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2021 GAO report: how the US fights trafficking & money laundering

We summarise the 2021 GAO report, explaining how TCOs and terrorist groups traffic goods and launder the proceeds; and how US authorities combat this.

Napier AI
January 27, 2022

The US Government Accountability Office report on trafficking and money laundering: How traffickers do it, and how federal authorities fight it.

Sometimes known as the “the Congressional watchdog” or “the taxpayers’ best friend”, the US Government Accountability Office (GAO) recently published its 2021 Trafficking and Money Laundering report, with a view to understanding how effective the country’s federal efforts are in combatting trafficking and the associated illegal flow of money.

The report explains the strategies that transnational criminal organizations (TCOs) and terrorist groups use to traffic illicit goods and then launder the proceeds; and examines the methods US authorities use to combat them.

As well as conducting multiple interviews and focus groups with representatives from law enforcement agencies (LEAs), financial regulation bodies, and the private sector, the report draws on the US Treasury’s 2018 National Money Laundering Risk Assessment and 2020 National Strategy for Combating Terrorist and Other Illicit Financing, FinCEN’s 2021 Anti-Money Laundering and Countering the Financing of Terrorism National Priorities, and anti-money laundering (AML) requirements stipulated by the US Bank Secrecy Act (BSA) regulations.

Background to the 2021 GAO Report

The GAO report notes that trafficking can be of humans- for sex or slavery- or illegal drugs, wildlife, minerals, and cigarettes. It then catalogues the process of trafficking, money laundering, and terrorist financing into three stages each.

The US BSA and anti-money laundering (AML) framework are vital tools in the fight against trafficking and related money laundering. FinCEN administers the BSA/AML Act and enforces compliance among a range of industries, including insurance companies, casinos, money services businesses (MSB), banks, and brokers of all kinds.

If you would like to learn more general information about AML, you can do so here.

Why and how transnational criminal organizations (TCOs) and terrorist groups choose and implement their trafficking schemes:

  • Geographical control. Whether through historical, cultural, or ideological ties, traffickers seek to dominate parcels of territory from and through which they can conduct illegal activities. Through this position of power they ‘tax’ other traffickers operating in their areas of influence, while extracting profit from their own activities. They favour unstable or corruptible political environments, as bribery affords a layer of protection for the traffickers.
  • Exploiting current operations. Traffickers can and do leverage existing routes and infrastructure to increase profit. This can take the form of smuggling, for instance, drugs and wildlife together. Obstacles they encounter can be geographical (such as coca leaf for cocaine manufacture being largely confined to South America), or limitations of expertise (such as the skill set and/or infrastructure required for human trafficking being incompatible with that needed for drugs and weapons trafficking).
  • Penalties versus profits. TCOs and terrorist groups weigh up the likely dividends of what they choose to traffic against the risk of being caught. For instance, cigarette smuggling could be less profitable than human or weapons trafficking, but carries lighter penalties as authorities might deem illegal cigarettes to be less of a security risk. The trade-off can influence what combinations of illegal activities traffickers use and can be swayed by relevant governments’ policy shifts on specific contraband, such as a major crack-down on cocaine smuggling.

The money laundering strategies deployed

FinCEN and the global Financial Action Task Force (FATF) divide money laundering strategies into two broad categories:

Cash-based money laundering strategies.

Dealing in cash is still very common among traffickers because of its relative anonymity, with US dollars being popular because the currency is widely accepted globally and relatively stable.

a) Bulk cash smuggling is when traffickers transport currency across international borders or from one jurisdiction to another which has less strict regulations. The total amount is often divided into smaller portions smuggled in different shipments, which reduces the risk of LEAs apprehending the entire illegal cash load.

b) Funnel accounts are bank accounts accessible to the traffickers into which their employees or outsiders on the payroll deposit relatively small amounts of cash in different parts of the USA. Funnel accounts serve to:

  • Circumvent the AML alarm which could be tripped if a single individual makes multiple deposits into the same account
  • ‘Remove’ drug traces from the notes. - once deposited, ‘clean’ notes can be withdrawn elsewhere
  • Rebuild the total currency amount by consolidating small deposits in one account
  • Eliminate the threat of detection by LEAs by bulk cash smuggling

The US Treasury’s National Strategy 2020 report indicated that funnel account use has declined since 2014 due to upgraded information-sharing protocols among financial institutions.

c) Money transmitters are MSBs other than banks which transfer funds across borders. Traffickers bribe licensed money transmitter agents and employees or using unlicensed practitioners to avoid handing over data that US AML regulations requires  

d) Informal value transfer systems are trust-based cash transfer mechanisms, which draw on ties of family, ethnicity, or culture to place funds in the hands of an ally in another jurisdiction, country, or area, and can be quicker than conventional cash transfers. These closed groups fall outside the gamut of normal banking and therefore are beyond the reach of AML regulators and are legal, which makes it easier for traffickers to cloak the movement of illicit funds and harder for authorities to prosecute.

