international law uarterly winter 2015 volume ii, no. 3 ... law uarterly winter 2015 volume ii, no....

10

international law quarterly winter 2015 • volume XXXII, no. 3

The Black Market Peso Exchange and the Small ExporterBy Robert J. Becerra, Miami

Introduction

The United States government, through the Department of Commerce, has been encouraging

small businesses to get involved in exporting as a way to grow their businesses and create jobs in a time of lackluster domestic demand. The Obama administration has encouraged this involvement in exporting United States products through the National Export Initiative of the International Trade Administration.1 Yet, for the small business, getting paid for export sales includes trade-based money-laundering risks that the small business owner is often ill prepared to detect or prevent.

The Small ExporterFor the purposes of this article, a small business engaged in export usually employs fewer than ten employees; is often family run; and is engaged in brokering and distributing internationally high-value merchandise such as electronics, medical devices and cellular telephones. Very often, this small exporter does not warehouse or stock its products for export, but instead orders merchandise directly from manufacturers or domestic distributors. The merchandise is then shipped directly to logistics providers, such as freight forwarders, ocean transportation intermediaries or air carriers. Those logistics providers execute the actual transportation of the goods resulting in their export to the foreign customer. The small exporter often receives payments in advance of shipping the merchandise in order to minimize transaction costs and to mitigate credit risk. These payments are usually received by the small

exporter into its bank account via wire transfer from a major international bank. Sometimes these wire transfers are received from the bank account of a third party to the underlying transaction, i.e., a person or a company other than the small exporter’s customer in the foreign country.

Trade-Based Money Laundering and the Black Market Peso ExchangeTrade-based money laundering has been defined as the process of disguising the proceeds of crime and moving

value through the use of international trade transactions. More simply put, it uses the international movement of funds as payments for goods and services to hide and transport illicit dollars. The Colombian Black Market Peso Exchange (BMPE) is the most common form of trade-based money laundering. The BMPE is a complex method of trade-based

money laundering. It was originally used to circumvent restrictive policies on currency exchange in Colombia.

Legitimate businesses in countries like Colombia need U.S. dollars to conduct international business. To circumvent restrictive policies and restrictions, businesses have used peso brokers that deal in the black or parallel currency market. Colombian drug traffickers, having a surplus of U.S. dollars, have taken advantage of this system to receive pesos in Colombia in exchange for drug dollars in the United States. Similar systems exist in other Latin American countries, such as Venezuela, Argentina, Brazil and Paraguay, as well as in Dubai in the Middle East.2 Through a system like the BMPE, a peso

www.freedigitalphotos.net; photo by David Castillo Dominici


11

... continued on page 34

broker brings together willing sellers of large amounts of U.S. dollars with companies that have a large demand for U.S. dollars to purchase United States exports.

In the past, illicit funds would be deposited into the BMPE and other alternative value systems by structured deposits in the form of cash, money orders or similar financial instruments. Presently, money launderers employ more sophisticated methods, such as utilizing those who have multiple bank accounts at divergent financial institutions, along with bulk cash smuggling. These smuggled dollars are deposited into foreign banking institutions in Latin American countries and then wired back into the United States to pay for the export of goods and services.3

The typical trade-based money-laundering transaction involving the BMPE usually follows this scenario:

1. Drug traffickers sell drugs in the United States for U.S. dollars.

2. The drug trafficking organization arranges to sell these U.S. dollars to a “peso broker” at a discount over official exchange rates in exchange for currency of the organization’s home country, for example, Colombia or Mexico. The peso broker pays the organization for the U.S. dollars in pesos from the broker’s bank account located in the home country.

3. The peso broker structures deposits of the U.S. dollars into the broker’s affiliated U.S. bank accounts, known as funnel accounts, in order to evade reporting requirements of the U.S. Bank Secrecy Act.

4. The peso broker locates importers in the broker’s home country that import goods from the United States and need U.S. dollars to pay their United States suppliers.

5. The peso broker arranges to pay the United States supplier on behalf of the importer in U.S. dollars from the broker’s bank account in the United States.

2,500 lawyers. 45+ offices. 25 countries. www.hoganlovells.com

Hogan Lovells is an international legal practice that includes Hogan Lovells US LLP and Hogan Lovells International LLP. © Hogan Lovells 2015. All rights reserved.

Hogan Lovells’ International Arbitration practice brings extensive experience to the resolution of complex, high-value international business disputes through commercial or investment treaty arbitration.

