The criminals, part of a transnational syndicate, began squeezing funds from companies and individuals in 2007. Phoning their intended victims and claiming to be speaking on behalf of the police, they informed them that their bank accounts were being abused by money launderers and terrorist organizations, then instructed them to transfer funds to "safe accounts" that were in fact controlled and owned by the syndicate.
According to Liu Ancheng, deputy director of China's Criminal Investigation Bureau (CIB), they then withdrew the money via local ATMs in Taiwan and Thailand.
In late May, after a two-year investigation, law enforcement authorities arrested 482 people from Myanmar, China, Taiwan, and Thailand. Ultimately, they will be accused of defrauding victims of funds totaling 73 million yuan (US$11.5 million) in at least 510 cases.
Originally, the group operated out of the Chinese mainland. Following a crackdown there in 2010, operations were move to various locations throughout Asia, including Myanmar, Cambodia, Indonesia, Fiji, Malaysia, Sri Lanka, Taiwan, and Thailand. According to the CIB, the group attracted recruits by promising high salaries and tourist visas and supplying specialized fraud training.
According to the Philippines police, authorities got one of their big breaks in the case when they tracked and geospatially located the Internet Protocol (IP) addresses of the gang, which made its calls using voice over IP. The criminals reportedly worked in cells that carried out the various aspects of the operation: phone calls; maintenance of the telecom network's servers and equipment; and withdrawing, transferring, and eventually, laundering money.
To capture the group, China engaged in unprecedented law enforcement cooperation with Taiwan - staggering in and of itself, since Beijing still considers Taiwan to be sovereign Chinese territory - and six other countries. The CIB has publicly asked other law enforcement agencies for help in tracking those in Asia and Oceania outside its own jurisdiction who are involved in telecrime.
At this juncture, international cooperation is "important to crack down on telephone fraud groups", according to Yang Dong, deputy director of China's criminal investigation department.
What can governments throughout Asia and Oceania do to stop telefraud and money laundering? While global organizations, such as INTERPOL, have an important role to play, it is time for forward-thinking Asian governments to create ASIAPOL as a smaller, more robust, regional association. Europe has EUROPOL, a law enforcement agency whose primary mission is to fight international crime and terrorism. ASIAPOL should fight human smuggling, counterfeiting, terrorism, drug trafficking, money laundering, organized crime, and the like.
Asian countries should also systemically roll out bilateral police cooperation agreements that would, among other measures, fight identity theft, phishing schemes, and fraud. As a corollary, law enforcement attaches assigned to select embassies around the region should be encouraged to help their host nations crack down on criminal activities sponsored by nationals from their home jurisdictions.
Following the money is another crucial tool in capturing criminals, but law enforcement agencies must aggregate and sort through financial intelligence in a smarter way. There are countless pieces of financial information filed internationally by a wide variety of sources, including banks, money service businesses, and individuals.
Law enforcement and intelligence analysts must become proficient in the innovative intelligence and financial tools developed in the last decade, including geospatial and network analysis tools, to attack criminal networks and uncover the financial links among them.
Tools such as Palantir, Analyst's Notebook, ArcGIS, and Google Earth make it easier to manage and sort through vast reams of data and facilitate tracking of financial flows and smuggling routes.
Nevertheless, many government officials do not use them and are not even aware that they exist. Ignoring these innovations hampers their ability to capture and put behind bars members of international crime syndicates, triads, and other illicit actors.
Finally, governments should focus on tightening their laws regarding jail time and fines for those engaging in telecommunications fraud. China, for example, has taken telefraud seriously, and sentences for this type of crime now range from three to 10 years.
A sentence of life in prison is also considered if the amount involved is over 500,000 yuan and the fraud results in someone's death. Keeping in mind the need to also balance human rights and basic liberties, other governments who wish to mitigate this emerging risk should consider following suit.
The criminals are getting better, faster, and smarter at their trade. This should force law enforcement officials to think beyond national borders and increase intelligence sharing capabilities. Lawmakers will also need to do their part by instituting appropriate penalties. All of this is critical for protecting and defending average citizens.