Non-cash-based money laundering strategies.  

According to LEA reports, the use of these strategies has increased, both because of more sophisticated criminal methods, and enhanced AML compliance by financial institutions. They include:

a) Trade-based money laundering is used by traffickers to integrate the proceeds of crime into the legitimate economy by purchasing goods at inflated or deflated prices, often internationally, then selling them at the destination for a more favourable fee and laundering the difference.

b) Buying high-value, easily movable assets such as gold, precious stones, fine art, and luxury vehicles. Such transactions are often relatively anonymous, and valid sales documents can steer suspicious regulators off-course.

c) Buying real estate, then selling it off, is used by traffickers seeking to launder money in the USA as it leaves a paper trail which can appear legitimate to AML investigators.

d) Virtual currencies are used by traffickers as a relatively anonymous way of either paying for illegal wares or laundering funds and is a popular method of moving currency internationally, as there are no physical borders to risk smuggling cash across.

e) Shell companies are dummy companies (‘shells’) created by traffickers to hold illegal funds, manage transactions, and avoid paying taxes. As US law only expects companies to register at state level with beneficial ownership declaration requirements, a reporting vacuum exists, which traffickers can exploit. FinCEN’s 2021 Beneficial Ownership Information Reporting Notice of Proposed Rulemaking (NPRM) is designed in part to combat this.

Professional networks and service providers

a) Professional money laundering networks are increasingly popular with traffickers as they provide the infrastructure and expertise needed to illegally move funds. They use combinations of shell companies, funnel accounts, and trade-based money-laundering, and can service multiple criminal clients at a time, usually on fee-based business models. A recent trend is the increased use of Chinese money laundering networks, which exploit Chinese expatriate communities for laundering funds and purchasing products used in the manufacture of narcotics in Central and South America. You can read about US authorities efforts to counter them here.

b) Complicit professional service providers are licensed financial service providers who use their expertise to exploit gaps in the US AML regime on behalf of traffickers. Lawyers, real estate agents, fine art dealers and company service providers- which create new companies on behalf of clients- can all use their specialist knowledge to facilitate transactions or business deals which assimilate laundered funds into the legitimate economy.

Collective federal counter-trafficking efforts

Federal agencies face three main challenges to combatting trafficking:

1. Multiple agencies

Combatting trafficking is shared by multiple agencies with differing priorities, which can adversely impact intelligence-sharing and cause uneconomical duplication of effort. The Federal government addresses this in several ways:

  • Creating multi-agency task forces to co-ordinate and combat TCOs and terrorist organizations, which allows LEAs to access more resources for complex counter-trafficking operations. Some of these task forces also assist in the prosecution of criminals
  • Fusion centres provide a gathering point for financial intelligence related to trafficking, which helps overcome common barriers to information-sharing
  • FinCEN’s memorandums of understanding (MOUs) make BSA data for trafficking-related financial information available to multiple LEAs, assisting them with their investigations
  • LEAs, FinCEN, and others utilize inter-agency liaisons, such as having their analysts work in other federal agencies’ executive branches, to provide constructive feedback and exchange information

2. Cross-border prosecution

Traffickers and their enablers often operate from outside the USA and use sophisticated tactics to exploit weaknesses in the trade and finance systems. This challenge is addressed as follows:

3. Dependence on intelligence from financial institutions

US LEAs currently rely on information about trafficking-related suspicious transactions or activities received from financial institutions which is superfluous to law enforcement requirements or is incomplete. To counter this, the federal government has done the following:

  • FinCEN issues regular advisories to improve the quality of data in suspicious activity reports (SARs). The FinCEN advisories educate institutions on old and new money laundering strategies used by traffickers, ‘red flag’ triggers, and learnings gleaned through pooling knowledge among different LEAs.
  • Information-sharing between LEAs and financial institutions aims to enhance the ability of authorities to disrupt the money laundering operations of traffickers by improving the quality of financial intelligence data collected. The FinCEN Exchange was founded in 2017 as a public-private partnership to achieve this goal, and the program was legislated into the US AML regime in 2021.  
  • The information-sharing program for financial institutions is a voluntary program which provides a forum for financial institutions to share usually private client information with each other when money laundering or terrorist financing is suspected. The program is authorised by the USA Patriot Act. The BSA Advisory Group formed in 2018 to support institutions further by providing guidance on what financial information can or cannot be shared.
  • Initiatives to enhance data analysis are a priority for the US Treasury, which sees improved capabilities in this area as key to identifying the actions, trends, and broader networks related to trafficking financial flows. Since 2018, FinCEN has partnered with government research entities specialising in data analytics to improve the accuracy and amounts of data which can be assessed by LEAs.

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Photo by @marcojodoin on Unsplash.

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