With access to the most sophisticated technology, our multilingual and multicultural lawyers operate from a network of offices in all major dispute centers and have a footprint in the world’s emerging markets. Whether down the street or across the world, our lawyers bring global experience with local market knowledge.

Global reach. Local roots.

Daniel E. González Global Head, International Arbitration Miami, T +1 305 459 6649 [email protected]

Alvin F. Lindsay, Partner Miami, T +1 305 459 6633 [email protected]

Richard C. Lorenzo, Partner Miami, T +1 305 459 6652 [email protected]

The Black Market Peso Exchange, continued

34


Upon receipt of the U.S. dollar funds, the United States supplier exports the goods to the importer’s country.

6. Finally, the importer, upon receiving the goods, sells them in the home country and pays the peso broker the arranged exchange fee in pesos, depositing them into the broker’s local bank account. This replenishes the peso broker’s account with local currency with which the broker can commence a new trade-based money-laundering transaction.4

Red Flags

FINCEN, the U.S. Department of Treasury’s Financial Crimes Enforcement Network, has identified certain red flags, which it states are potentially indicative of possible trade-based money laundering through the BMPE. These red flags include, but are not limited to:1. Payments from third parties for goods and services

made by a middleman apparently unrelated to the buyer or the seller of the goods;

2. Wires between an originator and a beneficiary with no apparent business relationship;

3. A customer’s inability to produce documentation to support a transaction;

4. Significant discrepancies between the descriptions of goods on transport documents, commercial invoices or packing lists;

5. Wire transfers received as payments for goods into United States bank accounts where the importer who ordered the wire does not reside in the country from where the wire originated; and

6. Multiple deposits occurring in various locations when the account owner resides elsewhere.

In addition, any of these red-flag indicators, in conjunction with shipments to duty-free zones of high-

www.freedigitalphotos.net; photo by scottchan

dollar merchandise such as electronics, auto parts, precious metals and the like could be an indication of trade-based money laundering or BMPE activity.5

Are Alternative Value Systems Illegal?

The existence of an alternative/parallel

currency exchange and transmission system that functions outside a country’s official banking system, such as the BMPE, is hardly unique to Colombia. Such systems for exchanging local currency for foreign currency and then transmitting that foreign currency to a designated recipient abroad are common. The government calls them informal value transfer systems or IVTS’s. These systems exist throughout the world. One of the best-known IVTS is Hawala (Middle East, Afghanistan and Pakistan), but there are others, including Fei Ch’ien (China) and the BMPE.

An informal value transfer system. includes any system pursuant to which a country’s residents can exchange their currency for a second country’s currency, for transmission to a designated person in the second country. An IVTS operates outside the conventional banking system, at least in part, and it often operates through intermediaries whose “primary business activity may not be the transmission of money.”6

An IVTS, like a conventional banking system, is sometimes used by money launderers. FINCEN has consistently reported, however, that “the majority of IVTS activity is legitimate.”7 No one knows how much money is exchanged and transmitted through these systems annually, but estimates range from US$100 billion to US$300 billion worldwide.8

An IVTS provides a quick, efficient, safe and inexpensive means of exchanging and transmitting funds. IVTS’s are used by numerous legitimate businesses. “Law abiding

The Black Market Peso Exchange, from page 11


35

ex-pat Colombian businesspeople” reportedly use Colombia’s informal/parallel market, which is an IVTS, “to hide Colombian purchases from criminals who would like to use the information in the Colombian banking system to target them and their families for extortions, theft and kidnapping.”9

The United States government expressly declined to make the use of an IVTS illegal. After outlining the benefits and the risks of IVTS’s, FINCEN concluded that “IVTS operations . . . can and do provide legitimate services to many customers who customarily prefer to use these types of financial services providers.”10 IVTS’s are not outlawed in the United States. In its 2002 report to Congress, FINCEN explained that:

Outlawing the activity also deprives the most law-abiding IVTS customers of the primary channel through which they transfer funds . . . . Traditional IVTS[’s] are very old and ingrained in the culture of many ethnic groups. They also serve legitimate needs, which makes it unrealistic and undesirable to try and eliminate them. Some countries have tried and achieved nothing but criminalization of otherwise law-abiding citizens. Indeed, this is likely to backfire and produce negative effects on Western interests.11

The Colombian informal/parallel market, a type of IVTS, has existed for many decades. It predates the narcotics trade. Thus, U.S. dollars that Colombians receive for selling coffee and many other legitimate goods in the United States have been available for purchase on the BMPE for many years. Like other IVTS’s, the Colombian parallel market is not illegal in the United States.12

As such, although an IVTS like the BMPE may be used by drug traffickers to launder their illegal profits, the BMPE by itself is not an illegal value transfer system. Illegal actors use it often, as they use the U.S. banking system to further their goals of returning illegally earned wealth to their home countries. Given that legal and illegal actors are

involved in the BMPE, how can a small exporter prevent it from being used inadvertently to launder illegal proceeds? Let’s examine a BMPE transaction from the viewpoint of the small exporter in what otherwise would appear to be a legitimate export transaction.