Avi Jorisch
Money laundering: Taken to the cleaners
A probe into the use of banks as conduits for drugs money has exposed systemic failings in finance |
| Clean up job: a raid on the Mexico City home of businessman Zhenli Ye Gon found more than $200 million |
While the raid was going on, Mr Ye Gon was reportedly spotted in Las Vegas indulging in his favourite hobby: high-stakes poker. Now in a US prison awaiting extradition to Mexico, he stands accused of buying from China and then selling to drug gangs the precursor chemicals used to make methamphetamine, a stimulant known in north America as “crystal meth”. As it happens, Mr Ye Gon was also a long-time client of banking giant HSBC.
The episode, contained in a report this week from the US Senate, shows what American lawmakers have called a systemic failure by the UK’s largest bank to control money laundering in its global operations and stop such funds from entering the US.
The multi-year investigation uncovered that HSBC was a conduit for drug money, had clients with alleged ties to terrorism, and stripped details from transactions that would have identified Iranian entities – which may have put the bank in breach of US sanctions against that country. HSBC’s internal culture has been “pervasively polluted for a long time”, said Senator Carl Levin, who led the investigation.
The probe has shaken HSBC; prompted the resignation of David Bagley, the bank’s head of compliance; and – in the wake of the Libor rate-rigging scandal – further battered London’s reputation as a global financial centre.
More than anything, it has shown the reach and depth of the world’s drug-trafficking and money-laundering businesses. From China to Mexico, the names of the locales and participants may seem exotic. Yet the business is often parochial, as Mr Ye Gon’s story shows.
Shortly after his arrest, Mr Ye Gon explained his fondness for gambling. Born in Shanghai in 1963, naturalised in Mexico in 2002, and with no previous criminal record, Mr Ye Gon said he had lost $126m in Las Vegas’ casinos, but as a valued customer, had been given back 40 per cent of his losses, plus gifts of luxury cars.
Although Mr Ye Gon denies all charges, the story of his casino trips offers some insight into one way in which suitcases of money can be laundered. A gambler with dirty money can buy millions of dollars of casino chips and then recoup some of the losses in legitimate cheques and cars.
In the rinse and spin of money cleaning, HSBC was simply one washing machine among many. As Antonio Maria Costa, the former head of the UN Office of Drugs and Crime (UNODC), says: “Today I cannot think of one bank in the world that has not been penetrated by mafia money.”
The global trade in illicit drugs is huge. The UNODC estimates it is worth $380bn in 2008 dollars, about 10 times the annual sales of online retailer Amazon. Indeed, it was because of international drug trafficking that money laundering first vaulted on to the agenda of international crime fighters.
The creation of the Financial Action Task Force in 1989 pooled the G7 group of industrial nations’ money-laundering expertise. The initiative gained real urgency after the 9/11 terrorist attacks in 2001. “Like it or not,” a US justice official then told a gathering of US bankers, “you are going to be on the front line of the coming war on terrorism.”
Yet the impact of this financial war appears limited – so far. Given that the illicit drugs business is blurred and all its numbers are prone to exaggeration, any assessment is difficult. What is clear, though, is that the vast majority of its profits are earned in drug-consuming nations, where the money trail begins.
Take the $35bn a year US cocaine market. Only 1.5 per cent of its proceeds accrue to coca-leaf producing peasants in the Andes. International traffickers get about 13 per cent. The vast bulk, about 85 per cent, is earned by distributors in the US. (European figures are similar.) It is the inadvertent washing of these dirty dollars that HSBC was accused of.
Money laundering is a three step process: drugs are sold, the money “cleaned” of its illegal origins, and then deposited somewhere in the global financial system. From the testimonies of convicted drug kingpins, Mexican authorities believe it has typically worked something like this.
Cocaine cargoes are dispatched from Latin America, say, to Atlanta, where they are sold wholesale to US-based retailers. The wholesalers are paid in cash, typically $10 and $20 bills, which they truck south to border towns, such as El Paso. Drivers charge between 6 and 8 per cent, depending on the distance and load.
