Exhibits C to Response and Opposition to State Defendants' Motion to Dismiss re [25] filed by Think Computer Corporation. (Carroll, Michael) (Filed on 2/29/2012) Text modified on 3/1/2012 conforming to posted document caption; incorrect event type used when posting Exhibit (bw, COURT STAFF).
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Page 1 Case5:11-cv-05496-HRL Document27 Filed02/29/12 Pagel of 48
oo, EXHIBIT CPage 2 Case5:11-cv-05496-HRL Document27 Filed02/29/12 Page2 of 48
A Report to the Congress
in Accordance with Section 359
of the
Uniting and Strengthening America by Providing:
Appropriate Tools Required to Intercept and Obstruct
Terrorism Act of 2001
(USA PATRIOT ACT)
Submitted by the Secretary of the U.S. Department of the Treasury
November 2002Page 3 Case5:11-cv-05496-HRL Document27 Filed02/29/12 Page3 of 48
TABLE OF CONTENTS
I. Executive SUMMALY.....c.cceseeveeee sevaueesensevutrucrdenenceonareanesens o
IH. Research Methodology...ccsssssssesevessseens Leen eeeaeneeesseseersenasess 4
If, Background on Informal Value Transfer Systems.......ccccecssees 5
IV. Existing Regulations for Informal Value Transfer Systems....... 6
VY. Law Enforcement Challenges........... seeneeesensensenasenen nen ansens 10
VI. Counter Measure Strategies..rccccceccccccccceeesnereresersccseerseneee ld
VIL Recommendations.,...ccccccccsccescssecvecenens eneenenenes ereavesetsowdd
VITL. Appendices.......cccesccsscccsecesesecceeeenveaeeaees beeneaccanancenecuse 18Page 4 Case5:11-cv-05496-HRL Document27 Filed02/29/12 Page4 of 48
I. Executive Summary
On October 26, 2001, the President of the United States si gned into law the
Uniting and Strengthening America by Providing Appropriate Tools Required to
Intercept and Obstruct Terrorism (USA PATRIOT Act) Act of 2001, Public Law
107-56. Section 359 of the USA PATRIOT Act requires:
Section 359 — Reporting of Suspicious Activities by Underground Banking Systems
(d) REPORT — Not later than i’ year after the date of enactment of this
Act, the Secretary of the Treasury shail report to Congress on the need for
any additional legislation relating to persons who engage as a business in
an informal money transfer system or any network of people who engage
as a business in facilitating the transfer of money domestically or
internationally outside of the conventional financial institutions system,
counter money laundering and regulatory controls relating to underground
money movement and banking systems, including whether the threshold
for the filing of suspicious activity reports under section 5318(g) of title
31, United States Code, should be lowered in the case of such systems.
The Secretary of the Treasury submits this report in accordance with the above
requirement. Based on fieldwork and analysis of data gathered to date, the following
preliminary findings are presented:
¢ Existing Bank Secrecy Act (BSA) regulations are applicable to the U.S,-based
operators of informal value transfer systems.
* Current research does not suggest an immediate need for additional legislation,
nor does it suggest a need to change the threshold for the filing of Suspicious
Activity Reports.
¢ The adequacy of the existing BSA rules shotild be reexamined over the course of
Treasury’s multi-year effort to enhance regulatory compliance among the
operators of informal value transfer systems. .
« The law enforcement and regulatory communities should undertake a-
comprehensive program to enhance their knowledge concerning the range of
mechanisms used in informa! value transfer systems in order to better understand
them and to determine whether they think that any additional legislation is
needed.
The BSA, the primary anti-money laundering statute in the United States,
includes provisions that apply to informal value transfer systems. Under the BSA, any
person or group of persons who transfers money as a business is defined as a Money
Services Business (MSB). These entities are defined as MSBs whether or not they
transfer mohey on a regular basis, and whether or not they are an organized business
concern.
‘ 'Page 5 Case5:11-cv-05496-HRL Document27 Filed02/29/12 Page5d of 48
The MSB class of financial institutions includes conventional entities with giobal
reach such as Western Union and Thomas Cook, It also includes the types of informal or
unconventional entities operating outside of the mainstream financial system, such as
hawala, hundi, fei ch’ien, hoe kuan, hui k’aun, and many others. Historically, these
informal entities have been labeled by various terms including “alternative remittance
systems,” “underground banks,” and “informal value transfer systems.”
Pursuant to the current MSB regulations, these businesses must register with the
Financial Crimes Enforcement Network, conduct customer identification procedures for
certain transactions, and maintain financial records, They are also required to file
Currency Transaction Reports (CTRs) and Suspicious Activity Reports (SARs).
There are many uncertainties and compiex issues associated with this segment of
the financial industry. Treasury will therefore work closely with law enforcement,
regulators, and the financial community to gain a fuller understanding of these informal
networks and how they interact with the more formal financial industry. As Treasury
continues to study and to address these issues, it will remain open to considering new
- legislation to reduce the vulnerability of MSBs in general, and informal value transfer
systems in particular, to money laundering and terrorist financing. The attached
appendices provide a more in-depth analysis of the data that has been gathered relating to
informal value transfer systems.
Il. Research Methodology
The Financial Crimes Enforcement Network (FinCEN) was directed to carry out
this study and staff! framed their research in the context of the following interrelated
issues:
¢ The unique law enforcement and regulatory challenges associated with informal,
unconventional, or underground money transfer mechanisms.
* The scope and application of the existing regulatory scheme with regard to
businesses that facilitate the transfer of money domestically or internationally (to
include persons who engage as a business in an informal money transfer system
or any network of people who engage as a business in facilitating the transfer of
money).
¢ The effectiveness of the existing money transmitter regulatory scheme with
respect to these informal systems (to gauge the technical adequacy of the
regulations, as well industry compliance),
' FinCEN staff conducted interviews with federal, state, local, and foreign law enforcement personnel, and
with representatives from the Federal Reserve Board, the Federal Reserve Bank of New York, the
Tnternational Monetary Fund (IMF), and the World Bank. FinCEN staff also interviewed several providers
of informal money transfer services, consulted with an academic expert in the field, and mined data
collected pursuant to the BSA. +
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TH. Background on Informal Value Transfer Systems
Informal Value Transfer Systems (IVTS) is a term used to describe those money or
value transfer systems that operate informally to transfer money as a business. In the past,
some of these informal networks have been labeled by various terms including “alternative
remittance systems” and “underground banks.” Within the broad realm of informal
institutions there exist more detailed descriptors for specific value transfer mechanisms,
such as hawala, hundi, fei ch’ien, hoe kuan, hui k’aun, and many others. For the purpose of
consistency and inclusiveness, VTS is the primary term of art used in this report. (See
Appendix A for examples of [VTS mechanisins.)
U.S. citizens and persons residing in this country from nations in which the use of
IVTS is commonplace use the system for various reasons. In countries lacking a stable
financial sector or containing substantial areas not served by formal financial institutions,
IVTS may be the only method for conducting financial transactions. For example,
foreign aid money going to Afghanistan. is being disbursed through IVTS due to a lack of
a banking infrastructure. Individuals and organizations often use [VTS due to the
existence of inadequate payments systems, to avoid foreign exchange or capital controls,
and.when the formal financial sector is not readily accessible, significantly more
expensive, or more difficult to navigate.
The international flows of VTS are most likely staggering, but quantification
with any certainty is currently impossible. An IMF/World Bank estimate that is likely on
the conservative side and only covers select countries puts annual worldwide IVTS
transfers at tens of billions of dollars,
In order to better understand this issue, FinCEN looked closely at the workings of
the hawala system, a widely used form of 1VTS. Hawala means “transfer” in Arabic and
the system works by transferring money without actually moving it. The basic hawala
transaction involves a sender, two trusted intermediaries, and a recipient. For example, a
U.S. resident who wants to send money to a friend in another jurisdiction (Country B)
would give it to a U.S. hawaladar,’ who typicaily gives the sender a code or identification
mechanism. The U.S. hawaladar then contacts a local hawaladar in Country B by
telephone, fax, or e-mail, and the sender contacts the intended recipient to convey the code.
The loca] hawaladar in Country B then delivers the specified funds to the recipient upon
presentation of the code. The hawaladar charges a flat fee, a commission, or may
alternatively or in addition, profit from the exchange rate differential between the official
and black market price of U.S. dollars in Country B. The accounts between the two
operators may be settled various ways including through compensatory payments (i.e.,
when someone from Country B sends money to the U.S.), conventional wire transfers or
checks, physical movement of money (by courier), invoice manipulation or other trade-
based mechanisms, and the trade/smuggling of gold and precious gems. (See Appendix B
for illustrations of these techniques.) ,
t
* ‘The term hawatadar refers to a hawala dealer or provider of hawala meney transfer services.
5 ’
en ccnp aman RH cgPage 7 Case5:11-cv-05496-HRL Document27 Filed02/29/12 Page7 of 48
Even this brief description highlights some of the key similarities and differences
between IVTS and formal value transfer mechanisms. While the primary transfer
between the sender and the recipient contains some unconventional elements (by U.S.
standards), the far greater differences occur on the back end, or settlement side of IVTS.
While it appears that the majority of [VTS activity is legitimate in purpose,’ these
systems have been used to facilitate the financing of terrorism and in furtherance of
criminal activities. For this reason, many governments have begun to look at this issue in
terms of the need for regulatory and legal controls and in terms of their ability to conduct
successful financial investigations in cases where IVTS has been used.
In order to make a judgment about whether the U.S. may need additional
legislation at this time to address informal value transfer systems, it is first necessary to
understand the present legal and regulatory regime. FinCEN’s analysis focused on the
relevance of existing regulations in the context of [VTS and whether these are adequate
to deal with the unique challenges presented by IVTS.
IV. Existing Regulations for Informal Value Transfer Systems,
Including Suspicious Activity Reporting
The BSA? authorizes the Secretary of the Treasury to impose on financial
institutions a variety of recordkeeping and reporting requirements that are deemed useful
to criminal, tax, and regulatory enforcement, and in the conduct of intelligence and
counter-intelligence activities relating to international terrorism.
FinCEN administers the BSA on behalf of Treasury and has adopted a broad
interpretation of the regulations with regard to their application to money transmitters. In
1999, FinCEN amended the regulatory definition of a money transmitter to include “any
person, whether or not licensed or required to be licensed, who engages as a business in
accepting currency, or funds denominated in currency, and transmits the currency or
funds, or the value of the currency or funds, by any means through a financial agency or
institution, a Federal Reserve Bank or other facility of one or more Federal Reserve
Banks, the Board of Governors of the Federal Reserve System, or both, or an electronic
funds network” or “any other person engaged as a business in the transfer of funds.”*
Section 359(a) of the Patriot Act amended the definition of money transmitter to
encompass “any person who engages as a business in an informal money transfer system
or any network of people who engage as a business in facilitating the transfer of money
domestically or internationally outside of the conventional financial institution system.”
These amendments make clear that under U.S. law all money transfer remitters, including
3 1VTS traditionally serves the purpose of remitting funds of expatriate communities to their home
t .
countries.
