GEARING YOUR AML PROGRAM TO MONEY-LAUNDERING RISK

  The Government leaves us discretion to determine how comprehensive our AML programs should be and what we feel we should emphasize.   The flip side of discretion is risk.  Doing too much risks competitive disadvantage; doing too little risks violating the law.

 The USA PATIOT Act forces us to confront those risks systematically.  There are now two general ways in which you can break anti-money laundering laws:

1. One is becoming part of a laundering scheme or doing business with a launderer.  That’s the obvious risk.

2. The other is regulatory risk.  Even if we’re sure we won’t get involved in a money laundering problem, we still need to meet the regulatory requirements to stay within the law.  It isn’t enough to just do what we sense is the right thing, because some of the regulations, especially those having to do with reporting suspicious activity, are counter intuitive.

  This paper will discuss the risk of getting involved in a money-laundering scheme, and the risk of having your assets forfeited even if your involvement was inadvertent and innocent.  It will also address the risk of ignoring danger signals or “red flags” and of not responding to them adequately.  And it will discuss how to handle these risks in your anti-money laundering program.

RISK OF BECOMING INVOLVED

To show how a precious metals laundering operation actually worked and to illustrate some of the risks we face, I am going to use Operation Polar Cap as an example.  Operation Polar Cap is the name of a combined Federal Government effort to stop a vast money laundering enterprise called La Mina.  The Medellin Drug Cartel ran it from about 1986 through 1991.  They called it La Mina because gold was central to the operation. 

  La Mina moved about $1.2 billion that we know about, roughly $1million a day, every day.  The revenues started out in the form of $100, $50 and $20 bills.  They had to be consolidated, counted and legitimized.  For the launderers, that is a monumental management and organizational problem.

  What is the risk of becoming involved?  I’d say fairly high because our industry has not been very hard for a launderer to penetrate.  If you glance at a few of the names indicted in Polar Cap, you will sense that, directly or indirectly, you were probably doing business with a launderer that was part of La Mina:

  Those are only one fifth of the people indicted.  During the various phases of Polar Cap, other precious metals companies, metal banks and commercial banks got unwelcome publicity. 

  Involvement is broader than being sued civilly or convicted criminally.  It’s really the risk of being touched.  That is, because you happened to do business with a launderer:

  The sheer scale of La Mina meant that, in a small, interconnected industry such as ours, if one of us was involved, others were likely to be.   

  La Mina was organized in Los Angeles by a money launderer named Raoul Vivas.  Vivas owned a gold refinery in Argentina and another in Los Angeles called Rose Marie Refiners.  The Medellin Drug Cartel gave Vivas the mandate to use gold as a cover to launder money.  He recruited several Los Angeles gold dealers and jewelry companies, including Andonian Brothers, Ropex, MetalBanc and others, but for simplicity’s sake, I will lump them under Vivas’ name. 

  The LA companies had established jewelry businesses.  Yet based on surveillance tapes, within months they all but abandoned their real businesses and immersed themselves in laundering. 

The first scheme worked like this:  From 1986 to 1989, Vivas imported gold-plated lead bars from Uruguay . Ten percent really was fine gold, but customs entry documents showed fine gold values for all the material.  That justified large remittances to Vivas’

Vivas sent invoices to jewelry companies for the phony gold.  The invoices offset the cash that was pouring in from laundering revenues.  The cash came from jewelers moonlighting as launderers and also from paperwork shells. They were in New York , Los Angeles , Miami , Providence , Atlanta , Houston and other cities. I mention these cities just to emphasize that laundering can take place anywhere.  

The 10% that was fine gold was sold to responsible companies with good names such as Cargill Metals, Phibro, Republic National Bank and MTB.  Vivas needed the names to lend credibility to the business as a whole.

Drug revenues were sent to Vivas by armored car in cardboard boxes. They were labeled scrap jewelry but they were actually stuffed with $50,000 to $300,000 in bills.  There was no time to count the $5’s and $1’s so they weighed them or sometimes just threw them away.  They would then deposit the funds in major banks, which used the gold sales invoices to support their Cash Transaction Reports.   Once in the banking system, funds would be wired to Banco Occidente, then transferred to the control of the Medellin Cartel.

The gold-plated lead bar strategy was the backdrop for half a dozen other schemes involving real gold.

