle and all the organizers for putting this event together. And
I'd like to thank everybody here and those that are listening in for
giving us the gift of your time. I know there's a lot of places you
could be right now and things you're doing, but to come here and to
give us an hour or two particularly devoted to trade-based money
laundering--a topic I feel very, very passionate about--I thank you all
very much.
I don't really have any prepared remarks, so we're just going to
talk, okay? And I'm going to begin by sharing a story with you--a true
story. It took place about 2002, 2003, not too long after 9/11. I was
talking to a Pakistani businessman who I think you could charitably
describe as being involved in the gray markets. And we were talking
about many of the things we're going to be talking about this morning.
We were talking about trade-based money laundering, and value transfer,
and underground financial systems, and counter valuation.
And then finally, at the end of our conversation, he turns to me
and he says: Mr. John, don't you know that your enemies are
transferring money and value right under your noses? The West doesn't
see it. Your enemies are laughing at you. They're laughing at us. And I
was talking to this guy primarily because I was concerned about threat
finance, but you could just as easily describe our adversaries as
corrupt capitalists or oligarchs or kleptocrats or transnational
criminal organizations of all sorts.
Now, Paul mentioned that the Financial Action Task Force labels
trade-based money laundering as one of the primary money laundering
methodologies around the world. The other two are through financial
institutions, non-bank financial institutions, and in cold cash
smuggling. Certainly there are countless other methodologies including
cryptocurrencies and other things that are in the news. But I believe
trade-based money laundering is the largest money laundering
methodology. And I can also tell you, with utmost certainly because
I've been looking at this for years, trade-based money laundering is
the one that is the least understood, identified, and enforced.
Now, why do I say it's the largest? Because if you add up all the
elements of trade-based money laundering--meaning what it entails--
customs fraud, which is by far and away the largest part of trade-based
money laundering. We'll talk about that in just a minute. But also tax
evasion, export incentive fraud, VAT fraud, capital flight--forms of
capital flight, evading capital controls, barter trade, underground
financial systems such as the hawala or the Chinese flying money
systems, commerce trade-based money laundering. Lakshmi's going to talk
about that in great detail, I think--Global Financial Integrity's done
some great work talking about abuse of trade and mis-invoicing,
transfer pricing, and this type of stuff. If you add it all up, it's
the largest money-laundering methodology in the world.
So many of you really don't know what it is. I'm going to give you
a couple quick examples--a hypothetical and a couple of real ones. So
say, for example, that Lakshmi and I are in the business of buying and
selling pens, okay? So she's in Dubai and I'm in the United States. And
I want to import pens. I want to import pens from Lakshmi. I don't know
her, but I find out about her business. So I send her an inquiry, and
we negotiate a price, okay? True manufacturing cost, insurance rate.
She charges a markup, and we consummate that transaction, okay? It's
what we call arm's-length transaction. She doesn't know me, I don't
know her. It's fair market value for this pen, okay?
Now, let's contrast that to another type of transaction. This time
we know each other, okay? Maybe we've worked together in the past.
Maybe we were in the same organization. Maybe we're members of the same
family--she's my cousin--or tribe, or clan. Or maybe we're fronts for
some transnational criminal organization. This time we take that same
pen that's, say, worth $50 true cost, and we over-invoice that pen to
say it would be worth $100. Or, we under-invoice it to say it would be
worth $1. You send enough pens one way or the other, you're
transferring a lot of value in the form of pens, okay? You're settling
debts or you're transferring value, say, overseas, right?
I'll give you another quick example. It's true. I was in Rome for 6
years, assigned to the U.S. embassy. I was combating Italian American
organized crime, the Mafia. And we were looking a number of things. And
one of the things that was very concerning at the time--and I don't
think much has changed--you've got gold couriers coming in from, say,
Milan's Malpensa Airport flying into JFK. They come in all the time.
Gold is one of Italy's largest manufacturing industries. They do great
things and they manufacture, say, 18-karat Italian gold rope.
So they come in, they have, say, satchel bags, something like this.
They have this gold rope. So they come into customs and they declare
this, all right, and say the true value of this 18-karat gold rope is,
say, I don't know, $500,000. But is it really? It is really 18-karat
gold? Maybe it's 24-karat gold. Maybe it's 14-karat gold. Maybe it's
12-karat Walmart special gold, okay? Is it worth 500,000 [dollars]? Is
it worth 700,000 [dollars]? Is it worth 100,000 [dollars]? Maybe it's
gold-plated lead. What is it, okay? Transferring value.
Another quick example on gold. The United States--we're importing
all kinds of gold into the United States, which is kind of strange, if
you think about it, because we're a gold-producing country. But we are
importing 4-9 gold from all over the world. Say, for example, Latin
America, Central America--4-9 gold. When I say 4-9, 99.99 percent pure
gold bullion.
We are also importing gold scrap. Gold scrap, for customs purposes,
is not clearly defined. It can be fillings from teeth, it can be the
innards of a computer, it could be--I once had a customs inspector tell
me you could have a 40-foot shipping container, you could fill it with
metal shards and scrap and bumpers off of buses and bicycles and
whatnot. You could take a salt shaker filled with gold dust, get on
top, sprinkled it over the top of that thing. And for customs purposes,
you would have gold scrap, okay?
Now, imagine this. You got gold bullion and you got gold scrap. You
could look at our import records. We are importing massive quantities
of gold scrap over--well over the price of gold bullion. Massive
quantities coming in from Latin America consistently. Why is that
happening? Do you think it could be hiding the proceeds of narcotics?
Just as a guess, maybe. Maybe. Do you think it's being investigated?
No, it's not. Not really, okay? Now, TBML, as I said, primary
techniques over and under invoices; multiple invoicing, because you
want to invoice as many times as you can, because every time you
invoice it justifies payment being sent out, okay; falsely described
goods, kind of like that gold stuff I was talking about; or phantom
shipping, where the shipment doesn't really go but nevertheless the
paperwork is produced and, again, payment is sent abroad.
What bothers me is because we've known about this for years, but
the U.S. Government--our government, Treasury, Justice, DHS has never,
ever systematically examined this problem until recently. I think
there's a bill in the works that is going to look at this. We need to
know how much is going on. We have guesses. David just came up with a
few estimates. There is a great academic down in South Florida, Dr.
John Zdanowicz, Dr. Z. His is the only study that I'm aware of that has
actually taken a look at the history of U.S. imports and exports and
put numbers to this. He estimates, I'm summarizing here, 6-9 percent of
our imports and exports are suspicious regarding over-under invoicing.
That's not to say they're fraudulent. That's not to say they're all
bad. But it's still 6-9 percent.