‘See 31 U.S.C. 5311 et seq.
> See 31 CFR 103.1 H{uu)(5). a
’Page 8 Case5:11-cv-05496-HRL Document27 Filed02/29/12 Page8 of .48
those that operate on an informal basis, or outside the scope of the conventional financial
sector, are subject to the BSA,
Money transmitters, as currently understood, are one of a number of non-bank
financial institutions that, for purposes of the BSA, are grouped within the category
called MSBs. This category of institutions also includes check cashers, currency
exchangers, and issuers, sellers, and redeemers of traveler’s checks, money orders, and
stored value.
As of December 31, 2001, all MSB principals (except the U.S, Postal Service,
federal, state, or local governmental units, and issuers and sellers of stored value) were
required to register with FinCEN. The registration form requires that the MSB provide
not only contact information, but also identify its owner or controlling person, provide a
governmentally-issued identification number for that person, and identify the company’s
primary transaction account. These registration records are provided online to FinCEN’s
Gateway’ partners for use in their investigations.
Although agents of MSBs are not independently required to register, FinCEN’s
regulations require all MSB principals to maintain a list of their agents and to make the
list available on request to FinCEN or any other appropriate law enforcement agency.
The agent list must include, in addition to identifying information (name, address,
telephone number), a listing of the months in which the agent's gross transactions for the
previous year exceeded $100,000, the name and address of any depository institution at
which the agent maintains a transaction account, and the number of branches or ‘
subagents the agent has.
Any MSB that fails to register with FinCEN, or files false or incomplete
information in the registration statement, is subject to civil penalties of $5,000 per day
while the violation continues. In addition, under 18 U.S.C. 1960, any person who
knowingly engages in a money transmitting business, and has failed to register and/or
comply with FinCEN’s registration regulations, may be subject to up to five years’
imprisonment.
All MSBs, including those that could be characterized as IVTS, must obtain and
verify customer identity and record beneficiary information for funds transfers of more
than $3,000." There are also separate recordkeeping requirements applicable to the sale
of MSB products, such as traveler’s checks and money orders, as well as to currency
exchange transactions.!” These records must be maintained for five years.'' In addition,
® The definition of every category of MSB other than a money transmitter has a threshold requirement
that the business engage in a transaction within the category (currency exchange, check cashing, etc.) in the
amount of $1,000 for any one customer in one day. There is no threshold requirement for money
transmitters.
? FinCEN’s Gateway system enables federal, state, and local law enforcement agencies to have direct,
ontine access to records filed under the BSA. See 2002 National Money Laundering Strategy, at 53.
8 See 31 CFR 103.41. ’
> See 31 CFR 103.33(f.
9 See 31 CFR 103.29, 103.37, ,Page 9 Case5:11-cv-05496-HRL Document27 Filed02/29/12 Page9 of 48
transactions in currency of more than $10,000 are subject to detailed recordkeeping
requirements to support the filing of CTRs.”
MSBs aré also subject to the SAR rule. As is the case with all MSBs, VTS
operators are required to file with FinCEN a SAR with respect to any transaction over
$2,000 that it knows, suspects, or has reason to suspect involves funds from illegal
activity or is designed to conceal their origin, is designed to evade BSA obligations, or
has no apparent business or law purpose.!
In addition to routine recordkeeping and reporting, FinCEN’s regulations also
authorize the imposition of further reporting requirements where needed to carry out the
purposes of the BSA regulations or to prevent the evasion of the BSA’s recordkeeping
and reporting requirements,!" Such additional requirements are imposed by means of
what is known as a geographic targeting order (GTO)" and may be applied to any
domestic financial institution or group of domestic financial institutions ina geographic
area, as well as persons participating in transactions subject to the order.
A GTO can be as detailed as requiring reporting of all transactions in currency
and/or monetary instruments, or of classes of transactions, equal to or exceeding an
amount specified in the GTO. Among other things, this regulation permits Treasury to
require reporting at a much lower threshold than otherwise required by its rules. For
example, GTOs have been successfully applied against money transmitters in two
metropolitan areas that were heavily used by drug traffickers, The GTOs required
records to be maintained and reports filed of all transactions over $750. The GTOs
resulted in the gathering of useful information for law enforcement and several successful
money laundering and structuring prosecutions.
Persons willfully violating any BSA reporting or recordkeeping requirement are
subject to civil and criminal penalties and imprisonment under 31 U.S.C, 5321-22,
Willful violations of any requirement imposed under a GTO are similarly subject to civil
and criminal sanctions,
As noted above, Section 1960 of Title 18 makes it a crime to operate an MSB in
the absence of compliance with FinCEN’s registration requirements. It also makes it a
crime to operate an MSB in the absence of compliance with applicable state licensing
'6 Most, but not all states, have such licensing requirements, In the Money Laundering Suppression Act of
1994, Pub. L. 103-325, 108 Stat. 2160, Congress recommended that the States enact uniform laws to
regulate MSBs. In response, the National Conference of Commissioners on Uniform State Laws
(NCCUSL) has promulgated a model law regulating MSBs, which it recommended that all States enact.
See Uniform Money Services Act (2000) (available on http:/Avww_law.upenn.edwbil/ule/ule_frame.htm).
The NCCUSL recently created a study committee to determine whether the Uniform Money Services Act
needs to be revised or updated in light of the events of September 11 and subsequent developments in the
field. '
'? These statutes were enacted in 1994 and 1996. The first conviction under Sec, 2339B occurred in June
2002. United States v. Hammoud, No. 3:00CR147-MU (W.D. N.C). ‘
i ¥Page 11 Case5:11-cv-05496-HRL Document27 Filed02/29/12 Page11 of 48
Finally, 18 U.S.C. 2 prohibits anyone from aiding and abetting an offense against
the United States. This statute would apply, for example, to an [VTS operator that
knowingly offered material assistance to anyone committing a federal crime.'®
V. Law Enforcement Challenges
To determine whether additional legislation or regulation is needed to deal with the
risks posed by IVTS, FinCEN’s study reviewed the challenges IVTS poses to law
enforcement in conducting financial investigations. Although law enforcement has not yet
had a great deal of exposure to [VTS, the experience to date demonstrates that the problems
do not arise from the lack of pertinent statutory or regulatory tools. Rather, the challenges
to effective law enforcement in this area stem from the need for stepped up compliance,
education, and cooperation. These challenges are discussed below.
As authorities have been intensifying their efforts to block terrorists from obtaining
funds in the United States and elsewhere, more focused attention has been devoted to
hawaia and other LVTS. In several countries, hawala has operated in parailel with formal
financial institutions or as a substitute or alternative for them. [VTS-type networks are
used by persons in the U.S. to send money or gifts to their friends and relatives residing in
Asian, African, and Middle Eastern countries.
While it appears that most clients of [VTS legitimately earn their money and try to
assist their extended families, criminals have also used these networks to launder dirty
money, make illicit payments, and commit other offenses, such as tax evasion and customs
violations. Dealing with illegal hawala providers and their networks represents a serious
challenge to U.S. law enforcement agencies for many reasons. Of particular concern is the
need for increased expertise in understanding the complexities of [VTS.
Certain common characteristics may often create extensive obstacles for law
enforcement. These include: (1) non-standardized or non-existent recordkeeping and
know-your-customer type of practices; (2) frequent commingling of hawala with other
business activities, including commodity trading or smuggling, when transactions pass
through jurisdictions with porous borders or cash-based economies; (3) language and
cultural barriers; and (4) inconsistent laws and regulations at the international and domestic
levels.
Recordkeeping Practices
Hawala ledgers are often insubstantial and in idiosyncratic shorthand. Initials or
numbers that are meaningful to the hawaladar are useless if they reveal nothing about
transactions, amounts, time, and names of people or organizations, Personal ledgers are
often destroyed within a short period of time, especially in countries where Hawala is
criminalized.
J
'S See U.S. v. Levy, 969 F.2d 136 (S” Cir. 1992) (upholding conviction for aiding and abetting failure to
report currency transactions), ,
+
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In some cases, particularly when hawaladars know that their clients are breaking the
law, no notes or records are kept at all. In other cases, hawaladars may serve customers
without asking many questions about their true identity, the origin of their money, or the
reason for the transfer. In such cases, even if providers decided to cooperate with
authorities, they would have no knowledge or useful information to share. Without records
or some documentary basis, there is virtually no paper trail and very little that investigators
can pursue, thus leaving them at a dead end in their efforts to build a case.
On the other hand, investigators sometimes end up finding masses of records,
ledgers, or notes kept by [VTS providers. However, they may be maintained in ways that
are hard to decipher without the cooperation of those who created the records. Sometimes
the notes are kept in foreign languages or in initials and codes.
In other instances, the transaction may involve third party accounts of individuals or
companies within the same country or a number of other countries, Nominee accounts,
sometimes referred to as “Benami,””” effectively stop the money trail, as evident from
investigations of banking, financial, and trade-related misconduct,
In the end, much of the paper trail might surface, but it becomes a difficult task to
interpret and reconstruct it accurately. The task of putting everything together for.a case
becomes time consuming and complicated, and may require the cooperation of hawala
providers or controllers in other jurisdictions, thus requiring significant resources.
As noted in the previous section, [VTS operators are money transmitters under the
BSA, and FinCEN’s recordkeeping rules are applicable to them. Achieving better
compliance does not call for additional legislation or regulation, but for increased outreach,
education, and enforcement,
Mixing of Businesses
Another challenge for law enforcement is proving criminal offenses and intent
when commingling of funds takes place. For example, businesses operating with
substantial amounts of cash or involving high turnover make it very easy to hide illegal
hawala deals by creating, for instance, “black holes” domestically and overseas, These
black holes are formed by withdrawing cash pooled by [VTS providers, depositing it in
different accounts at various intervals, and at various financial institutions (banks,
brokerages, and others), and/or using the funds to purchase commodities that then can be
traded in the U.S. or internationally. It is virtually impossible to match cash withdrawals
with other deposits and trade transactions when the amounts are comparatively small.
In other cases, hawala businesses interface with financial institutions (¢.g., they may
have bank or brokerage accounts, currency exchangers, offer telephone and fax services,
send wires, engage in real estate deals). A currency exchanger in a given country could
«“Ponami” or nominee accounts are culturally decepted in ethnic groups that also engage in hawala.
Because the true beneficiary of a transaction is not the person under whose name the transaction takes
place, it is very hard to identify the owners of criminal proceeds and people who engage in illegal activities.
, ,
IPage 13 Case5:11-cv-05496-HRL Document27 Filed02/29/12 Page13 of 48
send and receive wire transfers for a hawala customer via one or two foreign banks, When
the funds are booked into certain types of correspondent accounts at U.S.-based banks (i.¢.,
those that are not payable-through accounts), the trail becomes blurred as the funds move
from an institutional account not identified with any individual before finally being
transmitted to the ultimate intended recipient. However, this issue is not unique to [VTS,
but is a function of the realities of correspondent banking.”?