One of these schemes involved Ronel Refining in Florida , which refined precious metal scrap.  It was headed by Richard Ferris, who was an IPMI Board members at the time.  In 1986, Ronel was having difficulty, so Ferris jumped at Vivas’ offer to refine mine material from Uruguay . 

Instead of importing dore, Vivas used drug money to buy fine gold from dealers on Hill Street .  He adulterated it with 10% silver and shipped it to Ronel as mine dore.  He could show Ferris that the material was from Uruguay with the import documentation from the gold plated lead bars.  Never mind that Uruguay has no mines.

Ronel refined the gold and delivered it to its parent, Loren Industries, or to outside customers.  When the volume outgrew Ronel’s sales capability, Ferris reached an agreement with a dealer— another IPMI member—to sell the surplus.  With this new sales outlet, Ronel started buying fine gold shot and kilo bars from Vivas for resale to the dealer. 

After awhile, Ferris sensed he was getting back the same gold he was selling.  He grew suspicious and could have dropped out, but he chose to stay in the loop.  Ronel’s profits had doubled, then tripled in two years and Ferris was hooked. 

Let’s step back for a moment and consider warning signals that Treasury calls “red flags.” The law obliges you to try to detect money laundering warning signals and to follow up on them to see if there’s a problem.  Red flags are signs of trouble that you should investigate to see whether they signal suspicious activity.  If you ignore red flags or do nothing about them and then have a problem, you leave yourself open to investigation, shareholder suits and civil or criminal penalties for complicity or willful blindness.

Ferris testified he drifted into the La Mina problem.  If we were Ferris or Ferris’ managers and we wanted to avoid the laundering business, what were the signals we might have picked up to alert us to the risk?

RED FLAGS

Let me go through some red flags I think you’re most likely to encounter:

Gift horses

First, if a piece of business, like the dore from Uruguay , seems too good to be true, it probably is.  The business was great for Ronel.  But Ferris should have been suspicious from the outset because he knew Vivas was losing money on every transaction. 

Cash transactions  

Cash payments are a glaring red flag, and from the earlier money screen, it’s obvious why.  There is nothing wrong with dealing in cash as long as you file Cash Transaction Reports.  But it is a fact that most money laundering cases involve cash and Cash Transaction Reports.  It may be an important part of your business, but cash is still an ongoing vulnerability.

Listed names

If you find a customer’s name on a Government list, that would be a powerful red flag.  The lists of suspect individuals, particularly the OFAC list (Office of Foreign Assets Control), was started in the middle of Polar Cap.  Today, we could look up Vivas’ name and companies. 

Your AML program should provide for checking Government lists against your customers.  A search engine is a must to streamline the process.  Materials Management’s search engine covers eight lists of individual names, companies and countries, and we will add more as they become available.

–        OFAC List (Office of Foreign Assets Control)

–        Foreign Terrorist Organizations (State Department)

–        Debarred Parties (State Department)

–        Denied Persons (Commerce Department)

–        Unverified Parties (Commerce Department)

–        Special Entities (Commerce Department)

–        U.K. Financial Sanctions (Bank of England )

–        Sanctioned Entities-Al Qaeda and Taliban (United Nations)

Source

Suspect origins are a red flag.   There are several lists of countries that refuse to pass anti-money laundering laws or do not enforce the ones they have. 

The problem is, countries lobby and pressure to stay off these lists, and the worst offenders are the countries whose help we need the most.  So the lists tend to get shorter every year and feature countries like Nauru and the Cook Islands .  Common knowledge tells you which countries to worry about.   Montevideo in Uruguay is a well-known tax haven and a favorite outlet for Argentina ’s “black money.”  Whether a country is listed or not, if it is suspect you can be sure that the enforcement bodies monitor its trade carefully. 

Shells

Sales to non-existent companies are an obvious red flag.   The Patriot Act makes it illegal for financial institutions to do business with shell banks, and Polar Cap was the precious metals equivalent. It underscores the need to identify and know your customers.  I’ll deal with your customer identification requirements later in this talk. 

Documentation

It is a red flag if a customer explains his business only with government import documents.  Vivas repeatedly used just the US Customs entry documents for the gold-plated lead bars to explain what his business was and where the gold came from. 