Now, that represents hundreds and hundreds and hundreds and
hundreds of millions of dollars--billions of dollars. Billions of
dollars. Hundreds and hundreds of billions of dollars. Think of the
revenue we're losing, okay? Think of the proceeds of crime that are
possibly being transferred via value transfer, okay? The other thing
is, it's vitally important to understand. I have a background in U.S.
intel. I have a background in U.S. law enforcement. We have the best in
the world. We have the best in the world. We have the best customs
service in the world. If 6-9 percent of our trade is suspect, what do
you think's happening in the rest of the world?
All right. That being said, I actually have two reasons for being
optimistic, not the least of which is that everybody's here, like I
said. We're getting more and more attention to this. The first one is,
for the first time in my career, trade transparency is theoretically
achievable--theoretically. It's never going to happen, but
theoretically it's achievable. Why? Because we have the data. We don't
have to invent this stuff. It's there. It exists. Every country in the
world has a customs service. Every country in the world keeps track of
what goes in and what goes out for revenue purposes, for security
purposes, or whatever. We've had an explosion in commercially available
data over the last 5 years tracking stuff. Now, politically, that's
something else. But technically, trade transparency is achievable.
The other thing--and I'll close on this--the reason I'm optimistic
for this to combat trade-based money laundering is because trade-based
money laundering is the only money laundering methodology that I am
aware of that if you crack down on it, if the government cracks down on
it, you're going to get money, because you're cracking down on trade
fraud, okay? So it's in government's best interest to tackle this
problem. Too often, particularly after 9/11--I was overseas and working
with the USG, and at that time, it was like, you're either with us or
against us. If you don't cooperate with us to combat money laundering
and terror finance, the hammer was going to come down on your head.
With trade-based money laundering, we've got an opportunity here
because we can dangle that proverbial carrot in front of interested
audiences and say: Cooperate with us and it's in your best interest.
We'll show you how you can get money. Every country in the world needs
increased revenues. This could help them out.
Thank you.
Mr. Massaro. Well, thanks so much, John, both for your stories and
the clear explanation of TBML, but also for your two reasons for
optimism. And especially that second reason, oh boy. [Laughter.]
I mean, when you've got economic incentives, man, people should be
lining up, you know? So I think the more we can hammer that point home
is through congressional activity, executive, whatever. That's an
incredibly important point.
So, with that, I'll turn to Lakshmi. GFI, again, has been one of
the organizations that's really kind of taken this on in a practical
way, even as the USG has lagged behind. So, Lakshmi, please.
Ms. Kumar. Thank you, Paul. That's going to be really hard to
follow, after David and John. I don't know how much there's left for me
to say, but I'm going to take a stab at it. To begin with, at GFI we're
really lucky because we've had John on our board. We've done research
and academic studies of these things, but it has enhanced, I believe,
our work to have sort of a practitioner's viewpoint on all of this. So
if you haven't read John's book, I highly recommend it. It's an
excellent read and a very--it explains very simply sort of the problems
and solutions around TBML. [Laughter.] We didn't tag team this.
[Laughter.] This is just a spur of the moment. [Laughter.]
Mr. Massaro. Yes, get the photo op, yes. [Laughter.]
Ms. Kumar. So having stated that, now with TBML, very often when we
are talking about TBML--and I want to make sure I don't repeat what
David and John have gone over--very often sort of the notion of trade-
based money laundering isn't really a study a domestic trade. It is
essentially, when we are looking at trade-based money laundering
policy, most of the regulation and enforcement focuses on cross-border
international trade. And that is partially because the focus on
domestic trade, there are so many informal mechanisms that it becomes
even harder to track.
International trade is actually the easier thing to do than
domestic trade, which sounds confusing, but it is true. And what makes
sort of trade-based money laundering difficult, some of the factors
that influence it are the fact that to begin with while it is easier to
detect cross-border transactions, the fact that they are cross-border
means that you have to have the cooperation of multiple countries. And,
you know, depending on legal processes and legal systems, sharing of
that information can be hard.
Two, it is the share of volume, speed, and size of the transactions
involved. We are talking about tons and tons of goods and parties that
are--it's not even one-to-one transactions. Sometimes there can be
eight people in a single transaction. So ensuring there are some due
diligence mechanisms across supply chains that cover the manufacturer,
trader, consignee, notifying party, financier, shipper, shipping agent,
freight forward--I mean, a lot of these names might sound just like
gibberish to everyone here, but it's in reality what makes up the trade
chain. And the controls and oversight for them are not just with one
organization. It's not with the banks. It's not with--necessarily with
FinCEN [Financial Crimes Enforcement Network]. It's across multiple
government entities.
And when we're talking about sort of the regulation of TBML and
what it has meant, outside of the U.S. focus has traditionally focused
on looking at sort of the issues with international trade from the
banking perspective. So the countries that actually have sort of
official guidelines on how to handle this--Singapore, the U.K.--and
then there are some smaller developing countries that also do it. But
all of them look at trade through the banking lens. And what is
important to understand is when you're talking about international
commercial trade is that it occurs sort of in essentially three points.
It can occur through sort of what's called documentary trade, which
occurs when a bank provides financing documents for that trader and a
trade transaction happens. You know, financing documents are, like, a
letter of credit, a letter of guarantee. Alternatively, they can also
have the bank again involved but through sort of non-financing means.
Now, both these two methods only account for 20 percent of global
international trade. Most of the international trade, which is what is
called open account trading, is 80 percent of trade, which means that
the banks aren't really involved. The banks don't get to prepare
financing documents or don't do documentary checks to facilitate the
trade. The only roles that banks play in open-account trading is they
simply act to transfer money from one party to the other.
So banks very often don't know if someone in the wire transfer
says, Oh, we have a transaction, that's all the information they have.
They don't get a series of backup documentation. So 80 percent of all
international trade occurs through open account trading, where the
banks aren't the first-line defenders or first oversight mechanism. So
really, therefore, the impediment then becomes through customs
officials, freight agents, ports, shipping agents, the actual shipping
vessel. Those are your first line of defense. But most actual
policymaking in the realm of TBML, sort of outside the U.S., has always
traditionally focused on banks, because they have the most resources to
sort of do oversight.
When in actuality, as John and Paul and David have mentioned, the
focus actually has to be to empowering customs agents and having a
mechanism of oversight and supervision that covers freights, export
agents, export controls, the various players that I've mentioned,
consignees. All of them that form that trade team, that's where
supervision has to lie. And as John and I think David mentioned, when
we are talking about commercial trade, the most commonly used method--
and I say this because of 80 percent of international trade is open-
account trading--while there are other ways to do trade-based money
laundering, the biggest occurs in sort of the actions of mis-invoices
which, as John said already, is you can mis-invoice the value of goods.