Again, these are not issues that require additional legislation or regulation. Rather,
addressing these issues requires education and cooperation among regulators, law |
enforcement, and the financial community, Therefore, it is important for the law
enforcement and regulatory communities to educate financial institutions about the
typologies associated with VTS. It is necessary that bank officials, credit card companies,
brokerages, money exchanges, transmitters, and others be made familiar with illicit IVTS
patterns, recognize them, and report them as suspicious.
Language and Cultural Barriers
U.S. law enforcement often is faced with language and cultural barriers when trying”
to communicate with suspects, identify suspicious transactions, interpret evidence, and
conduct undercover operations. For instance, when hawaia ledgers are found, it may be
impossible for law enforcement to understand their contents and underlying transactions.
Therefore, the cooperation of IVTS providers is often essential in deciphering these records
{as in cases of accounting fraud or records of drug traffickers). However, such cooperation
may not always be forthcoming, if ethnic, cultural, or other sensitivities are misunderstood
or ignored by law enforcement.
On the other hand, too much focus on particular ethnic groups or cultural practices
may divert attention from any potential intersection or collaboration across ethnic lines.
For example, there have been cases in which persons of one ethnic background have used
systems prevalent in another culture or cultures. Outreach efforts by law enforcement into
the affected communities can enhance the efforts to obtain their cooperation and improve
our understanding of how [VTS is used and abused.
Inconsistency in Laws and Regulations
Differences in laws and regulations internationally also pose a major challenge to
law enforcement. (See Appendix D for a description of international regulatory
approaches). When hawala operates through jurisdictions with strict secrecy regulations,
the investigative task is further complicated and cooperation is lessened. Bank secrecy,
corporate secrecy, and attorney-client privilege make the investigator's task difficult.
Sometimes, a vicious circle prevents law enforcement agents from completing their task.
In order to obtain information from such jurisdictions, evidence of wrongdoing is
Pursuant to Section 312 of the USA Patriot Act, regulations have been proposed that would require
U.S. financial institutions offering corfespondent accounts to perform due diligence and, in appropriate
circumstances, enhanced due diligence on their correspondents. See 67 FR 37,736 (May 30, 2002) and 67
FR 48,348 (July 23, 2002). ’
+
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required; however, access to information in those jurisdictions is critical in obtaining that
evidence in the first place. Addressing these challenges requires multilateral, rather than
unilateral, action, as discussed below.
VI. Examples of Counter-Measures Being Developed
As noted above, the challenges faced by law enforcement in confronting [VTS do
not currently appear to require a legislative solution, but appear amenable to counter-
measures by the regulatory and law enforcement communities that involve compliance
efforts, education, and outreach, and increased cooperation between and among
government and the financial sector. In this section, we discuss some examples of the more
promising strategies that are being developed to enable law enforcement to deal with
financial investigations involving IVTS. The lesson from these examples is that the
existing legislative framework offers appropriate tools and opportunities to effectuate law
enforcement counter-measures aimed at the abuse of IVTS. ~
During its research for this report, FinCEN had an opportunity to observe several
developing counter-measure strategies being applied in different regions through the United
States. These strategies are directed toward:
Q enhancing the transparency of [VTS operations;
a bringing the TVTS providers into the BSA regulatory structure;
a obtaining cooperation in interpreting relevant records and further understanding
of IVTS mechanisms and customer activity;
a revealing trends and patterns of typical versus atypical suspect transactions;
Q revealing ancillary or mixed business associations;
Q disrupting and prosecuting immediate threats, while sending a message to other
IVTS entities to comply with regulatory requirements;
Q disrupting and turning over couriers associated with IVTS; and
Q working with the financial sector to better monitor and detect suspicious IVTS
activities. Examples of some of these strategies are discussed below,
Visits to California, New York, and Puerto Rico by representatives from FinCEN
revealed successful outreach strategies being pursued in several regions by both law
enforcement and regulatory authorities, which are aimed at the [VTS sector. These
strategies are designed to enhance cooperation with [VTS providers in interpreting their
records, and to learning about their operations, mechanisms, and customer transaction
profiles. There has been substantial support for such outreach strategies among multiple
agency representatives from many different regions of the country.
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Law enforcement also is engaged in the extensive review of SARs filed on [VTS-
related activity. Currently, the New York High Intensity Money Laundering and Reiated
Financial Crime Area (HIFCA) has developed a SAR review strategy that encompasses an
extensive review of SARs followed by categorizing the suspicious activity, Each level of
that review involves correlated searches with other types of suspicious activity with other
law enforcement sources of information, Following this analytical process, records are
created in various law enforcement indices and then further examined for possible
investigative development at regular multi-agency and multi-district SAR meetings. These
meetings also included the participation of regulatory agencies and prosecutors.
Federal officials interviewed in another region of the country have applied
existing regulatory provisions to derive an innovative triad approach for potential
prosecutions of CMIR and bulk smuggling violations 31 U.S.C. Sections 5316 and 5332,
respectively). This approach emphasizes the importance of law enforcement authorities
being able to apply currency smuggling related statutes to investigations that might:
involve couriers linked to |VTS operations. Ifa courier associated with an IVTS-type
business is detected at the border with more than $10,000 and an apparent intent to
conceal the money, both CMIR violation charges and bulk cash smuggling charges may
be applied, Ifthe suspect declares that the funds are not his/her own but rather he/she is
moving them on behalf of someone else, the suspect can be subject to Section 1960
charges for operating as an unlicensed money transmitter. In addition, if the courier is
‘working for a particular business (i.¢,, a suspected [VTS operation), then CMIR, bulk-
cash smuggling, and, potentially, Section 1960 charges may be filed against the source
business and its owners.
Law enforcement is also making a concerted effort to work more closely with the
larger financial community to assist banks and other depository institutions in becoming
more familiar with transactions that may indicate suspicious [VTS activity. .FinCEN
believes this type of outreach to the financial community is critical in view of the extensive
interface between [VTS and formal banking services. The cases included in this report (see
Appendix C) illustrate that SARs play a significant role.
An example of a state-initiated strategy is the current program being developed by
the New York State Attorney General's Office, in conjunction with a multi-agency task
force, to identify regionally based [VTS operations, particularly in the terrorist financing
context,
The goals of this program include:
identifying, within the region, unlicensed money transmitters operating hawala-
type businesses and feeding the information into a central database for further
tracking and review for both law enforcement and intelligence purposes;
Q determining methods of operation and identifying any associated (“second tier”)
businesses;
14Page 16 Case5:11-cv-05496-HRL Document27 Filed02/29/12 Page16 of 48
Q prosecuting individuals violating state law and, wherever possible (based upon
corroborating information, such as intelligence checks and leads, informants, bank
record reviews) identifying investigative leads to terrorist activities;
a removing and/or disrupting immediate threats and thus sending a message to other
IVTS entities to comply with regulatory requirements; and
a further identifying IVTS activity trends, patterns, operations, records, and
customer transaction profiles. ,
These strategies all rely on the existing legislative and regulatory structure
governing MSBs, They are examples of how the law enforcement and regulatory
communities can carefully tailor existing regulatory tools to cope with the challenges
posed by IVTS.
VH. Recommendations
The U.S, approach of regulating informal value transfer activity is preferable to
outlawing the activity altogether, a course chosen by some nations. Attempting to outlaw
[VTS ultimately deprives law enforcement of potentially valuable information and drives
the informal remittance providers further “underground.” Outlawing the activity also
deprives the mostly law-abiding [VTS customers of the primary channel through which
they transfer funds.
In addition, the U.S. approach to regulation is consistent with emerging
international standards such as the Special Recommendations on Terrorist Financing,
issued in November 2001, by the Financial Action Task Force (FATF) on Money
Laundering. The FATF’s Special Recommendation VI on Alternative Remittance calls
on nations to “take measures to ensure that persons or legal entities, including agents, that
provide a service for the transmission of money or value, including transmission through
an informal value transfer system or network, should be licensed or registered and subject
to all the FATF Recommendations that apply to banks and non-bank financial
institutions.” .
Laren
The U.S. approach is also consistent with the Abu Dhabi Declaration on hawala
issued in May of this year in the United Arab Emirates, following a congress of
government officials from more than 50 nations. The declaration cails on countries to
“adopt the FATF recommendations in relation to remitters, including hawaladars and
other alternative remittance providers,” and to “designate competent supervisory
authorities to monitor and enforce the application of these recommendations to
hawaladars and other alternative remittance providers.” The declaration goes on to say
that, “the international community shou!d remain seized with the issue and should
continue to work individually and collectively to regulate the hawala system for
legitimate commerce and to prevent its exploitation or misuse by criminals or others.”Page 17 Case5:11-cv-05496-HRL Document27 Filed02/29/12 Page17 of 48
As described in this report, the BSA clearly provides the framework for
comprehensive oversight of all U.S.-based money transmitters, including those
characterized as IVTS. However, many of the requirements under the BSA framework
are too new to adequately determine their effectiveness with respect to IVTS.
Treasury, therefore, believes it would be premature at this time to call for new
legislation. Based on what we know so far, we appear to have the legislative and
regulatory tools that we need. The primary problems are those of compliance,
enforcement, education, and cooperation. Treasury accordingly recommends that U.S.
efforts be focused on these areas, beginning with the effort to bring al] money
transmitters, IVTS or otherwise, into compliance with the existing regulatory regime.
Similarly, we believe it is premature to change the SAR threshold. The MSB
SAR requirement is less than one year old—insufficient time to enable FinCEN to
determine whether relevant activity is being captured by the current threshold.
Like the SAR requirement, the MSB registration requirement is less than one year
old. Anecdotal evidence suggests that the compliance rate among [VTS providers is far
lower than among more conventional types of MSBs. Further research should be
undertaken by FinCEN to determine the accuracy of this evidence and how compliance
can be maximized.
The compliance question will be critically important as Treasury continues to
assess the adequacy of existing regulations. This is particularly relevant in relation to the
recordkeeping and customer identification rules, both of which directly impact on the law
enforcement and regulatory challenges presented by [VTS.
One of the key compliance issues identified through FinCEN’s analysis is the fact
that 1VTS operators often maintain non-standardized records and do not exercise sound
customer identification practices, Investigators, for example, sometimes find records,
ledgers, or notes maintained in code, or in idiosyncratic shorthand, making it hard to
decipher without the cooperation of the [VTS operator who created the records, In some
cases, particularly when ITVS operators know or suspect that their clients are breaking the
law, no notes or records are kept. In other cases, IVTS operators serve customers without
_ asking questions about their true identity, the origin of their money, or the reason for the
transfer. In most instances, the practices described above are violations of the existing
regulatory requirements.
Other compliance issues arise from the practice of 1VTS operators of pooling funds
from numerous transactions, As previously noted, businesses operating with substantial
amounts of cash (such as convenience stores) or involving high turnover make it very easy
to hide illegal 1VTS transactions through the commingling of funds (see page 11, supra). It
is virtually impossible to match cash withdrawals with other deposits and trade transactions
when the amounts are comparatively smail.