Business purpose

Business that does not fit a customer’s business purpose is an important red flag.  When Vivas met with Ferris, he told him he was going to ship dore.  Then he began shipping kilo bars and .9999 shot.  Combined with the knowledge that Vivas had to be losing money on every transaction, Ferris had to know he was part of a laundering scheme.

Third-party transfers

Third party money or metal transfers are a red flag.  If a customer sells you material and asks you to send a check or wire funds to a third party, it could be an effort to place illegal funds into the system. 

Remitting sales proceeds to the customer rather than to third parties should not be a difficult policy for most of us to adopt.   

Third party metal releases could be meant to hide the source of funds or metal.  But third party releases are so much a part of our business that avoiding them is probably impossible.  What it means is that we have to keep close controls and complete documentation, which most of us already do.  But the fact is, La Mina could never have happened without third party payments and third party gold transfers.  

Business patterns

Departures from normal business patterns are red flags.  Surges in volume, new metals or different grades can be a sign of trouble.  If a customer’s daily deliveries go from 10 kilos to 80 kilos to 300 kilos in two years, as Vivas did at Ronel, it is a red flag. 

Our software sets standards based on your own or your customer’s projections.  After awhile, you can base the standards on historical experience.  The reports should be simple graphs showing deviations from expected volume, or grades, or revenues.  You should be able to just glance at the graph and pick out anomalies. You might already have sales management reports that give you this information.  If you don’t, detection software could also be a real help in analyzing your sales.

FILING SARS

If you determine that there is suspicious activity underlying a red flag, you are confronted by a devil’s choice:  Do you, or do you not, file a Suspicious Activity Report with FinCEN?  The law says we can file or not depending on our assessment of the risk.  But the Government does “encourage” us to file. 

If you file, the good news is:  you probably save yourself from being an ongoing investigation target, even though you do not absolve yourself of previous problems.  

The bad news is:  you could well be asked by the enforcement agency to conclude laundering deals to help incriminate the launderers.

At least a half dozen times, Ferris reported his concern to his board—sometimes in writing and with diagrams—that the Vivas business involved laundering.  The Board never responded and gave the impression it felt the business was too important to lose.  Ferris also called and wrote to the company lawyer to check on his liability.  The lawyer told him not to worry about it.

Ferris knew he was violating the law, or skating on very thin ice.  He apparently wanted to stop—or be stopped—but he did not want to risk his job.  We have to empathize with Ferris, because anyone submitting a SAR probably goes through the same inner conflict. 

Employees have to know that management is committed to its AML program, that it feels reporting red flags is important, and that reporting will not hurt an employee’s career.   

POOL ACCOUNTS

As the La Mina volume grew in size and complexity, Vivas’ 5% commission from the cartel started to get tight.  He told Ferris he had to cut Ronel’s revenues (and offered Ferris 2 ½Ë an ounce personally). Ferris solved the problem by suggesting pool accounts. 

The pool account mechanism let Vivas generate all the volume he needed without the cost of moving gold from LA to Miami and back. It started as a depository account at Prosegur’s Los Angeles vault.  Vivas would deposit cash into Prosegur.  Prosegur would count it, file the Cash Transaction Reports, and remit the funds to a dealer to pay for Vivas’ gold purchases.  Vivas would then release the gold to Ronel.   Ronel sold the gold to the dealer and remitted the proceeds to Banco Occidente.   It was a continual loop where no physical gold ever changed hands. 

Eventually, the dealer grew suspicious and the pool account shifted to Ronel.  Ronel then shifted the business to London . 

How do pool accounts affect your AML programs?  Precious metals pool accounts are a hybrid between the physical commodity business and the banking business.  The Treasury Department recognizes, if you have a pool account, you are operating in a quasi-banking business. 

Taking Ronel as an example, the likelihood of a problem is much greater with a pool account than without. 

We should be aware that we will probably be faced with two levels of customer identification standards. 

1. If you do not offer pool accounts, you can probably continue to collect much the same sort of information you do now—with perhaps a few modifications—as long as you are comfortable you have properly identified your customer.

2. If you do offer pool accounts, I have been told by Treasury that you could soon be required to have a formal customer identification program similar to the banks’. 