So you can have a commercial invoice that says, oh, the goods are
valued at 100 million [dollars] when in actuality they could be 200
million [dollars]. You can mis-invoice the number. You could be doing
wine fraud, and have a container full of wine but then on the shipping
label say, oh, it's just widgets. You can lose millions in doing this.
And another big way of--something that doesn't get talked about is
sort of the origin certificate in all of this, which is--you know, and
more recently it's come up with--especially because Venezuela's become
a big focus. And the Maduro regime in Venezuela has often used gold.
They send it through Guyana and then ship it out. And if you look at
Guyana's exports--the amount of gold that Guyana produces versus the
amount of gold that Guyana exports is vastly different.
The exports are so much more higher than the amount of gold that's
actually produced in Guyana. Which means that, from what studies have
shown, is that Venezuela is shipping its gold to Guyana. Guyana is
setting up fake refineries. And those refiners are falsely labeling
Venezuelan gold as Guyanan gold. And that is a way of sort of moving
gold, but the money is actually moving from Guyana back into Venezuela.
So, these are multiple ways in which sort of commercial invoicing is
used to mask the movement of goods.
Now, in terms of what are the--why do people use methodologies and
what are sort of the larger macroeconomic implications of all of this?
Let's say you are under-invoicing the export, which means that let's
say exports are valued at 100 million [dollars], you export it at 50
million [dollars]. And the reason people do this is so that you can
keep--you can move your profits to a lower-tax jurisdiction. So to go
back to John's example--if John was exporting something that's worth
100 million [dollars] he'd say, Oh, Lakshmi, why don't you pay me 50
million [dollars] to my U.S. account, and pay 50 million [dollars] to
my Cayman Islands account so the U.S. Government doesn't know about the
50 million that's gone to the Cayman Islands account. John becomes a
lot more richer than he should be. [Laughter.]
And now on the other side of it is, you know, import under-
invoicing and import over-invoicing. Now, again, to use the same
example that John used, let's say I'm supposed to get that shipment of
pens. And I say, on my end that, Oh, actually, I know it's 100 million
[dollars]. I again say to my side, to my government that, Oh, it's only
valued at 50 million [dollars]. And the reason you do it is to
circumvent local taxes so that you don't pay taxes to the government on
that freight.
And on the flip side, if the same goods that are worth 100 million
[dollars] and I actually report them on the invoice at 2[00] or 300
million [dollars], now the reason sometimes that people do this is,
let's say, there are price controls in a country that--pens are an
example, but let's say we're talking about cellphones. If a cellphone
can only be--or an important good like survival goods, like milk or
rice can only be sold at, let's say $2 or $3. By over-invoicing you're,
in a way, able to make the difference between what the government
allows you to sell it for, saying that I had to import these at these
exorbitant values so I can sell it at, you know, higher than the
government is allowing me. So it's, in a way, sort of to keep capital
out of the domestic countries and places.
A lot of trade mis-invoicing, the focus of it is to move capital
outside the home jurisdiction so that government don't benefit from
revenue. That is, in a sense, a lot of what sometimes trade mid-
invoicing does. Now, by our--by GFI's own estimates, and the studies
that we've done, the value can be 1 trillion [dollars]. And even if--
and it's an estimate, because here are gaps in the data. So even if we
are--if you're wrong about this, and even if it is only 5 percent or 6
percent of the value, the numbers are still huge. And where John and
David mentioned that in the U.S. it's 6-8 percent, there have been
countries that we've look at where it's as high as 13 percent.
When it's in GFI it's that it's not just looking at the policy, but
actually trying to find tools. And what a lot of countries have done is
look at data bases which are called world market price data bases,
which is essentially when you're a customs official and, let's say John
is in the U.S. I'm, for example, let's say sitting over here in Ghana,
and there's trade between us. It allows the U.S. customs agent to be
able to look at sort of a world market price data base and say, Oh, for
this good what has been the value at which it's been traded over, let's
say, the last calendar year, over two calendar years? What price have
exporters in the U.S. been selling those goods to Ghana?
And if there's sort of a discrepancy, then as a customs official
you are able to investigate. What we have often seen is that a lot of
customs officials don't use tools like this. They very often are going
on Amazon and saying, Oh, how much does a widget cost on Amazon? Those
are retail values. Those aren't bulk commercial values. Or they go and
look on Robb Report to see what's a used car value, but that's just for
one car. It isn't a container full of used cars. And so a lot of those
problems lie.
You know, at GFI we've tried to sort of create our own tool called
GF Trade to help countries, but there are other tools out there, and
there are governments that use them. But it's important that it's not
just customs agents that use it, but also you have the banks start
using it. And in a survey that was done by, you know, the U.K.'s
financial conduct authority, they found that most banks don't--in fact,
a lot of international banks do the same thing that developing country
customs officials do, which is go on Amazon and look for individual
prices, which is deeply problematic.
Oh, I'm really running out of time, but the one thing I did want to
last speak about is that when we are talking about trade-based money
laundering, yes, there are criminal threats. There are sort of
transnational organized crime elements. But if it is purely just a
money laundering mechanism, what you must understand is the person
who's doing it just doesn't care. It's a way for him to launder his
money, turn black money into white. So it's very often just flooding
the market with goods that are possibly cheap and inexpensive, because
they don't care. They just want to change their money to white money.
But the consequence of all of that has been you're flooding a
market with cheap goods. It means that legitimate businesses can't
compete or function. So not only are you just money laundering, you're
also slowly collapsing legitimate businesses and, more importantly, can
collapse an economy around it. And it can lead to the death of
industry. And that's what we have to take away. So national security
threats don't directly come through terrorism or organized crime. They
can come through this sort of methodology. And you know, I hopefully--
later, as we go on, we can--I'd like to talk more about sort of
recommendations that GFI has.
Mr. Massaro. Well, great. That's really wonderful, actually, both
the work that GFI is doing with GF Trade, but also to better understand
kind of what the solutions are and also just, like, what the problems
are at the very operational level for these customs officials. Sort of
unbelievable for me to hear that they're just looking up on Amazon what
the retail price is. [Laughs.] And David whispered in my ear, ``Well,
there's lots of counterfeits on Amazon, too.'' You know, there's a lot
of problematic--so it's even if you're looking at a retail price, who's
to say that's even a--you know, a legitimate retail price, right? So
there's all sorts of issues that come with it.
Okay, so we're going to move into the Q&A segment now. And I have a
few questions, so I'll ask one or two before we kind of open up to the
audience. Please go ahead and think about what kind of questions you'd
like to ask. We're going to end at 11, unless we exhaust all questions
in which case we'll end a little earlier. After I ask a question or
two, I'd like to see if Danielle would like to ask a question, a
priority question from the House Financial Services Committee. So go
ahead and think about that question, Danielle. [Laughter.]