16Page 18 Case5:11-cv-05496-HRL Document27 Filed02/29/12 Page18 of 48
Compliance by IVTS providers with the BSA’s existing recordkeeping, customer
identification, and reporting requirements may go a long way to address these problems
and to enable investigators to “follow the money trail.” For example, the problem of
incomplete, coded, or illegible records may be addressed because inherent in the BSA’s
recordkeeping requirements is the requirement that the records be truthful, complete, and
accurate.”! Coded and illegible records do not meet this standard. The problem raised by
the practice of aggregating customers’ transactions before transmitting them through
depository institutions is addressed by the requirement that individualized records must
be maintained for each transmittal order, which includes, for customers other than
established customers, the requirement that customer identity be verified and recorded,”
Reporting of suspicious activities by IVTS providers will give law enforcement
an important window into, and an early warning system for, questionable activity in
communities that may otherwise be difficult to penetrate. Finally, VTS compliance with
the BSA’s CTR and CMIR requirements has the potential to aid substantially in detecting
IVTS-related bulk cash smuggling and other currency-related crimes.
Education and outreach are the crucial ingredients to building capacity among
legitimate IVTS providers who want to comply with the law and regulations, FinCEN is
currently expanding its existing outreach program that already has resulted in the.
registration of over 11,000 MSB principals. The planning process for the expanded
program, which will include the translation of educational materials into various
languages, meetings with associations of business in affected communities, and, possibly,
the use of focus groups, is underway.
Education is also critically needed within the law enforcement and regulatory
communities, as there needs to be a greater understanding of how these systems operate.
The dearth of technical knowledge is compounded by the fact that [VTS is used in the
U.S. primarily among immigrant communities, which poses an additional challenge to
investigators and regulators who may lack the language skills and cultural awareness
necessary to operate in this environment. These types of barriers can limit the ability of
authorities to communicate with IVTS operators and/or criminal suspects to interpret
evidence or to conduct effective undercover operations. It is equally important to
enhance the awareness of the formal financial industry regarding existing and continually
emerging IVTS mechanisms that may interface with the formal banking sector, especially
in the context of their performance of their due diligence and SAR obligations.
Finally, although we already know much about some types of [VTS and how they
operate, there is still much that remains a mystery. Treasury, therefore, believes that
there is a need for continued research, particularly with regard to understanding the range
of mechanisms associated with the IVTS payment clearance mechanisms.
2! See, eg., Lowell Niebur & Co., Inc,, 18 SEC 471, 475 (1945).
*2 FinCEN anticipates that, once the Section 326 rules for verification of identity are finalized for those
financial institutions that maintain accounts for customers, the rules for verification of identity for the
various transactions entered into by MSBs (including rules governing funds transmittal by both bank and
nonbank financial institutions) will be amended as needed to be consistent with the Section 326 rules,
' t
17Page 19 Case5:11-cv-05496-HRL Document27 Filed02/29/12 Page19 of 48
APPENDICES
APPENDIX] _. TITLE
A Range of Existing and Continually Emerging IVTS
Mechanisms and Mixes With Formal Banking Sector
Basic Hawala and Sample Account Settling
Developing Case Patterns
International Oversight Practices
MOO) a
Acknowledgments
18Page 20 Case5:11-cv-05496-HRL Document27 Filed02/29/12 Page20 of 48
Appendix A
Range of Existing and Continually Emerging IVTS
Mechanisms and Mixes With Formal Banking Sector
Broad Scope of IVTS Mechanisms
A primary finding resulting from the study is the need for law enforcement and
regulatory authorities to be cognizant of the extensive and potentially complex
(sometimes interfacing) nature of existing and continually emerging IVTS mechanisms,
as the above graphic illustrates.
The following are examples of [VTS methods that, in and of themselves, may
serve as mechanisms for transferring funds or value and sometimes interface with each
other for settlement purposes:
) ‘
19Page 21 Case5:11-cv-05496-HRL Document27 Filed02/29/12 Page21 of 48
L, False Invoicing of Exports or Imports — This practice can help hawaladars balance
their books. For instance, under-invoicing by $20,000, the hawaladar “sends” this amount
to the importer of computer equipment, who will make profits higher by this amount upon
resale of the goods, If the amounts are not excessive, they can easily “disappear” in
otherwise legal trade. A $20,000 “mistake” in a $1-2 million trade is unlikely to raise
suspicion, even if detected. Therefore, false invoicing can serve to be a stand-alone IVTS,
part of a trade diversion scheme, or a means of tax evasion,
The detection of under-valuation or over-valuation of goods often requires inside
information and is difficult even using sample checks by U.S. Customs Service (i.e., if
medical, computer, and other equipment contains chips, drivers, or updated software
versions, these can only be discovered if the equipment is opened up and subjected to the
most thorough inspection), However, existing technologies may be used to overcome such
difficulties, The U.S. Customs Service operates a relational database, developed in the
early 1990s, that enables the analysis of data by country, port, manufacturers, importer, and
commodity. That database is known as the Numerically Integrated Profiling System or
NIPS. Investigators, using NIPS, have the ability to run samples against the database to
help detect anomalies and thus provide leads regarding false-invoicing schemes.
In other cases, “payments” are made for goods that are not delivered, incorrectly
described in the invoice, or returned after delivery is recorded. The payment does not
appear to be connected to any unusual or suspicious activity.
a Courier Services and Physical Transport — Courier services and physical
transport methods also can be used to transfer funds or other value and settle accounts
amongst IVTS Providers. Cash has been found in everything from containers to
suitcases, Money changers in the Middle East, who trade in currencies and therefore
need the cash in place, also use couriers. Value can also be moved when IVTS Providers
use cash to purchase easily movable commodities that can later be sold for cash at the
final destination.
3, Correspondent Bank Accounts — Certain types of correspondent accounts (such
as “nostro” and “vostro”)? may be used as the modern equivalent of a sophisticated
‘hawala’ moving more substantial amounts of value without the bank officials in the
U.S., or even in other countries knowing the true identity of the customer. Access to the
U.S. financial system is an added advantage to users of these mechanisms. This type of
activity is particularly problematic in nesting or multiple levels of accounts, in which
3 Nostra and vostro accounts are held by banks at other banks in foreign currencies and jurisdictions,
where they have no presence themselves. For example, when bank A from country X needs to engage in
U.S. dollar transactions but has no offices in the U.S., it may open a nostro {literally “our”) account with a
New York bank B. When bank B, on the other hand, wishes to engage in transactions denominated in the
currency of country X but has no offices there, it will open a locally denominated account with bank A in
that country. This would be a vostro account (“your account”), These are essentially’clearing accounts that
balance transactions between the two banks, Whereas a correspondent account is more of a one-way
service, nostro/vostro accounts serve reciprocal interests and are like “mirror” accounts. :
)
20Page 22 Case5:11-cv-05496-HRL Document27 Filed02/29/12 Page22 of 48
large numbers of institutional and individual accounts are consolidated through a network
of banks.
4, Gift and Money Transfer Services — Smaller amounts can also be transferred
through easily available gift and money transfer services via special vouchers that can be
bought through internet websites. Clients provide a credit card number to be charged for
goods (such as flowers, food, or super market vouchers) to be received and/or used by a
friend or relative elsewhere around the world.
5. In-Kind Payments — Another practice that can be used independently, or as a
settlement method, involves the provision of services or in-kind payments. For example,
a travel agent sending groups to India may have someone pay all the expenses of the
group, and make a payment to any account in the United States, or other account of the
Indian provider,
6. Debit and Credit Cards — These types of cards may be used by multiple
individuals. Holders of bank or credit card accounts may have multiple cards on the
same account and hand them over to other people, who may use the cards for withdrawals
in other countries. Only the account holder may know who is taking the cash and for
what purpose, and even the account holder may not know where the value goes next.
7. Internet Payment Schemes — Similar, but often more complicated, alternatives
involve internet companies that offer payments and money transfer services from within
the U.S. or from overseas, including some based in secrecy or laxly regulated
jurisdictions. Others facilitate payments and value transfers on the basis of gold deposits
held in London, Zurich, or Dubai.
8 Pre-paid Telephone Cards — These cards and any other instruments that
effectively store value may be used for funds transfer.
9 Trade Diversion Schemes — These schemes allow for hard-to-detect value
transfers, the laundering of dirty money, as well as fast illegal profits. For example,
Customer X (e.g., a front company based abroad) purchases legal goods at a discount
(often up to 50 percent) from a U.S. manufacturer, and receives the goods via an
intermediary in a third country. The goods are then diverted back (Le., returned) to the
United States. These goods are eventually sold to wholesalers in the U.S. by Customer
(or an intermediary) at a higher price. This price still represents though for the
wholesalers a discount (e.g., 20 percent), and for Customer X the receipt of legal money
anywhere on earth as proceeds of a legal sale. Buying a million dollars worth of goods
for $500,000 and re-selling them for $800,000 in a couple of weeks generates a profit of
$300,000 and clean funds for anyone to use.
Therefore, it is clear that [VTS can include a very wide range of methods — from
very basic to extremely sophisticated methods. It is also important to note that in certain
instances the interface of several types of IVTS include the finding of cross-ethnic
,
21Page 23 Case5:11-cv-05496-HRL Document27 Filed02/29/12 Page23 of 48
(middlemen) collaborations; the more interface used and the greater use of
intermediaries, the harder it becomes to investigate a case or network.
IX, Mixing of IVTS Mechanisms with the Formal Banking Sector
Our study has found few examples of “basic” hawala in the United States; that is,
where value transfers occur without any interface with the formal banking sector. IVTS
providers interface with the formal banking sector when they make deposits, engage in
wire or other transfers, and manage ancillary businesses (¢.., travel agency, grocery
store, jewelry store). In many of the cases reviewed, it became apparent that during the
settlement process, the IVTS operator transferred funds through financial institutions on
an aggregated basis when its cash pool reached a certain level, FinCEN has also
observed [VTS providers who maintain bank accounts in order to obtain negotiable
instruments, to wire funds domestically and overseas, and to draw on for. the purchase of
commodities/goods (the proceeds from sale of these commodities/goods were then used
to remit money overseas on behalf of local VTS customers). (See Case Synopses
illustrated in Appendix C.)
22Page 24 Case5:11-cv-05496-HRL Document27 Filed02/29/12 Page24 of 48
Appendix B
Basic Hawala and Sample Account Settling
Marwan Amjad
USA Pakistan
Hawaladar Hawaladar |
inUSA 4¢ in Pakistan
23Page 25 Case5:11-cv-05496-HRL Document27 Filed02/29/12 Page25 of 48
24Page 26 Case5:11-cv-05496-HRL Document27 Filed02/29/12 Page26 of 48
25Page 27 Case5:11-cv-05496-HRL Document27 Filed02/29/12 Page27 of 48
Appendix C
Developing Case Patterns
Examples of [VTS Cases in the United States
During its research on IVTS in the United States, FinCEN met with federal, state,
and local faw enforcement officials throughout the country to discuss cases being
investigated or prosecuted that involve 1VTS.”" Field agents and prosecutors provided
FinCEN with extensive cooperation and assistance. Most of the cases highlighted in this
report are based on observations of these law enforcement officials. Although many of
these investigations are in their preliminary stages, additional criminal activities may
become apparent over time.