Export Transaction Involving the BMPE

Anytown Wireless (a fictional entity for illustrative purposes only) is a small cell phone exporter in Miami. Anytown has four employees and a small office west of Miami’s airport. Its principals are expatriates from Latin America, and they sell cell phones and accessories

to customers in the electronics industry that they have cultivated over a period of years. Anytown uses freight forwarders to warehouse and arrange shipments to Latin America. Orders from customers are usually sent to Anytown via email or are taken over the phone or via Skype. Being a small exporter, Anytown Wireless usually does not extend credit to customers, but instead demands payment in U.S. dollars prior to shipping orders to Latin America.

Anytown Wireless has a good customer located in a South American country that it has sold to without incident over a period of years. Latam Cellular (again


“Xiaomi Redmi Note” by Ilya PlekhanovLicensed under CC BY-SA 4.0 via Wikimedia Commons

36


fictional and for illustrative purposes) purchases cell phones and accessories from Anytown and retails them to customers in the local market in storefronts located in shopping malls. Although its sales in the local market are in the local currency, Latam must obtain U.S. dollars to pay Anytown before Anytown will ship the ordered merchandise. The country in which Latam Cellular is located has two currency exchange markets—one in banks that sell U.S. dollars at an official exchange rate and one in a parallel, informal market that sells U.S. dollars at lower, more attractive exchange rates, which are often published in leading newspapers. Since the cell phone market is very competitive and Latam needs to keep its costs as low as possible, it accesses the parallel informal market for U.S. dollars to pay Anytown.

Latam Cellular approaches a money broker, perhaps in an office located in the same shopping mall where one of its stores is located. Latam asks to purchase a U.S. dollar denominated wire transfer for the value of the invoice it owes to Anytown Wireless to be sent directly to Anytown’s bank account in the United States. The money broker quotes a price in the local currency to Latam for this U.S. dollar wire, Latam pays it with “clean” local currency and the U.S. dollar wire is sent to Anytown’s U.S. bank account the following day. Latam tells Anytown to expect the wire so that when it is received, Anytown will immediately export the ordered merchandise to Latam. The wire received by Anytown, since it was sent by the money broker, is in the name of a third person or an entity that is unknown to Anytown Wireless and perhaps even to Latam Cellular.


In the above scenario, Anytown Wireless does not know the identity of the money broker hired by Latam Cellular or the source of the U.S. dollars ultimately wired into its account from a third-party bank account. All parties to the transaction are satisfied; Anytown receives payment, and Latam receives its merchandise. To the extent that the U.S. dollar bank account from which Anytown received its wire is funded either wholly or partially by illicit proceeds, the money launderers are satisfied as well. Anytown Wireless, the exporter that receives what may be tainted U.S. dollars, has no knowledge of any illicit nature of the source of the money, believing it to be connected to Latam Cellular, which it knows from a multi-year relationship to be a legitimate importer of cell phones in the Latin American country.

Nevertheless, given anti-money-laundering programs at United States banks and the FINCEN red flags previously discussed above, Anytown Wireless’s bank files a suspicious activity report (SAR) with FINCEN because the wire transaction bears red-flag indicators. Afterward, a federal law enforcement agency, whether it be the Federal Bureau of Investigation or Immigration & Customs Enforcement, causes a seizure warrant from a federal court to be served on Anytown’s bank, seizing Anytown’s operating account that received the wire transfer, alleging Anytown’s involvement in trade-based money laundering through the BMPE. Under United States federal forfeiture laws, Anytown Wireless can challenge the seizure on the basis of it being an “innocent owner” of the funds, with no knowledge of its illicit nature, but this involves challenging the government in a federal court proceeding, which may take years and incur huge litigation costs. In the

Invite a colleague to become an ILS member!