The money is then changed into handier $100 bills and filtered across the border, to be fed into classic front businesses – cash-intensive operations such as restaurants – or swapped at exchange houses for pesos. The rinsed dollars are then bought by banks, such as HSBC, from where they can be wired anywhere in the world.
HSBC Mexico was well-placed to hoover up those dollars. At one point after its $1.1bn acquisition of Grupo Financiero Bital in 2002, the bank had more branches in Mexico than in the UK. Yet all of the last stages of this process are legal, even if suspicious. Furthermore, they are camouflaged by larger legitimate money flows.
The Senate report found that HSBC transferred $7bn to its US holding through 2007 and 2008. It seems some of those transfers may even then have been illegal drug trade proceeds. Yet, by comparison, daily turnover in Mexico’s currency markets is $50bn.
Officials are often, therefore, looking for the proverbial needle in the haystack. Their search is further complicated by cunning new practices, such as cleaning dirty dollars via prepaid store cards, a business worth some $550bn a year; or the purchase of legal goods – such as tomatoes or bolts of fabric – which are then legitimately transported across borders.
Money laundering, like drug trafficking, is also something of a vicious circle: bulky dollar bills are often reconverted into handy packets of cocaine, the drugs thereby concealing money rather than the reverse. Another characteristic of the business: someone else is always to blame.
During the Washington hearing, there was some tacit finger-pointing at London – even though the scale of HSBC’s wrongdoing pales next to Wachovia’s. Like HSBC, the US bank did not have rigorous systems. As a result some $373bn in wire transfers, versus HSBC’s $7bn, were made from 2004 to 2007. More than $4bn in bulk cash was also transported from Mexican banks to Wachovia accounts. Bought in 2008 by Wells Fargo, Wachovia has since paid $160m to settle charges, and nobody in the US has gone to jail (versus 15 in Mexico).
HSBC passed the buck. At the hearing, Paul Thurston, head of retail and wealth management, blamed the bank’s lapses on Mexico’s “challenging” environment, including the kidnapping, extortion and bribery risks his staff faced. While that might have been true of a branch manager in a violent border city, it was surely not a threat faced by staff in Mexico City. Mr Thurston’s was “an easy escape attempt,” says one Mexican official.
But Mexicans also find scapegoats. There have been 50,000 deaths since the government began an offensive on organised crime six years ago. Many Mexicans say the offensive is one where “Mexico supplies the deaths, and the US keeps the dollars and supplies the guns”. Yet it is also true that Mexico provides the assassins.
The HSBC case has renewed hopes that the fight against organised crime can be won using “ninja accountants” who will drain its lifeblood with spreadsheets – as happened to Al Capone, who was imprisoned on tax evasion charges. Yet that is doubtful.
Dirty money will always find a weak spot to enter the global financial system – be that opaque countries such as Russia or others that use the US dollar, such as Ecuador. Even in supposedly sophisticated countries the record is poor. In 2010, Federal Asset Seizures totalled just $2.5bn, a fraction of the US’s estimated $65bn annual illegal drugs market. In the UK in 2009/2010, the Serious Organised Crime Agency seized criminal assets worth £318m.
Money-laundering investigations are also slow-moving. Even with HSBC’s full co-operation, the probe took five years. Also, tighter bank regulation and better compliance – HSBC for example says it has doubled spending on compliance and now has 3,500 people on the task – have pushed money-washing into non-financial companies. These are more numerous and harder to monitor.
Estimating the scale of money-laundering is almost impossible. The UN reckons global criminal proceeds total $870bn annually. That is a huge number but, seen in the context of annual global trade of $18tn, or daily foreign exchange turnover of $4tn, it can easily be overlooked. Like a sucker fish riding on a whale, criminal commerce, including money-laundering, is submerged, discreet, usually in cash and hard to capture as it can just swim off somewhere else.
F.T.
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