Let me go ahead and, I guess, first things first--trade
transparency units have come up. I've heard that this is kind of the
primary aspect of the USG's response to this issue, despite the USG
having kind of a lack of coordinator strategy. And I was wondering,
John, if you could maybe speak a little bit to the status of trade
transparency units.
Mr. Cassara. Thank you, Paul. Thank you for that question.
Trade transparency units are something I feel very strongly about,
and I'll tell you the reason why. It really goes back to that
conversation I had with that Pakistani businessman right at the
outset--this, again, 2002, 2003. Very concerned about combating threat
finance by looking at underground financial systems and counter-
valuation, or a system of balancing books between hawaladars, or that's
another topic entirely. I think you guys know what hawala is, right,
okay? Transferring--it's an underground financial system invented in
India centuries ago that is used today for--primarily for the remitting
of wages, which nobody has any objection to, but it is also used by
criminal organizations and terrorist organizations to transfer money.
And it's very opaque, and very hidden, and very much underground. Very
difficult for us to peer inside those networks. Historically and
culturally they used trade between brokers to settle accounts.
So I was consumed by this problem right after 9/11. I spent a
number of years at Treasury's FinCEN. And I was also working at the
State Department's Bureau of International Narcotics and Law
Enforcement Affairs with David at the time. So I came up with this
idea. Every country--well, there are about 160 financial intelligence
units around the world today. Like we have Treasury's FinCEN. Well,
there are 159 other financial intelligence units out there around the
world. So the thought was, make a somewhat analogous network of what I
called trade transparency units, or TTUs.
As I said, every country in the world has a customs service. It's a
fairly easy process, a logical process to keep track of what goes in
and what goes out and compare that record of imports with another
country's record of exports. As we were talking about earlier, if I'm
exporting 1,000 widgets to Mexico, and each widget is valued at $100,
when they get into Mexico you should still have 1,000 widgets and the
value should still be about $100. If it's not, you compare our data
with the Mexican data. If it's not, you have an indication that perhaps
there's some trade fraud or something else involved.
So I proposed this--the creation of TTUs back about 2003, 2004. The
U.S. Government was in the process of creating the Department of
Homeland Security at the time. It delayed it a little bit. But finally
it was adopted. We do have a TTU now. It's over at Immigration and
Customs Enforcement. It was the world's first trade transparency unit.
There are approximately, if I understand it correctly, about 16 TTUs
now. Most of them are in the Western hemisphere, but we do have one in
the Philippines. We have one in the U.K. There perhaps are some others
in the works. We primarily put them in the Western hemisphere to combat
black market peso exchange problems.
It's part of our national anti-money-laundering strategy going back
to 2007. I'm optimistic that eventually we will have a worldwide
network of TTUs. However, it seems to be stalled. And I cannot talk for
DHS, I cannot talk for ICE. I think there's some good reasons why it's
stalled. I think lack of funding and personnel and line items and this
kind of thing are part of the problem. But I cannot speak to the
specifics. But it is still the USG kind of official countermeasure for
all of this. There are other countermeasures that we can talk about,
but this is the official U.S. Government countermeasure--trade
transparency units.
Mr. Massaro. Well, thanks very much, John. And I guess my second
prerogative question would be for David. David, you'd brought up free
trade zones as a potentially problematic aspect of--related to TBML,
but even more broadly related to illicit trade globally. And I was just
hoping maybe you could break that down, shortly, briefly. What is a
free trade zone and why are they so easy to abuse?
Mr. Luna. Thank you very much, Paul, for the question. Free trade
zones actually do play a very positive role within the international
global trading system, as a lot of the goods transit from one
jurisdiction to another. So generally they play a very important and a
very positive role. But where I think it gets problematic relates to
the lack of oversight, you know, the secrecy in some regards on what's
going on within the free trade zones. And I think it is important to
also consider the issues of corruption, the issues of transparency,
oversight, because, again, as I mentioned in my statement, when we're
looking at convergence crime, not only are we looking at the licit side
of trade and the role that free trade zones play globally, but really
the illicit as well.
And, again, in free trade zones you tend to have the issues of
counterfeits, the issues of gray goods as well. But folks who are
benefiting often will use that secrecy or lack of transparency within
free trade zones to embark on various illicit trade activity, including
money laundering and trade-based money laundering. As I mentioned, one
of the cases related to luxury goods where some of the free trade zones
were also involved as trades made their way from Asia to the United
States. So, again, free trade zones are positive, but in places like
the drug war, in places like Panama, unfortunately they have not been
model free trade zones. And I do think this is why it is important to
consider sanctioning those free trade zones that are risky, that are
not really being as transparent, or enforcing, implementing, anti-
illicit trade, anti-corruption, anti-money-laundering regulations and
laws to help combat the cross-border issues of illicit trafficking, as
our colleagues pointed out.
Mr. Massaro. All right. Thanks very much, David.
And is our mic working? Okay, so for questions if you could stand
up, sort of get your Friday exercise and walk to the mic.
Danielle, if you have a question, please.
Ms. Lindholm. Okay. The last two comments with David and Lakshmi, I
just want to say I very much appreciate the concept that we need to
have data to understand what's normal in order to then understand
what's abnormal or anomalous. And this is one really good example of
where that's essential. So appreciate that.
The question is this: Is there only a role for interagency and
intergovernmental collaboration to combat the problem, or is there also
a role for public-private partnership? And if so, what is that and how
does it look different in your minds, versus what it looks like now? So
whether that's for import and exporters, or for financial institutions,
or other?
Thank you.
Ms. Kumar. You know, I think at the end of the day, it will have
to--there has to be sort of interagency-intergovernment collaboration
because I think it is the financial system and it is the international
trade system. So you do have to--government has an incredibly important
role to play. But in terms of sort of private sector-public sector
collaboration, I think 2015, 2014, there were geographic targeting
orders that were issued exclusively for trade-based money laundering.
And the focus with those orders focused on looking at cash transactions
to find the beneficial owner or the person behind cash transactions.
Now, while that was a great way to sort of approach TBML, it made
the same mistake of looking at TBML through the lens of looking at how
we normally look at AML [anti-money laundering], which is through the
banking system. And you know, after 2015, GTOs [geographic targeting
orders] weren't--GTOs for TBML weren't renewed. And I will be honest, I
am not clear why that didn't happen. I've sort of asked around, but
have yet to receive a decisive answer.