Benefits of Section Membership:• The International Law Quarterly• Writing and Speaking Opportunities• Discounts for Seminars, Webinars & Downloads• Section Listserv Notices• Networking Opportunities• Great Seminars in Four-Star Hotels at a Group Rate


37

meantime, Anytown’s bank severs its banking relationship with the company, and the government retains possession of funds that Anytown Wireless, a small company, may need to pay accounts payable and remain in business.

How can such a disaster be avoided in the first place?

Avoiding Being an Unwitting Accessory to Trade-Based Money Laundering

To avoid being caught in the web of trade-based money laundering through the BMPE, a small exporter must be diligent in ascertaining exactly who is paying for its exports and cannot rely only on what appears to be the legitimacy of its business relationship with its known customers. Although it is not illegal in and of itself to receive wire transfers from third parties to a transaction, when the small exporter receives a wire into its account from an unknown third party to pay for goods exported to a known customer, the question must be asked: Why? What is the business reason for receiving payments from an unknown third party unconnected to the underlying transaction, besides providing an opportunity for and enabling that third party to launder illicit funds through international trade? Is the third party actually a related entity to the foreign customer? Another supplier of the foreign customer with whom the customer has a legitimate business credit? A legitimate financing or factoring entity? A relative of the owner or other person for which there may be a business or personal reason, inconsistent with money laundering, for making third-party payments?

If the foreign customer insists on making payments only through third parties that are unknown even to the foreign customer itself, FINCEN’s red flags teach that the transaction has a high probability of being part of trade-based money laundering through the BMPE. Inadequate due diligence in the records of the small exporter regarding a wire transaction with such red flags may be the proverbial kiss of death when law enforcement is evaluating whether the small exporter is an unwitting dupe or an intentional participant. A small exporter (and its principals/officers) accepting such payments without being objectively satisfied as to their legitimacy does so at its own risk of incurring civil forfeiture and potentially criminal liability for either intentional engaging in, or


being willfully blind that it is engaging in, a conspiracy to commit money laundering. For a small company, exporting can be extremely lucrative, but without adequate knowledge, training, experience and diligence regarding the acceptance of payments for such exports, exporting can also be a money-laundering disaster waiting to happen for the unwary. Obtaining advice from experienced counsel and professionals regarding IVTS and BMPE transactions may be the difference between survival and extinction for the small exporter in these turbulent international waters.

Robert J. Becerra of Becerra Law, P.A., is a Florida Bar board certified specialist in international law. He concentrates his practice in the areas of civil and white collar criminal litigation in matters involving international trade, including exports, imports, cargo losses, trade-based money laundering,

export enforcement, customs and FDA seizures and investigations and civil forfeitures. Becerra Law, P.A., is based in Miami, Florida.

Endnotes1 The International Trade Administration web page on the National

Export Initiative, found at http://trade.gov/nei/, 22 December 2014.2 FINCEN Advisory FIN-2010-A0001, 18 February 2010.3 Understanding and Detecting the Black Market Peso Exchange,

Evan Weitz and Claiborne Porter, United States Attorneys’ Bulletin, September 2013.

4 Where Does the Money Come From? Illegal Drugs, Due Diligence and Company Accounts, David L. Goldberg, ABA Business Law Section, Volume 12, Number 3, January/February 2003.

5 FINCEN Advisory FIN-2010-A001; FINCEN Advisory, FIN-2014-A005, 28 May 2014.

6 FINCEN Advisory, Issue No. 33, March 2003.7 FINCEN Report to Congress in Accordance with Section 359 of

Patriot Act, November 2002.8 Walter Perkel, Money Laundering and Terrorism, Informal Value

Transfer Systems, 41 Am. Crim. L. Rev. 183 (Winter 2004).9 Javier Sarmiento, CFE, CPA, Black Market Peso Exchange: An

International Scheme; Fraud Magazine, July/August 2007.10 FINCEN Advisory Issue No. 33, March 2003.11 FINCEN Report to Congress in Accordance with Section 359 of

Patriot Act, November 2002.12 Transcript, House of Representatives Subcommittee on General

Oversight and Investigations on Banking and Financial Services, Law Enforcement Efforts to Combat Money Laundering Through Black Market Peso Brokering, 22 October 1997 at 61-62 (Chairman Bachus: “And it is all illegal?” Agent James, IRS Criminal Investigations Division: “Not in our country, sir”). ILQ

R. BECERRA

international law uarterly winter 2015 volume ii, no. 3 ... law uarterly winter 2015 volume ii, no....

Documents