The IVTS investigations involve a variety of illegal activity, including:
a use of IVTS providers (unlicensed/unregistered money transmitters) to remit funds
to or from abroad (including in several instances an OF AC-blocked country;”°
several illegal hawaladars also connected to drug trafficking);
Q exploitation of cash intensive businesses (e.g., grocery stores; travel agencies;
delicatessens; kiosks;”* convenience stores: phone card businesses; and money
exchange businesses) often located in close-knit ethnic communities to launder
illicit proceeds derived, for example, from cocaine, heroin, methamphetamine
trafficking, alien smuggling, food stamp fraud, and transfer of funds or value to
problematic countries (see graphic below);
”* Interviews were primarily conducted with representatives of High-Risk Money Laundering and Related i
Financial Crime Areas (HIFCAs) in Chicago, Los Angeles, San Francisco, New York, and San Juan.
Extensive outreach was also conducted with additional contacts beyond the HIFCAs in particular cities
where additional leads were discovered (e.g., Washington, D.C. headquarters offices: Atlanta, Georgia;
San Diego, California; Charlotte, North Carolina; and Austin, Texas). Also, see Appendix H for a list of all
organizations consulted in our study.
> The Department of the Treasury’s Office of Foreign Assets Control (OFAC) administers and enforces
economic and trade sanctions based on United States foreign policy and national security goals against
targeted foreign countries, terrorists, international narcotics traffickers, and those engaged in activities
related to the proliferation of weapons of mass destruction.
*6 One law enforcement investigation, for example, identified the use of kiosks located in shopping malls
and other businesses such as convenience stores to place and layer criminally-derived proceeds. The kiosks
were also used by criminal elements as money exchanges. Investigators are focusing on alien smuggling as
the underlying unlawfulactivity. : *
26Page 28 Case5:11-cv-05496-HRL Document27 Filed02/29/12 Page28 of 48
a conversion (placement) of bulk cash to money orders and other types of monetary
instruments to circumvent federal reporting and recording requirements;
Q use of commercial mail carriers to send monetary instruments out of the U.S, to
circumvent Currency and Monetary Instrument Report (CMIR) filing
requirements;7’
Q use of couriers to smuggle bulk monctary instruments across international borders;
ao use of stored value (pre-paid telephone cards) to both transfer value and circumvent
reporting requirements;
a exploitation of non-government organizations (N GOs) and charities to move funds
potentially linked with terrorist activity;
3 A CMIR is required when a person physically transports currency of other monetary instruments in an
acoregate exceeding $10,000 at one time, into or out of the United States. See 31 CFR 163,23(a} and 31
sgreg g
U.S.C, 534 6¢a) and 5317. :
27Page 29 Case5:11-cv-05496-HRL Document27 Filed02/29/12 Page29 of 48
a smuggling of cigarettes; and
a use of Black Market Peso Exchange-type schemes.”®
In many of the cases, the underlying activity was frequently described as hawala,
but FinCEN only has been able to characterize one case as “basic” hawala (i.¢., transactions
in which a broker or intermediary accepts cash on behalf of a sender in one location, and
arranges for disbursement of the cash, minus a small fee, from another broker or
intermediary at another location without the actual movement of any funds through any
forma! financial institution). In most cases, IVTS providers had bank accounts or accounts
at other financial institutions, which they used in the settlement of the transactions. This is
based on what law enforcement has shared with FinCEN. There may be other “basic”
hawalas in the United States that law enforcement has not disclosed or not discovered.
The reality of the [VTS situation in the United States appears to be that many of the
investigative cases, along with anecdotal information provided by law enforcement about
suspected IVTS involvement in illegal activity (and some information provided by IVTS
service providers themselves) indicate a prevalence in the United States of the “mixed”
category of IVTS in which illegal money transfer activity is conducted in conjunction with
legal business enterprises, such as money transmitters, check cashers, travel agencies,
jewelry businesses, grocery stores, and others, and in which settlement is accomplished
using the formal financial system. The illegal money transfer activity may encompass both
BSA violations and other illegal activities (e.g., narcotics trafficking, alien smuggling fees,
and suspected terrorist funding).
Detailed case-related synopses and accompanying graphics of the types of [VTS
activity and common patterns observed in the United States are provided below. These
cases were reported to FinCEN during consultations with federal and state law
enforcement officials. FinCEN will continue to consult with these law enforcement
officials to learn additional information and report upon possible subsequent phases and
developments. Because most of these cases are still under investigation or raise other
sensitive disclosure issues, they have been described generically.
Cases like this require a regulatory and faw enforcement infrastructure that will
assist law enforcement in identifying the illegal transactions so that a successful
prosecution will occur. The challenge for law enforcement is to determine how to target
the illegal transactions without affecting the numerous legal transactions by individuals
sending money home to their families and without unduly disrupting trade, government,
or NGO activities that help those legitimately in need.
8 The Black Market Peso Exchange (BMPE) is a large-scale money laundering system used to launder
proceeds of narcotics sales in the United States by Latin Anterican drug cartels by facilitating swaps of
dollars in the U.S. for pesos in Colombia through the sale of dotlars to Latin American businessmen
seeking to buy U.S. goods to export. ’
, +
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Case Synopses
Case |
Suspected Basic [YTS Operation
G@ A recent jaw enforcement investigation identified a non-licensed/registered IVTS
operator who provided transfer services to countries in Europe and abroad,
GQ The U.S. IVTS operator is a suspected narcotic trafficker.
Q ‘The operator also provided transfer services for customers wishing to send money
from an OFAC blocked country located in the Arabian Gulf.
Q The 1VTS operator provided his services from his residence.
Q In order to execute payments the operator utilized other [VTS operators in countries
abroad in which instructions were provided via fax and phone.
OQ Payments were made using a basic hawala system. 3
Q The operator maintained over $1,000,000 of cash at his residence (believed to be
maintained for cash pay-outs).
Q IVTS balances were reconciled through the U.S. IVTS operator meeting with other
IVTS operators in Europe.
* Information is subject to change as the case fully develops. ’
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Case 2
Use of Commodities to Reconcile Transfer Payments Between IVTS Operators
a Law enforcement has identified an [VTS operator who provided remittance services
to nationals of an East African nation residing in the U.S.
a People wishing to send money would contact the U.S, [VTS operator and arrange to
send money to the operator through one of two methods: 1) the person wishing to
send money physically provides the funds to the [VTS operator; or 2) the customer
deposits the funds to be transferred directly into the operator’s account.
GQ The sender provides the name and phone number of the beneficiary to the operator.
The sender also faxes a copy of the deposit receipt to the operator indicating a
deposit was made into the operator’s account (if that method was used).
a The operator then faxes the payment instructions to his counterpart (fainily
member) located in the East African country. The beneficiary picks up the money
from the sender at an exchange business operated by the East African IVTS
operator. Funds (proceeds of commodity sales) paid to beneficiaries are withdrawn
from a reserve account maintained by the exchange.
a Funds collected by the U.S. [VTS operator were not automatically sent out of the
U.S. Usually the U.S. operator would allow the balance of his operating account to
accumulate to $10,000.00 before making a wire transfer.
a The money is eventually wire transferred to an account located in a European
country that is controled by the East African [VTS operator.
Q The European account is used by the East African operator to purchase goods in
bulk that are imported back to the East African national, and further sold at the
same location as the exchange.
a Proceeds from the sale of those products are maintained in a reserve account that
functions as the primary source for paying money out to beneficiaries from the
company’s IVTS activities.
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Case 3
AL
Use of Cash Intensive Businesses In Ethnic Communities to Facilitate IVTS Activities,
Case A
ag
Law enforcement efforts identified a case in which an organization provided
unlicensed remittance services for nationals of an Arabian Peninsula country
residing in the U.S. Numerous businesses within the ethnic community collected
money from individuals wishing to send funds back home. A small fee was
charged for the transfer services. The funds were then converted to monetary
instruments to be smuggled out of the country.
An agent of the organization would then collect the funds from area delis, travel
agencies, and other miscellaneous stores that served as the primary points of contact
for people wishing to remit funds.
The U.S, [VTS operator would then phone and fax all of the transaction orders to
another 1VTS operator located in the Arabian Peninsula. The beneficiaries would
be paid prior to the actual transfer of funds.
Once cash was collected from the collecting agent of the U.S. organization, several
individuals were then enlisted to convert bulk cash to money orders and other types
of negotiable instruments. Cash was also structured into nominee bank accounts
maintained by area banks. Numerous financial institutions captured some of the
structuring activity and subsequently filed SARs,
Once the cash was converted_or deposited into accounts, checks and money orders
from the conversion of the funds were provided to couriers who physically
smuggled the instruments to the Arabian Peninsula nation.
Once the Arabian Peninsula [VTS operator received the instruments, he negotiated
them through a jocal bank’s correspondent accounted maintained by a U.S. bank.
;
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Case 4
Use of Cash Intensive Businesses In Ethnic Communities to Facilitate [VTS Activities,
Case B
ao Law enforcement investigations identified an organization involved ina multitude
of criminal activity to include ephedrine trafficking; cocaine, heroin,
methamphetamine trafficking; food stamp fraud; resale of stolen property; etc. The
organization utilizes numerous businesses and individuals within the ethnic
community to facilitate its illegal activities.”
a ‘The organization also runs a money remitter business that caters to nationals of an
Arabian Peninsula country residing in the U.S. The business is unlicensed in the
state where it is located and not registered with the federal government.
a People wishing to send money through the business contact an agent of the
company in which the customer pays the remitter for the service in addition to
providing beneficiary information. The U.S, IVTS operator coordinates the
payment with his counterpart located in the Arabian Peninsula nation via phone and
fax.
°° Based in part on cultural and socio-economic grounds, members of certain ethnic groups mutually
support one another in numerous aspects to include financial support in the establishment of businesses.
Criminal elements within these ethnic groups also play an active role in supporting the establishment of
new businesses through financial support. Thus, the business that is opened with the assistance of funds
from criminal organizations becomes vulnerable to facilitating future criminal activity. This can take place
as people trusting each other will not always ask about the origin or destination of funds, A blind eye or
genuine ignorance can effectively provide cover for attivities such as the reselling of stolen goods or the
active participation in other illegal activities such as food stamp fraud, coupon fraud, and money
laundering, >
F ?
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Q Beneficiaries pick up money from the broker located in the Arabian Peninsula
nation.
Q The actual movement of funds is conducted later when bulk cash is deposited by
agents of the organization into personal and business accounts. SARs filed by
financial institutions indicate many of those transactions were structured. Money
orders and third party checks*’ are also used to deposit funds into accounts or to
purchase cashiers checks from financial institutions.
Q Funds deposited into accounts owned by the criminal organization in the U.S. were
reconciled with the Arabian Peninsula IVTS operator through the use of checks.”
Q Checks were mailed (via commercial mail) to the [VTS operator located in the
Arabian Peninsula nation where they were negotiated through local financial
institutions that had correspondent bank accounts with U.S. financial institutions.