What I do think would be great, and a way to involve both the
public and private were if instead the GTO were focused on ports, like
vulnerable ports for a change, then you could have the people that were
in charge of sort of the ships, the shipping vessels, the export and
import agencies, and start extending that network. Because when it's a
Financial Action Task Force or any other international agency or
government agency, there is very little that's been done in terms of
actually doing an assessment on the players that make up the
international trade chain, and how you can better equip them to engage
on AML.
The Financial Action Task Force's recommendations and mutual
evaluations for countries don't focus on TBML. They focus on the
banking sector and the formal financial sector. So I think when we talk
about public-private collaboration into sort of moving those
assessments for TBML to that space, and then having a framework in mind
where you can involve those chain of participants who can engage with
the government. The reason why sort of the AML space has sort of
succeeded and there's so much money in it is because the first line of
defenders are the private sector, they are the banking sector. And
they're able to invest those millions because it's multiple private
sector players who have the capacity, the staff potential, technical
skills.
Whereas a lot of the times with TBML we make it the entire burden
of the customs agent, who are very often not as well staffed, don't
have as many resources. So spreading that risk to more of the private
sector would actually help bolster the enforcement for TBML.
Mr. Cassara. I just want to pick up on one thing very quickly, and
that is I think the best countermeasure out there, if it were to ever
happen, would be for the FATF, the Financial Action Task Force, to make
trade-based money laundering recommendation number 41. Because in the
world of AML CFT [countering the financing of terrorism], the FATF
makes things happen, period. They've been dragging their feet on this
for years. They don't want to go in that direction. They're kind of
like the UGS, our AML CFT policies have all been focused, as Lakshmi
said, on financial intelligence, on money laundering through banks
primarily, other things as well, even bulk cash smuggling. But they do
not want to take up trade.
And it's too bad. And it's also--I think it's a shame because I
think the U.S. has the presidency of FATF right now. So this was a
missed opportunity. I think China has the presidency next. Forget it. I
think China is the largest trading power in the world. [Laughs.] Time
does not allow us to go into all the reasons why China benefits from
the status quo. I don't think the Chinese want trade transparency. I
think legitimate traders would welcome it.
Enough said.
Mr. Luna. Yes. You know, I'm a big fan of public-private
partnerships. I'm really a fan of collective action. I think across
sectors, not only the business community but civil society as well.
And, you know, they bring a lot of expertise, a lot of insight. If you
look at the business community across sectors who are working in all
markets around the world, oftentimes they have more boots on the ground
than law enforcement, certainly U.S. law enforcement, obviously local
enforcement as well. But they have a lot of data, a lot of insights as
well on how to work across the international community with
governments, international organizations, and all market stakeholders
to improve some of the market conditions, the mis-governance, the
issues of money laundering and corruption. A good example of a public-
private partnership, related to your earlier question of free trade
zones, is the work that the OECD is doing on their guidelines to
improve transparency of free trade zones for OECD member States that
are working with the international intergovernmental organizations, and
the international business community to bring greater transparency, to
bring a code of conduct to better have better governance in a lot of
free trade zones.
Mr. Massaro. Great. Thanks so much. Could we get some questions?
Yes, Clay. You can also just project if you don't want to walk to the
mic. [Laughs.] It is a ways. [Laughs.]
Questioner. I'll go ahead and do it. So most of you guys you don't
know me. I'm Clay Fuller. I'm with the American Enterprise Institute.
I'm the Jean Kirkpatrick fellow on foreign defense policy studies.
I loved everything about this. I wanted to just explain how I come
to this, and where--it explains my comments. My academic research, I
study the survival of authoritarian regimes. And what I found in my
work is that the best predictor of how long a dictator--a modern
dictator will survive in office is how much money he embezzles while
he's there. And then I found that the best predictor for how long a
modern authoritarian regime will last is the extent to which they
experiment with liberal economic policies. Specifically, special
economic zones, which are what we call foreign trade zones or what
Latin America calls free trade zones. So that's the sort of picture
that I come into this.
Now, with the foreign trade zones, special economic zones, I love
it. I've been trying to tell people to pay attention to this for a long
time, and I'm so glad people are. But getting with the transparency--so
I study the transparency and the data on this as well. And most people
find, most academics find, that transparency in the form of credible
data about trade or about all this stuff is a function of the capacity
and the willingness to be able to put it out there, right? So
democracies, free countries, typically are more prosperous, have the
capacity and the willingness to put this data out there in the form of
trade transparency. And this is what makes their markets work better
and everything.
Authoritarian regimes sometimes have the capacity, but they don't
always have the willingness, right? China, Russia, UAE, all these
countries have the capacity to be able to report very credible data on
the trade and the economic stuff coming in and out of their countries,
but they do not have the willingness. So this gets to the sort of core
of where it is, because it threatens their political model. It
threatens the authoritarian model of government to be transparent about
what you are doing economically. And so that's sort of where the bulk
of that goes.
And this gets to--I love John's comment about the laughing--them
laughing at us, because that's what I've seen in 10 years of studying
only nondemocratic countries around the world, is that this is why--you
know, how does a dictator sleep well at night? Well, it's because
they're just moving value all around the world and storing it at home.
And they don't care if we sanction them. They don't care if give
speeches about them. They don't care if we criticize them over their
human rights record, or anything like that. They're sitting on a pile
of cash that they're siphoning out of our markets.
So this is extremely--very important. But so getting to the
capacity thing I would like to ask the panel--get to my question and
not to my speech. [Laughter.] Sorry. I'm not running for office.
[Laughter.]
Mr. Massaro. You can give a speech anytime you'd like, Clay.
[Laughs.]
Questioner. But with the zones I worry about--so there are terrible
zones out there. You get to the tribal order area. You get to the
golden triangle in Southeast Asia, or if you look through what's going
on with the Chinese zones in around there. There's lots of lawlessness
in these. But on a lot of these places, especially the tribal order
area in our developing other democratic states, they don't have the
capacity, right, to be transparent about it. So I worry about punishing
bad zones in friendly countries versus reaching out them. Like I say,
using the BUILD Act or something like that to go, you know, build them
the capacity to be able to keep moving forward. And then the countries
that don't want to--don't have the willingness to report, punish those.
So I'm wondering if the panel had thoughts on that.
Mr. Massaro. Anybody want to take that one?
Ms. Kumar. I'll let it start from this end.
Mr. Massaro. Maybe David?
Mr. Luna. Well, thank you very much. And as always, thank you for
your insights and really for your leadership in really advancing a lot
of these important research areas.
On capacity, well, before that, the comment that you made on
political will. Absolutely very important. This goes back to Danielle's
question on public-private partnerships and harnessing all capacities,
all energies to put more pressure on some of the problematic
jurisdictions or problematic trading partners as well. And because,
again, the more that we can do together, it's important to put that
political pressure. Look, we're here at Congress. Resources are very
important.