Regarding Customer Identification Programs and how they might fit into your AML Program.  The information you collect will depend on the risk a customer poses.  As a minimum, financial service companies need the customer’s:

The financial definition of a beneficial owner is:  the person that has the risk and benefit of an investment.  Treasury focuses more on who controls the company.

You also need documentary verification, which means a Government issued document that confirms this information.  For instance, a current business license for a company or a driver’s license for an individual.  If you cannot get official verification, you are supposed to get non-documentary, or unofficial, verification, such as a financial statement, a credit agency report or a bank or trade reference.

Along with programs to know your customers, most financial institutions are installing know your employee programs.  Many of you already have comprehensive programs that include employment record checks, criminal records checks, credit checks and drug testing.  Just so you know where you are on the curve, 15 years ago, the launderers in La Mina gave their employees polygraphs every three months. 

COST OF INVOLVEMENT

How a person or company cooperates or deals with the authorities is key.  Below are some of the Polar Cap prison sentences:

•         Steven Saccoccia                     660 Years

•         Raoul Vivas                              505

•         Andonian brothers                    505

•         Joseph Mollicone                        30

•         Richard Ferris                               8 ½

•         Aharon Sharir                               ?

Ferris turned himself in and helped convict Vivas and the Los Angeles jewelers.  Steven Saccoccia of Providence worked with Aharon Sharir in New York .  They bought precious metals scrap with drug money, had it refined and laundered the proceeds.  Joseph Mollicone of Heritage Bank took duffel bags and boxes full of their cash into Heritage Bank, which seldom bothered to file Cash Transaction Reports.  The three were arrested in the last phase of Polar Cap. Sharir testified against 35 launderers and Russian organized crime figures while he was in the witness protection program.  By the time Mollicone surrendered, he had little information to offer.  Vivas and Saccoccia both had to be extradited and refused to cooperate, as did the Andonians.  None of their companies survived.

The real risk for the group in this room is to be caught up in a scheme as an innocent participant.  Here are some problems faced by the inadvertent participants in Polar Cap.

The law assumes that all the assets belonging to a money launderer and acquired during a reasonable timeframe can be considered the product of laundering and subject to forfeiture.  So if you bought from a launderer, even innocently, you were buying goods acquired illegally and therefore subject to forfeiture.  It is like buying stolen goods.

Enforcement agencies could, and did, freeze bank accounts if they suspected you bought laundered goods, and it took days and sometimes longer to show your involvement was innocent.  If your bank account or assets are frozen even for a couple of days, you will probably be in violation of your bank covenants.  In an industry such as ours, where leverage is so important, losing liquidity while you scramble to prove your innocence can be harsh.

The enforcement agencies confiscated assets of companies that bought La Mina gold.  Confiscation is a matter of policy.  Its objective is to underscore that a launderer could lose everything.  If an enforcement agency confiscates your assets as being laundered goods, the agency will receive some or most of the proceeds.  This may not be an incentive to confiscate, but it is certainly not a disincentive. 

Say you innocently bought 100 ounces of gold from a launderer and melted it with other material into a 400 ounce bar.  The enforcement agency could seize the bar, and you might well have to sue to get it back, or at least to regain the value of 300 ounces. 

Pool account metal is unallocated and subject to seizure.  In the Polar Cap prosecution, the Government seized $100 million in Banco Occidente’s US correspondent accounts at Luxembourg , Swiss, UK and Colombian banks.  Banco Occidente appealed, saying that its capital was only $7 million and that the assets seized were those of innocent account holders.  The suit was settled at $7 million, but only after months of litigation while the funds were frozen.  The same could happen with pool accounts and pool account customers.

The quality of your AML program will play the determining role as to whether you retrieve confiscated goods and how much you get back.  You will need to show that:

Nonetheless, despite your diligent best efforts, you became an innocent victim.

CONCLUSION

From La Mina, it is clear that if there is one company in the circuit with a sound name, such as Ronel, it’s not difficult for a launderer to infiltrate the industry. It is painful being touched by a launderer, never mind being indicted or convicted.  The downside is huge and the history in our industry has been difficult.

With or without the USA PATRIOT Act, we need to defend ourselves against laundering by installing AML programs and by training our employees.  If you do not have a program that proactively helps you detect laundering, you are rolling the dice with your company.

Michael Riess