>! Law enforcement agents have determined the organization often uses third party checks drawn on other
business accounts. The technique includes the purchase of the third party checks by the criminal
organization, which are used to purchase cashiers checks from area banks. The use of this technique
further complicates the audit trail in identifying the original source of the funds.
* The use of checks drawn on respective accounts was the most prominent method used to send money to
an African Peninsula Country. It is believed wire transfers were also used as an adaptation resulting from
check seizures made by law enforcement during the course of the investigation. Cashiers checks were also
used as part of the scheme to reconcile accounts between the criminal organization located in the U.S. and
the [VTS operator located in the African Peninsula Country.
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Case 5
Providing Remittance Services to an OFAC Blocked Country
a AUS. based IVTS organization advertised its services through several different
cultural newspapers and the World Wide Web. Those advertisements indicated the
company could send money to an OFAC blocked country located in the vicinity of
the Arabian Gulf.
a {norder to send money through the company the customer would make contact with
the IVTS operator and would provide their name and the name and account number
- of the beneficiary located in the OFAC blocked country.
OG There was no commission for the transaction but profit was realized through the
exchange rate. The IVTS operator also provided services to known drug traffickers
in which a 5% flat fee was charged for moving money derived from criminal
activity. The operator was fully aware the money being transferred originated from
drug trafficking,
Q The operator would then fax instructions to an [VTS operator in the OFAC blocked
country in addition to another [VTS operator located in another Arabian Gulf
country.
a The IVTS operator located in the OFAC blocked country would provide funds to
the beneficiary upon confirmation of the instructions sent by the U.S. IVTS
operator.
a Once the U.S. IVTS operator received funds from customers in the U.S. in the form
of cash, money orders, and third party checks, the operator would deposit the funds
into his account and periodically wire transfer funds to a U.S. based account owned
by the IVTS operator operating in the Arabian Gulf country.
I
34Page 36 Case5:11-cv-05496-HRL Document27 Filed02/29/12 Page36 of 48
XT.
The Arabian Gulf [VTS operator would then wire transfer the funds from his U.S.
account to another account located in an Arabian Gulf country.
The money in that account was reconciled with another account located in the
OFAC blocked country.
The U.S. IVTS operator also converted cash into money orders by structuring the
purchases of the instruments to circumvent federal identification and recording
requirements,
The U.S. IVTS operator conducted several cash deposits in a manner to possibly
circumvent federal recording requirements. The [VTS operator also structured
cash to purchase money orders in violation of federal identification and recording
requirements.
* Information primarily derived from SAR analysis. +
35Page 37 Case5:11-cv-05496-HRL Document27 Filed02/29/12 Page37 of 48
Case 6
Remittance of Bulk Cash Proceeds Derived From Heroin Trafficking
Q Law enforcement agencies of a European country identified a number of storefront
companies being used by heroin suspects to launder illicit funds. The storefront
companies allegedly provided transfer services to [VTS operators but actually
served as placement centers to transfer drug proceeds.
a The companies used the services of an exchange company located in an Arabian
Gulf country as the means to send proceeds from Europe to other criminal elements
located in a Southwest Asian country.
a Bulk cash was collected from drug sales at three storefront operations.
a Cash was then deposited into business accounts and remitted to the exchange’s
account maintained by a U.S. owned bank.
G Funds were then remitted through the exchange to numerous beneficiaries located
in other Southwest Asian countries and elsewhere around the world,
a USS. financial institutions filed numerous SARs on the exchange company and on
subjects and businesses in the U.S. who received or remitted funds from or to the
exchange company.”
Case 7
East African Money Remitters Located in the United States®>
GQ Law enforcement identified a business located in the U.S. that remits funds on
behalf of East African nationals.
a The business is an unlicensed money transmitter and is not registered with the
federal government. .
Q SARs indicate continuous structuring of deposits (mostly cash, but sometimes
checks and money orders), through the use of multiple individuals into multiple
businesses or personal accounts at multiple banks and branches focated in multiple
states,
Qa Suspects made attempts to circumvent CTR requirements.
4 Accounts of suspects with low-income occupations exhibited unusual flows,
volumes of funds.
GQ Same addresses sometimes being used by multiple suspects.
Q Wire transfers were initiated shortly after deposits were completed funds were then
transferred to accounts maintained at banks located in an Arabian Gulf state.
GO Limited knowledge/traceability on the final disbursement of funds once credited to
Arabian Gulf banks (black hole syndrome).
™ Several cases have been initialed by U.S. law enforcement on a number of U.S, based subjects belieVed
to have done business with the exchange company.
* Information primarily derived from SAR analysis.
36Page 38 Case5:11-cv-05496-HRL Document27 Filed02/29/12 Page38 of 48
Case 8
Providing Remittance Services to an OFAC Blocked ‘Country
Oo
Q
A law enforcement investigation identified six unlicensed money remitters.
Investigative efforts identified several of the remitters as possibly remitting funds
on behalf of known criminal elements.
Investigations are pending to determine if any of the companies violated federal law.
by remitting funds to OFAC blocked countries, *6
Extensive ledgers were maintained by the entities detailing wire transfer activity.
The companies guaranteed money transmission to the OFAC blocked country
within 1-4 days.
The only beneficiary information required to complete a transaction from the
companies was the name and bank account number of the recipient oversees. Select
businesses also provided hand delivery of funds to beneficiaries for an additional
charge.
36 A full financial anilysis of the bank records associated with the case is still pending. However, many of
the advertisements posted by the suspect companies indicated they provided transfer services from the U.S.
to an OFAC blocked country loeated in the Arabian Gulf. y
’
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Case 9
United States vy. Mohamed M. Hussein, et al.
Q A law enforcement investigation identified an illegal remitter in Boston, MA, that
provided foreign transmittal services. The business operated without a license in
violation of MA State law.
Q On August 7, 2000, the president of the company filed an application with the
commonwealth of MA, Division of Bank and Loan Agencies, in order to obtain a
license to engage in the business of receiving deposits of money for transmission to
foreign countries.
Q The application identified another business located in an Arabian Gulf country as an
affiliate of the company. The application also included a number of receipts
indicating the. business had already remitted funds internationally, In response, the
Division of Banks sent a letter to the business advising the company of their
obligation to obtain a state license, not to continue to engage in illegal wire
transmission activities, and the penalties if the activity continued. Two subsequent
letters were also sent to agents of the company with little or no response.
a Agents of the company engaged in the deposit of cash and checks originating from
several subjects located in MA and other states.
G@ Once deposits were credited to the businesses account, the funds were then wired to
an Arabian Gulf country in which the wired funds were made available to the
designated recipient.
Q Agents would typically initiate wire transfers telephonically through an automated
wire transfer procedure that did not require the agent to speak to a bank employee.
Nearly $3,000,000 was wired oversees through the illegal wire transmitter.
Q Checks were also written from the remitter account for recipients receiving money
from oversees senders residing in the United States.
Q On July 22, 2002, Mohamed HUSSEIN, an agent of the business, was sentenced to
one and half years in prison and two years of supervised release for operating an
illegal money transmitting operation without a state license. Another subject, Liban
HUSSEIN, president of the company, has also been charged in the case.
Case 10
Charitable Organization With Possible Links to a Designated Terrorist
Organization Remitting Funds Abroad”!
O Law enforcement investigations identified possible links between the owners of a
U.S. based charitable foundation and a designated terrorist organization.
a Acentral account was used by agents of the company to deposit cash. Several
SARs were filed by financial institutions on the suspect nature of the transactions.
Q International wire transactions were then initiated from the account in which funds
were sent to Russia and two former Soviet Republic States.
a Wire transfers were also credited to the U.S, company account from unknown
transactors through a European Bank.
’
* Information primarily derived from SAR analysis. i
’ )
38Page 40 Case5:11-cv-05496-HRL Document27 Filed02/29/12. Page4o of 48
a The U.S, company also wire-transferred funds to another U.S. based business
engaged in similar business activities (charity). All of these transactions are suspect
based on the volume and patterns of activity affecting the company’s account vis-a-
vis the types of services the company was providing.
a Wire transfers from the company were credited to a similar type of U.S. based
company. That company also is suspected of having an association with a
designated terrorist organization.
Case |]
IVTS Activities Conducted on Behalf of Known Criminal Elements
a Law enforcement identified an extensive [VTS network that provided remittance
services and laundered drug proceeds on behalf of a Middle Eastern drug trafficking
organization.
a USS. financial institutions identified both deposit and transfer activity conducted by
agents of the IVTS organization and subsequently filed SARs on the large cash
deposits conducted by numerous transactors.
u The network sent money throughout the world through the use of wire transfer
payments,
Case 12
Use of Money Orders to Facilitate [VTS Activities
a Law enforcement officials initiated an investigation based on SAR referrals that
identified the negotiation of bulk money orders through a bank located in a Middle
Eastern country.
Q The money orders appeared to have been purchased at various money order vendors
located in the U.S.
oO Money orders were then negotiated through a bank located in a Middle Eastern
country and ultimately cleared through a U.S. correspondent account.
a It is unknown how the money orders were transported to the Middle East but it is
assumed that they were smuggled based on the large volume negotiated.
a There are indications of ethnic crossovers in facilitating money transfers.
Case 13
Use of Money Orders to Facilitate Black Market Peso Exchange (BMPE)
a Law enforcement identified a BMPE case in which money orders were heavily used
to convert drug proceeds to negotiable instruments.
Q The organization in the U.S. worked under the direction of a money broker located
in a Central American country. It is believed the money broker would provide
instructions to his agents in the U.S. regarding the pick-up of bulk cash derived
from narcotics trafficking.
8 Information primarily derived from SAR analysis. '
39Page 41 Case5:11-cv-05496-HRL Document27 Filed02/29/12 Page41 of 48
Q Once the cash was picked up, subjects within the organization would immediately
convert the cash to money orders. The money orders were purchased from area
vendors in a manner to circumvent federal reporting and recording requirements.
a Agents of the company also structured cash into bank accounts.
O Once drug proceeds were converted, the Central American broker provided his U.S.
agents with coded instructions on the distribution of the funds. Much of the funds
were distributed via commercial mail carriers to various U.S, companies on behalf
of customers doing business with the Central American broker,
a Some of the funds were also mailed via commercial carrier or smuggled via courier
to the Centra! American broker where they were further negotiated by third parties.
Case 14
Use of Black Market Brokers, Bank Accounts, and Sheil Companies
United States of America v. Maria Carolina NOLASCO, et al.
go A recent law enforcement investigation identified a bank official working in the
private banking department of an institution in the Northeast U.S. facilitated the
transfer of hundreds of millions of dollars in less than a year by using the facilities
of the U.S. bank. The money transfer operations required a license under State law
and federal registration, neither of which had taken place. The transfers were
between the U.S. and a South American country.
Q Money brokers sent the bank official instructions by fax for transfers to be
conducted through dozens of accounts [the official controlled more than 250
accounts].
a The bank official also controlled accounts of more than 40 shell companies,
a Wire transfers out of these accounts were payments for goods bought by other
companies, which had purchased the dollars through the black market.