We can talk across an array of transnational security threats, but
at the end of the day Congress or the administration is not requesting
the type of resources to help our law enforcement to fight
transnational crime, to fight money laundering, to fight corruption.
Then it is--it makes the battle more difficult, no doubt. And a lot of
these good partners do need the capacity on so many fronts. And I hope
as some of these bills move forward that--you know, again, I'm not
lobbying, I've got to be careful--but I hope that the issue of
resources become part of that discussion, because without those
resources the FBI, DHS, HSI [Homeland Security Investigations], CBP
[Customs and Border Patrol] cannot do the type of work that is
important, including the TTUs that John was mentioning. So resource is
very critical.
Mr. Massaro. Would you like to say something?
Mr. Cassara. Very briefly. And, once again, Clay, thank you for all
the work you do in so many different related areas. And he does some
phenomenal reports. I encourage anybody to look at his work.
Two issues on capacity, very briefly. And I'm trying to summarize
some things that I've been thinking about for a number of years here.
The first one in the United States is one of our major problems in
combating trade-based money laundering--there's a lot of them. But one
of them that doesn't get the attention it deserves--and I got this
directly from the TTU chief a couple years ago, and I talked to a lot
of other people--and that's assistant U.S. attorneys around the country
are reluctant to take these cases. They don't understand them, right,
and they're not sexy, all right? And they have so many competing
interests, all right? So it's a major problem.
You can have the best data in the world and a wonderful
investigation, but if an AUSA won't take these cases to prosecute,
we're out of luck. And we need cases, all right? So we need to do more
on educating our colleagues in the U.S. attorney offices around the
country to take these cases, okay?
The second one is a capacity issue overseas. And that is, in the
United States U.S. customs, which doesn't exist anymore. We have ICE,
okay? That's another issue. But they have enforcement authority. They
have a badge. They have a gun. They interview. They have a power of
arrest. They conduct investigations. They actually conduct more
investigations than the FBI does, right? Overseas, most customs
services don't have that. Most customs services are what we call
inspection and control. They look at what stuff goes in. They look at
stuff what goes out, and they may put a fine on it. But they don't
conduct investigations. If they happen to be motivated, they may pass
it off to the country's fiscal police, but they don't understand this
stuff. So as a result, this stuff doesn't get investigated overseas.
And you need to work with countries to change that.
Mr. Massaro. Please go ahead. Yes, sure.
Ms. Kumar. No, just to add to what John--just a small sort of
example is, you know, when you're talking about capacity, we--in the
U.S. we have TTUs with Australia. The Australian regulators website has
long documentary reason on why they don't want to do TBML and they will
not have a TBML policy. So if that's with a friendly ally that we have
TTU with, it just gives you an insight into what it is for every other
country, that there isn't and then doesn't have the capacity.
Mr. Massaro. All right. Well, thanks so much.
Yes, Leah, if you'd like to ask a question. Would you prefer to
project or go to the mic?
Questioner. I'm just going to project.
Mr. Massaro. Okay, great. If you could say: Leah with the
Subcommittee on Europe and Eurasia.
Questioner. That's what I am. Okay.
So I just had a quick question. What region of the world should we
be the most focused on for this issue? And then since I'm from the
Subcommittee on Europe and Eurasia, if you could talk a little bit
about what's going on in that region and what we should be most focused
on.
Mr. Luna. I'll take a first stab. I think all regions--when we
think about globalization, when we think about the cross-border nature
of these threats, I think all regions are very important, especially,
again, from a convergence perspective. On the issue of counterfeits, no
doubt, you know, working within the U.S. Government and our partners to
engage China, engage some of the markets that are really proliferating
the counterfeits, including--well, Hong Kong is part of China.
But on counterfeit medicines, some of the other jurisdictions that
are really putting these counterfeit medicines that are harming a lot
of citizens in the U.S. and globally. But when it comes to
strengthening international cooperation, again, I think given the
cross-border nature of it I think we need to be working because as some
of these goods go, from--for example, from China to UAE, you know, to
or through Panama on the other side, in between all of these places
U.S. law enforcement needs to be working with all these partners to
really, again, disrupt and hopefully dismantle some of the illicit
networks. So all jurisdictions I think are important.
Mr. Massaro. Just real quick, we're going to finish this up. John,
did you have any thoughts there, or Lakshmi, before we move on? We will
move on----
Mr. Cassara. Very, very quickly. TBML affects every country in the
world, every single one, developed and developing. Every single one.
And really quick answer to your question, I mean, we can talk in some
detail, but it's--if you were to ask me what country is the most
problematical right now, it's China because of all the reasons that
David mentioned.
But there's another issue that has never been, again,
systematically examined, that's the capital flight leaving China. And
the trade value transfer that takes the form of capital flight has
never been looked at. You mentioned GTOs earlier. All this money coming
in and buying up U.S. real estate--commercial real estate, residential
real estate. What's behind that?
And the other thing is the Chinese flying money system, okay, their
equivalent of hawala which probably actually dwarfs hawala in the
magnitude because of the Chinese diaspora around the world, all this
counter valuation, settling accounts, do you think when China's
overseas in Africa, or Europe, or the Americas, do you think they keep
their money there? It goes back. It goes back to China. How does that
happen? Via value transfer with trade. And nobody's looking at it, and
nobody understands it, and nobody talks about it.
Mr. Massaro. So I'd just like to really quick, Maria--my colleague
Maria Sierra with Senator Cassidy's office. I know you're very focused
on this. Do you have any--so if you could just target your question
toward one--we've only got 15 minutes left. I'm going to try to get a
bunch of questions. Maria, and then we'll grab you. Sorry. [Laughs.]
Questioner. You know that I've been looking at this issue for quite
a while. What agency do you recommend should be the agency that--I know
that it's an interagency issue, but some agency has to take the lead.
What agency do you think? What U.S. Government agency do you think
should be the one to take the lead, or the most adequate?
Mr. Massaro. I guess that'd be a best John question, maybe?
Mr. Cassara. Almost by definition it's a customs issue. It has to
be. And as I said, we don't have a customs service anymore. We have an
ICE, all right? One of the reasons I don't think we've made the
progress that we should have over the last 10-15 years since 9/11 is
because customs, in effect, was disbanded. We now have a Department of
Homeland Security, okay? Immigration and Customs Enforcement, the first
word on that is immigration, right? The resources, the money has gone
into immigration. And I don't want to speak out of turn here, because
I'm not representing ICE, okay, but I believe customs has gotten
short--traditional customs work, including combating trade fraud has
gotten short----
Questioner. Shrift.
Mr. Cassara. Thank you. [Laughter.] Yes, they have, okay? And
it's--because the data is basically customs and commerce and other,
it's customs has to be the focal point on this.
Questioner. And what role would FinCEN sort of play into this? I
mean, it's just--I've been at this for years, trying to figure it out.
Mr. Cassara. One thing that a lot of people I think don't quite
grasp, we're talking about trade transparency units and investigating
trade fraud in general, the more data you have the better it is. So
what we'd like to do is overlap, say, financial intelligence with the
trade data, and all other sources, okay? So FinCEN has a role in that.
Back in the early days--and I was at FinCEN at the time--we gave FinCEN
the opportunity to host the TTU, and they turned it down.
Mr. Massaro. Interesting. Okay.
Mr. Luna. Just briefly, but if you're going to address the issue
holistically, comprehensively, you need the whole interagency. You
know, you need State Department, also working on intelligence,
economic, Commerce, Treasury and others. Obviously the Department of
Justice as well.
Mr. Massaro. Yes, so I'd like to recognize my colleague Danica
Starks, our new detailee from the Department of Commerce at the
Helsinki Commission.
Questioner. So, question. Thank you to everybody.
You mentioned that it's very hard to get the sort of anti-money-
laundering, financial crimes folks to talk about trade. Has there been
success at getting the trade folks to talk about money laundering? You
know, are there are any efforts to reach out to the WTO [World Trade
Organization], that type of thing?
The reason I ask is that Lakshmi brought up a good point. You know,
one of the big problems that we've had at Commerce is countries using
reference pricing and other things, or other nonsavory ways of doing
evaluations. So there has been a concerted effort to do training on
customs valuations and other issues. But that community, it seems to
me, is very separate from the sort of money-laundering community.
Has there been any effort to sort of attach some of the money-
laundering efforts to more traditional trade and customs evaluation
folks?
Ms. Kumar. So when you look at the World Customs Organization,
which is what most customs entities in different countries participate,
they have a very cursory reference to it. There is nothing in depth,
even within a risk template, that talks about it. You know, the WTO
doesn't really consider it as an issue. And it's mostly been the ambit
of the Financial Action Task Force and all its regional bodies. And the
issue is that the Financial Action Task Force needs to start roping in
the World Customs Organization.
And I think then it will actually give birth to dialog on this
issue where it brings trade and AML. Because otherwise if you look at
most AML conferences today, they're focused on TBML. Like I said
earlier, most of them are led by the banking sector. And that is a
false notion, because most of the trade that goes and that we are
concerned about doesn't go through the banking sector. So I think the
World Customs Organization, if that's what you're talking about, I
think there should be sort of----
Questioner. Or WTO, or any--yes.
Ms. Kumar. Well, WTO, but especially the World Customs Organization
because then you have direct face-to-face contact with the customs
agencies. And then they can be roped into sort of advocate at other
fora to talk about bringing TBML into the mix.
Mr. Massaro. Thanks so much. So if you could please loudly shout
your name and affiliation. [Laughs.]
Questioner. Ken Duncan [sp], U.S. citizen. [Laughter.]
Mr. Massaro. All right. [Laughs.]
Mr. Cassara. I love that.
Questioner. Former State lawmaker. First off, I appreciate this
panel and this discussion.
My question to American Enterprise as well as Helsinki as a
commission--most laws get passed based off of appropriate noise--
advocates, incidents. What's happened in the Chicago region, at least
reported-wise from good journalism, is that these pharmaceuticals are
so toxic that they're impacting certain segments of the population--
typically low-income black or brown populations where there is no
voice, there's no commission. What is your campaign? Outside of you
doing these wonderful papers and having these incredible, informative
panels, who is that outside voice to help prod policymakers and
employees of the USG to really make this a public campaign, if you
will? Almost like smoking. Not just for pharmaceuticals, but in general
a lot of these bogus products are all in low-income areas across--not
out--they're in middle class areas across this country.
Mr. Massaro. I do want to turn it over to my colleague David,
because David is doing a lot of work on counterfeit and toxic products.
I think that that's huge. But I'll say that as far as noise-making
goes, I think a lot of work's been done in this town to pass
legislation, to work on legislation around this. It's going to the
House Financial Services Committee right now. You know, looking at a
beneficial ownership registry in the United States that would go after
a lot of this stuff. But let me go ahead and kind of turn it over to
David, because he's the man with a plan when it comes to counterfeits.
Questioner. I like plans.
Mr. Massaro. Yes.
Mr. Luna. And, again, I'm not with the commission.
Mr. Massaro. Not with the commission, yes.
Questioner. All right.
Mr. Luna. But as an American citizen as well. [Laughter.] You know,
very good point, because oftentimes when we talk about counterfeits or
other illicit threats, they are impacting those distressed communities
that you're talking--significantly.
On the issue of counterfeits, it's because of the price issue, but
because the criminals smartly target them as well. Not only in physical
retail markets, but online as well. So it is a big challenge.
Certainly, I mentioned this U.S. interagency study that the
president asked to be done in 180 days. DHS is taking the lead for
that. And I hope that they do address not only the impacts and the
harms to the American economy and business, but to American citizens,
especially the community.
So I would encourage you to--and we can talk offline about who's
taking the lead for that. I also hope that the administration finds the
OECD on this important issue, because they are doing some of the best
research related to countering counterfeit and pirated goods. One last
thing, as the chair of the Anti-Illicit Trade Committee of the U.S.
Council for International Business, I can assure that certainly USCIB,
the business communities, are taking this issue very seriously.
Mr. Massaro. And maybe I'll just add one final thing from sort of
the perspective of the Helsinki Commission staff. You know, we're a
mandated commission of Congress, founded in 1976. And our job is to
promote sort of the rule of law, human rights, and democracy around the
world. And we do that from a values-based perspective, but we also do
it because sort of if the bad guys win there's more of this coming, you
know?
I mean, there's a definite--it may not seem that way, you know,
from the high-browed foreign policy community, right, but there's a
definite reason why we need to fight back against corruption,
transnational organized crime and authoritarianism, because this is the
kind of environment, the sort of deviant globalization, that leads to
this free-for-all, corrupt, capitalist globalization that leads to
drugs and counterfeit goods, and all sorts of nastiness that impacts
the lives of our constituents in really meaningful ways. So I guess
from a Helsinki Commission perspective that's what we do on a daily
basis. [Laughs.]
Questioner. You know, I just never heard of this component of the
Helsinki Commission.
Mr. Massaro. Certainly. Yes, definitely. So please, Jim, right
there, and then we'll get you, thanks.