@ The bank official used the bank's wire facilities to make the transfers [instructions
given to the wire facility also by fax from the bank employee].
oO ‘The money transferred appears to be the proceeds of illegal drug trafficking.
Case 15
Cigarette Smuggling in Support of Terrorist Organizations
United States of America v. Mohamad Youssef Hammoud, et al.
a Law enforcement efforts identified a U.S. cell of a known Middle Eastern terrorist
group that engaged in cigarette smuggling.
Q Subjects from the U.S. based cell acquired numerous credit cards to purchase
cigarettes in bulk from various cigarette wholesalers.
a ‘Once purchased the cigarettes were transported to another state within the U.S. with
a significantly higher excise tax than the state where the cigarettes were purchased.
a The cigarettes were sold for profit to a central contact.
a A senior member of the U.S. based cell often communicated with members of a
similar cell operating in another North American country. That cell was identified
4 }
*? The purchase of U.S. dollars by Central American businessmen who wished to get a better exchange rate
of pesos to dollars. ’ '
40Page 42 Case5:11-cv-05496-HRL Document27 Filed02/29/12 Page42 of 48
by law enforcement as acquiring equipment (with possible military applications) on
behalf of a known Middle Eastern terrorist organization.
a Asenior member of the U.S. based cell at least on one occasion transferred funds to
a member of the other terrorist cell located in another North American country.
Case 16
Use of Phone Cards to Transfer Value
oO Law enforcement efforts identified a criminal organization that used pre-paid phone
cards to front money for a drug transaction."” The phone cards were also used to
circumvent CMIR requirements.”
Case5:11-cv-05496-HRL Document27 Filed02/29/12 Pagel of 48
oo, EXHIBIT C
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Case5:11-cv-05496-HRL Document27 Filed02/29/12 Page2 of 48
A Report to the Congress
in Accordance with Section 359
of the
Uniting and Strengthening America by Providing:
Appropriate Tools Required to Intercept and Obstruct
Terrorism Act of 2001
(USA PATRIOT ACT)
Submitted by the Secretary of the U.S. Department of the Treasury
November 2002
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TABLE OF CONTENTS
I. Executive SUMMALY.....c.cceseeveeee sevaueesensevutrucrdenenceonareanesens o
IH. Research Methodology...ccsssssssesevessseens Leen eeeaeneeesseseersenasess 4
If, Background on Informal Value Transfer Systems.......ccccecssees 5
IV. Existing Regulations for Informal Value Transfer Systems....... 6
VY. Law Enforcement Challenges........... seeneeesensensenasenen nen ansens 10
VI. Counter Measure Strategies..rccccceccccccccceeesnereresersccseerseneee ld
VIL Recommendations.,...ccccccccsccescssecvecenens eneenenenes ereavesetsowdd
VITL. Appendices.......cccesccsscccsecesesecceeeenveaeeaees beeneaccanancenecuse 18
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I. Executive Summary
On October 26, 2001, the President of the United States si gned into law the
Uniting and Strengthening America by Providing Appropriate Tools Required to
Intercept and Obstruct Terrorism (USA PATRIOT Act) Act of 2001, Public Law
107-56. Section 359 of the USA PATRIOT Act requires:
Section 359 — Reporting of Suspicious Activities by Underground Banking Systems
(d) REPORT — Not later than i’ year after the date of enactment of this
Act, the Secretary of the Treasury shail report to Congress on the need for
any additional legislation relating to persons who engage as a business in
an informal money transfer system or any network of people who engage
as a business in facilitating the transfer of money domestically or
internationally outside of the conventional financial institutions system,
counter money laundering and regulatory controls relating to underground
money movement and banking systems, including whether the threshold
for the filing of suspicious activity reports under section 5318(g) of title
31, United States Code, should be lowered in the case of such systems.
The Secretary of the Treasury submits this report in accordance with the above
requirement. Based on fieldwork and analysis of data gathered to date, the following
preliminary findings are presented:
¢ Existing Bank Secrecy Act (BSA) regulations are applicable to the U.S,-based
operators of informal value transfer systems.
* Current research does not suggest an immediate need for additional legislation,
nor does it suggest a need to change the threshold for the filing of Suspicious
Activity Reports.
¢ The adequacy of the existing BSA rules shotild be reexamined over the course of
Treasury’s multi-year effort to enhance regulatory compliance among the
operators of informal value transfer systems. .
« The law enforcement and regulatory communities should undertake a-
comprehensive program to enhance their knowledge concerning the range of
mechanisms used in informa! value transfer systems in order to better understand
them and to determine whether they think that any additional legislation is
needed.
The BSA, the primary anti-money laundering statute in the United States,
includes provisions that apply to informal value transfer systems. Under the BSA, any
person or group of persons who transfers money as a business is defined as a Money
Services Business (MSB). These entities are defined as MSBs whether or not they
transfer mohey on a regular basis, and whether or not they are an organized business
concern.
‘ '
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The MSB class of financial institutions includes conventional entities with giobal
reach such as Western Union and Thomas Cook, It also includes the types of informal or
unconventional entities operating outside of the mainstream financial system, such as
hawala, hundi, fei ch’ien, hoe kuan, hui k’aun, and many others. Historically, these
informal entities have been labeled by various terms including “alternative remittance
systems,” “underground banks,” and “informal value transfer systems.”
Pursuant to the current MSB regulations, these businesses must register with the
Financial Crimes Enforcement Network, conduct customer identification procedures for
certain transactions, and maintain financial records, They are also required to file
Currency Transaction Reports (CTRs) and Suspicious Activity Reports (SARs).
There are many uncertainties and compiex issues associated with this segment of
the financial industry. Treasury will therefore work closely with law enforcement,
regulators, and the financial community to gain a fuller understanding of these informal
networks and how they interact with the more formal financial industry. As Treasury
continues to study and to address these issues, it will remain open to considering new
- legislation to reduce the vulnerability of MSBs in general, and informal value transfer
systems in particular, to money laundering and terrorist financing. The attached
appendices provide a more in-depth analysis of the data that has been gathered relating to
informal value transfer systems.
Il. Research Methodology
The Financial Crimes Enforcement Network (FinCEN) was directed to carry out
this study and staff! framed their research in the context of the following interrelated
issues:
¢ The unique law enforcement and regulatory challenges associated with informal,
unconventional, or underground money transfer mechanisms.
* The scope and application of the existing regulatory scheme with regard to
businesses that facilitate the transfer of money domestically or internationally (to
include persons who engage as a business in an informal money transfer system
or any network of people who engage as a business in facilitating the transfer of
money).
¢ The effectiveness of the existing money transmitter regulatory scheme with
respect to these informal systems (to gauge the technical adequacy of the
regulations, as well industry compliance),
' FinCEN staff conducted interviews with federal, state, local, and foreign law enforcement personnel, and
with representatives from the Federal Reserve Board, the Federal Reserve Bank of New York, the
Tnternational Monetary Fund (IMF), and the World Bank. FinCEN staff also interviewed several providers
of informal money transfer services, consulted with an academic expert in the field, and mined data
collected pursuant to the BSA. +
5
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TH. Background on Informal Value Transfer Systems
Informal Value Transfer Systems (IVTS) is a term used to describe those money or
value transfer systems that operate informally to transfer money as a business. In the past,
some of these informal networks have been labeled by various terms including “alternative
remittance systems” and “underground banks.” Within the broad realm of informal
institutions there exist more detailed descriptors for specific value transfer mechanisms,
such as hawala, hundi, fei ch’ien, hoe kuan, hui k’aun, and many others. For the purpose of
consistency and inclusiveness, VTS is the primary term of art used in this report. (See
Appendix A for examples of [VTS mechanisins.)
U.S. citizens and persons residing in this country from nations in which the use of
IVTS is commonplace use the system for various reasons. In countries lacking a stable
financial sector or containing substantial areas not served by formal financial institutions,
IVTS may be the only method for conducting financial transactions. For example,
foreign aid money going to Afghanistan. is being disbursed through IVTS due to a lack of
a banking infrastructure. Individuals and organizations often use [VTS due to the
existence of inadequate payments systems, to avoid foreign exchange or capital controls,
and.when the formal financial sector is not readily accessible, significantly more
expensive, or more difficult to navigate.
The international flows of VTS are most likely staggering, but quantification
with any certainty is currently impossible. An IMF/World Bank estimate that is likely on
the conservative side and only covers select countries puts annual worldwide IVTS
transfers at tens of billions of dollars,
In order to better understand this issue, FinCEN looked closely at the workings of
the hawala system, a widely used form of 1VTS. Hawala means “transfer” in Arabic and
the system works by transferring money without actually moving it. The basic hawala
transaction involves a sender, two trusted intermediaries, and a recipient. For example, a
U.S. resident who wants to send money to a friend in another jurisdiction (Country B)
would give it to a U.S. hawaladar,’ who typicaily gives the sender a code or identification
mechanism. The U.S. hawaladar then contacts a local hawaladar in Country B by
telephone, fax, or e-mail, and the sender contacts the intended recipient to convey the code.
The loca] hawaladar in Country B then delivers the specified funds to the recipient upon
presentation of the code. The hawaladar charges a flat fee, a commission, or may
alternatively or in addition, profit from the exchange rate differential between the official
and black market price of U.S. dollars in Country B. The accounts between the two
operators may be settled various ways including through compensatory payments (i.e.,
when someone from Country B sends money to the U.S.), conventional wire transfers or
checks, physical movement of money (by courier), invoice manipulation or other trade-
based mechanisms, and the trade/smuggling of gold and precious gems. (See Appendix B
for illustrations of these techniques.) ,
t
* ‘The term hawatadar refers to a hawala dealer or provider of hawala meney transfer services.
5 ’
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Even this brief description highlights some of the key similarities and differences
between IVTS and formal value transfer mechanisms. While the primary transfer
between the sender and the recipient contains some unconventional elements (by U.S.
standards), the far greater differences occur on the back end, or settlement side of IVTS.
While it appears that the majority of [VTS activity is legitimate in purpose,’ these
systems have been used to facilitate the financing of terrorism and in furtherance of
criminal activities. For this reason, many governments have begun to look at this issue in
terms of the need for regulatory and legal controls and in terms of their ability to conduct
successful financial investigations in cases where IVTS has been used.
In order to make a judgment about whether the U.S. may need additional
legislation at this time to address informal value transfer systems, it is first necessary to
understand the present legal and regulatory regime. FinCEN’s analysis focused on the
relevance of existing regulations in the context of [VTS and whether these are adequate
to deal with the unique challenges presented by IVTS.
IV. Existing Regulations for Informal Value Transfer Systems,
Including Suspicious Activity Reporting
The BSA? authorizes the Secretary of the Treasury to impose on financial
institutions a variety of recordkeeping and reporting requirements that are deemed useful
to criminal, tax, and regulatory enforcement, and in the conduct of intelligence and
counter-intelligence activities relating to international terrorism.