Questioner. Sure. I'll make it quick. I just wanted to support this
idea of the public-private partnerships, because whether it's the
banking industry or the trade industry, they need to work together and
do more, because a lot more can be done there. I'll give you an example
about the complexity of trade-based money laundering. I'm asked from
time to time by investigative reporters to help them out on cases. If
it's a pure money laundering case, the first question is: Is this money
laundering? And I say, I'll tell you later. With the trade-based money
laundering cases it takes a tremendous amount of time, looking at a
tremendous number of documents. So extremely complex. And that's why we
need a lot of education. With respect to institutions, I think the bank
regulators can do a better job. Right now, you have the compliance
staffs looking at money laundering, and you have the trade people
conducting the transactions, and there's not enough communication.
Mr. Massaro. Please.
Questioner. Hi. My name's Victoria Prieboh [ph]. I'm just an intern
trying to learn.
So I have a question simply about--you talked a lot about how money
laundering can affect Americans in all sorts of different ways. I was
wondering about the cost-benefit of sanctioning? Because a lot of you
mentioned sanctions as a way to combat that. But sanctions also face
the risk of backlash, for example, if we're, like, sanctioning Syria I
can see it leading to possible oil shortages. So I was wondering if you
could elaborate on the cost-benefit and how the benefits in the long
run kind of outweigh those.
Ms. Kumar. I can take the question.
Mr. Massaro. Please, Lakshmi, yes.
Ms. Kumar. So the thing is sanctions really haven't done this for
TBML, but they've looked a lot at correspondent banking relationships,
which then touch on trade because, you know, a lot of trade finance is
routed through correspondent banking. So there is--you know, sanctions
are complicated, but the one thing that we at GFI, that at least that
I've been looking at, is the sort of cascading effect of that.
So you know, you target corresponding banking relationships. And
the Financial Stability Board at the end of, I think, November 2018
released a report because when you are looking at this, it's not just
that you are affecting those institutions or those sectors. There are
cascading effects that come from now you have a short fall in
remittances, and remittances are, like, a $500 billion market.
For example, I think sanctions that targeted corresponding banking
relationships in Somalia, there was a loss of 40 percent of the GDP
because the remittances couldn't go there. And I think in the Caribbean
it's become a huge issue because there are a lot of sanctions that
target corresponding banking relationships there. And the U.N. has
released a report that covers the Caribbean, which is it affects their
ability to participate in the formal financial system. It affects the
ability of existing business to participate in trade. But also, when
you cut off relationships, it leads to the potential--and it's very
difficult to measure some of these things, but at leads to the
potential of how will new businesses then engage with the economy?
And I think what is often lost in all of this, and it should be a
conversation of how we target, is that not--money has to find a way.
Money will always find a way. So if it's not going through the formal
financial system, it means you are growing the shadow banking system.
And the shadow banking system has--within the last 5 years--has grown
by 6 trillion [dollars]. Which means it will just continue to grow. So
when you're talking--I think talking about sanctions, you think of
cascading effects around it. It doesn't necessarily touch TBML, except
to the extent we're talking about corresponding banking relationships.
Mr. Massaro. Okay, thanks so much. Yes, please, name and
affiliation, though I know who you are. [Laughs.]
Questioner. Tim Nelson, State Department.
I just wondering if you could, from the bigger perspective, while
we're looking at pinpointing law enforcement with, you know, thousands
of documents to go through for single cases, are we structurally built
to be the world's Number 1 money laundering destination because we
allow this type of non-transparency, whether it's in LLCs, or not even
looking in the biggest levels of money laundering coming into the
country? Have we earned that position worldwide?
Mr. Cassara. It's an interesting question, but I want to take issue
with the premise that the United States is the biggest money laundering
country in the world, biggest destination. I used to think it was
simply because of our economy of scale and our insatiable appetite for
narcotics. But we're no longer the Number 1. It's China. China is the
Number 1 money laundering country in the world. My estimations are--and
I've got some numbers I can back this up--I think they're responsible
for about half of the money laundering going on in the world today.
Ms. Kumar. Can I just answer that?
Mr. Massaro. Please, please.
Ms. Kumar. So, you know, the fact that the U.S. is such a stable
financial system, it means that unstable economies want to park their
money. And some of which--you know, at GFI we did a report which just
sort of crystallizes, I call it a library card project. And we looked
at 50 states in the U.S. and saw what the requirements were to get a
library card and what the requirements were to form any kind of
company. And in every state, it was harder to get a library card than
it was to form a company. And I think one example that I find
particularly fascinating is that in Kentucky you have to give biometric
identification----
Mr. Massaro. What? [Laughter.]
Ms. Kumar. But you need nothing to form a company. [Laughter.] But
having said that, even with all of this, even though there are sort of
handicaps and not knowing beneficial ownership, not knowing all of
these pieces of information, the U.S. still takes the lead more than
any other advanced economy in pursuing money laundering.
For example, in Mozambique right now, their economy has collapsed
because a minister decided, Oh, I will take out a $2 billion personal
loan, and then make my country now responsible for it. And I was
through banks in the U.K. The U.K. has given up that fight. The U.S. is
still pursing that investigation. When FIFA was being investigated,
soccer isn't a big--Europe is obsessed with soccer. But it was the U.S.
Government that went after it.
So, yes, there are deficiencies within the legal framework, but I
think on the enforcement side there is so much that is being done that
the rest of the world still has to catch up to.
Mr. Massaro. David, you wanted to say something?
Mr. Luna. Just briefly. Even though if we're not, you know, still
the biggest money laundering safe haven, right, I think we should
continue to reduce our levels, including, again, by passing legislation
to have anonymous companies requiring more beneficial ownership. I
think denying safe haven to kleptocrats and criminals so that they
don't enjoy their fruits by buying real property, not only for them but
their families and their facilitators as well.
Mr. Massaro. And I mean, I'm the moderator, but I do want to echo
something that John said earlier, and that is U.S. law enforcement is
world class. Nothing like it in the whole planet. I mean, and I think
we need our legal framework to catch up, you know, for sure, and our
financial framework to catch up. But once it does, the boys are going
to go to town, you know? [Laughs.]
Anyway, I guess with that, it's 11. Thank you all for sticking it
out till the end. [Applause.] It was a lot of fun. Look forward to the
next panel.
Again, May 29th we have the next House Financial Services Committee
and Helsinki Commission partnership. We'll be having the Brits in. John
Penrose MP, the prime minister's anti-corruption champion's going to be
there. We're going to talk about their public corporate transparency
registry and their information sharing--private-public information
sharing structure JMLIT, the Joint Money Laundering Intelligence
Taskforce. Hope to see everybody there.
Have a great day and a happy weekend--Memorial Day weekend.
[Whereupon, at 11:01 a.m., the briefing ended.]
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