FinCEN administers the BSA on behalf of Treasury and has adopted a broad
interpretation of the regulations with regard to their application to money transmitters. In
1999, FinCEN amended the regulatory definition of a money transmitter to include “any
person, whether or not licensed or required to be licensed, who engages as a business in
accepting currency, or funds denominated in currency, and transmits the currency or
funds, or the value of the currency or funds, by any means through a financial agency or
institution, a Federal Reserve Bank or other facility of one or more Federal Reserve
Banks, the Board of Governors of the Federal Reserve System, or both, or an electronic
funds network” or “any other person engaged as a business in the transfer of funds.”*
Section 359(a) of the Patriot Act amended the definition of money transmitter to
encompass “any person who engages as a business in an informal money transfer system
or any network of people who engage as a business in facilitating the transfer of money
domestically or internationally outside of the conventional financial institution system.”
These amendments make clear that under U.S. law all money transfer remitters, including
3 1VTS traditionally serves the purpose of remitting funds of expatriate communities to their home
t .
countries.
‘See 31 U.S.C. 5311 et seq.
> See 31 CFR 103.1 H{uu)(5). a
’
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Case5:11-cv-05496-HRL Document27 Filed02/29/12 Page8 of .48
those that operate on an informal basis, or outside the scope of the conventional financial
sector, are subject to the BSA,
Money transmitters, as currently understood, are one of a number of non-bank
financial institutions that, for purposes of the BSA, are grouped within the category
called MSBs. This category of institutions also includes check cashers, currency
exchangers, and issuers, sellers, and redeemers of traveler’s checks, money orders, and
stored value.
As of December 31, 2001, all MSB principals (except the U.S, Postal Service,
federal, state, or local governmental units, and issuers and sellers of stored value) were
required to register with FinCEN. The registration form requires that the MSB provide
not only contact information, but also identify its owner or controlling person, provide a
governmentally-issued identification number for that person, and identify the company’s
primary transaction account. These registration records are provided online to FinCEN’s
Gateway’ partners for use in their investigations.
Although agents of MSBs are not independently required to register, FinCEN’s
regulations require all MSB principals to maintain a list of their agents and to make the
list available on request to FinCEN or any other appropriate law enforcement agency.
The agent list must include, in addition to identifying information (name, address,
telephone number), a listing of the months in which the agent's gross transactions for the
previous year exceeded $100,000, the name and address of any depository institution at
which the agent maintains a transaction account, and the number of branches or ‘
subagents the agent has.
Any MSB that fails to register with FinCEN, or files false or incomplete
information in the registration statement, is subject to civil penalties of $5,000 per day
while the violation continues. In addition, under 18 U.S.C. 1960, any person who
knowingly engages in a money transmitting business, and has failed to register and/or
comply with FinCEN’s registration regulations, may be subject to up to five years’
imprisonment.
All MSBs, including those that could be characterized as IVTS, must obtain and
verify customer identity and record beneficiary information for funds transfers of more
than $3,000." There are also separate recordkeeping requirements applicable to the sale
of MSB products, such as traveler’s checks and money orders, as well as to currency
exchange transactions.!” These records must be maintained for five years.'' In addition,
® The definition of every category of MSB other than a money transmitter has a threshold requirement
that the business engage in a transaction within the category (currency exchange, check cashing, etc.) in the
amount of $1,000 for any one customer in one day. There is no threshold requirement for money
transmitters.
? FinCEN’s Gateway system enables federal, state, and local law enforcement agencies to have direct,
ontine access to records filed under the BSA. See 2002 National Money Laundering Strategy, at 53.
8 See 31 CFR 103.41. ’
> See 31 CFR 103.33(f.
9 See 31 CFR 103.29, 103.37, ,
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transactions in currency of more than $10,000 are subject to detailed recordkeeping
requirements to support the filing of CTRs.”
MSBs aré also subject to the SAR rule. As is the case with all MSBs, VTS
operators are required to file with FinCEN a SAR with respect to any transaction over
$2,000 that it knows, suspects, or has reason to suspect involves funds from illegal
activity or is designed to conceal their origin, is designed to evade BSA obligations, or
has no apparent business or law purpose.!
In addition to routine recordkeeping and reporting, FinCEN’s regulations also
authorize the imposition of further reporting requirements where needed to carry out the
purposes of the BSA regulations or to prevent the evasion of the BSA’s recordkeeping
and reporting requirements,!" Such additional requirements are imposed by means of
what is known as a geographic targeting order (GTO)" and may be applied to any
domestic financial institution or group of domestic financial institutions ina geographic
area, as well as persons participating in transactions subject to the order.
A GTO can be as detailed as requiring reporting of all transactions in currency
and/or monetary instruments, or of classes of transactions, equal to or exceeding an
amount specified in the GTO. Among other things, this regulation permits Treasury to
require reporting at a much lower threshold than otherwise required by its rules. For
example, GTOs have been successfully applied against money transmitters in two
metropolitan areas that were heavily used by drug traffickers, The GTOs required
records to be maintained and reports filed of all transactions over $750. The GTOs
resulted in the gathering of useful information for law enforcement and several successful
money laundering and structuring prosecutions.
Persons willfully violating any BSA reporting or recordkeeping requirement are
subject to civil and criminal penalties and imprisonment under 31 U.S.C, 5321-22,
Willful violations of any requirement imposed under a GTO are similarly subject to civil
and criminal sanctions,
As noted above, Section 1960 of Title 18 makes it a crime to operate an MSB in
the absence of compliance with FinCEN’s registration requirements. It also makes it a
crime to operate an MSB in the absence of compliance with applicable state licensing
'' See 31 CFR 103.38.
2 See 31 CFR 103.28. In addition, any person who physically transports or causes the transport-of over
$10,000 in currency or monetary instruments into or out of the United States must file a Report of
International Transportation of Currency or Monetary Instruments (CMIR) with FinCEN, See 31 CFR
* $03.23. .
'? See 31 CFR 103.20. FinCEN has published a notice of proposed rulemaking to add a fourth category to
the MSB SAR rule for transactions that involve use of the MSB to facilitate criminal activity. See 67 FR
64075 (October 17, 2002). Issuers of traveler’s checks and money orders (as opposed to sellers or
redeemers), are subject to SAR requirement at a $5,000 threshold.
4 See 31 CFR 103.26. °
'S Issued under the BSA, a GTO is used fo impose stricter reporting and recordkeeping requirements on
specified financial service providers in a certain geographical area for a timited time period, )
'
b
8
Case5:11-cv-05496-HRL Document27 Filed02/29/12 Page11 of 48
Finally, 18 U.S.C. 2 prohibits anyone from aiding and abetting an offense against
the United States. This statute would apply, for example, to an [VTS operator that
knowingly offered material assistance to anyone committing a federal crime.'®
V. Law Enforcement Challenges
To determine whether additional legislation or regulation is needed to deal with the
risks posed by IVTS, FinCEN’s study reviewed the challenges IVTS poses to law
enforcement in conducting financial investigations. Although law enforcement has not yet
had a great deal of exposure to [VTS, the experience to date demonstrates that the problems
do not arise from the lack of pertinent statutory or regulatory tools. Rather, the challenges
to effective law enforcement in this area stem from the need for stepped up compliance,
education, and cooperation. These challenges are discussed below.
As authorities have been intensifying their efforts to block terrorists from obtaining
funds in the United States and elsewhere, more focused attention has been devoted to
hawaia and other LVTS. In several countries, hawala has operated in parailel with formal
financial institutions or as a substitute or alternative for them. [VTS-type networks are
used by persons in the U.S. to send money or gifts to their friends and relatives residing in
Asian, African, and Middle Eastern countries.
While it appears that most clients of [VTS legitimately earn their money and try to
assist their extended families, criminals have also used these networks to launder dirty
money, make illicit payments, and commit other offenses, such as tax evasion and customs
violations. Dealing with illegal hawala providers and their networks represents a serious
challenge to U.S. law enforcement agencies for many reasons. Of particular concern is the
need for increased expertise in understanding the complexities of [VTS.
Certain common characteristics may often create extensive obstacles for law
enforcement. These include: (1) non-standardized or non-existent recordkeeping and
know-your-customer type of practices; (2) frequent commingling of hawala with other
business activities, including commodity trading or smuggling, when transactions pass
through jurisdictions with porous borders or cash-based economies; (3) language and
cultural barriers; and (4) inconsistent laws and regulations at the international and domestic
levels.
Recordkeeping Practices
Hawala ledgers are often insubstantial and in idiosyncratic shorthand. Initials or
numbers that are meaningful to the hawaladar are useless if they reveal nothing about
transactions, amounts, time, and names of people or organizations, Personal ledgers are
often destroyed within a short period of time, especially in countries where Hawala is
criminalized.
J
'S See U.S. v. Levy, 969 F.2d 136 (S” Cir. 1992) (upholding conviction for aiding and abetting failure to
report currency transactions), ,
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In some cases, particularly when hawaladars know that their clients are breaking the
law, no notes or records are kept at all. In other cases, hawaladars may serve customers
without asking many questions about their true identity, the origin of their money, or the
reason for the transfer. In such cases, even if providers decided to cooperate with
authorities, they would have no knowledge or useful information to share. Without records
or some documentary basis, there is virtually no paper trail and very little that investigators
can pursue, thus leaving them at a dead end in their efforts to build a case.
On the other hand, investigators sometimes end up finding masses of records,
ledgers, or notes kept by [VTS providers. However, they may be maintained in ways that
are hard to decipher without the cooperation of those who created the records. Sometimes
the notes are kept in foreign languages or in initials and codes.
In other instances, the transaction may involve third party accounts of individuals or
companies within the same country or a number of other countries, Nominee accounts,
sometimes referred to as “Benami,””” effectively stop the money trail, as evident from
investigations of banking, financial, and trade-related misconduct,
In the end, much of the paper trail might surface, but it becomes a difficult task to
interpret and reconstruct it accurately. The task of putting everything together for.a case
becomes time consuming and complicated, and may require the cooperation of hawala
providers or controllers in other jurisdictions, thus requiring significant resources.
As noted in the previous section, [VTS operators are money transmitters under the
BSA, and FinCEN’s recordkeeping rules are applicable to them. Achieving better
compliance does not call for additional legislation or regulation, but for increased outreach,
education, and enforcement,
Mixing of Businesses
Another challenge for law enforcement is proving criminal offenses and intent
when commingling of funds takes place. For example, businesses operating with
substantial amounts of cash or involving high turnover make it very easy to hide illegal
hawala deals by creating, for instance, “black holes” domestically and overseas, These
black holes are formed by withdrawing cash pooled by [VTS providers, depositing it in
different accounts at various intervals, and at various financial institutions (banks,
brokerages, and others), and/or using the funds to purchase commodities that then can be
traded in the U.S. or internationally. It is virtually impossible to match cash withdrawals
with other deposits and trade transactions when the amounts are comparatively small.
In other cases, hawala businesses interface with financial institutions (¢.g., they may
have bank or brokerage accounts, currency exchangers, offer telephone and fax services,
send wires, engage in real estate deals). A currency exchanger in a given country could
«“Ponami” or nominee accounts are culturally decepted in ethnic groups that also engage in hawala.
Because the true beneficiary of a transaction is not the person under whose name the transaction takes
place, it is very hard to identify the owners of criminal proceeds and people who engage in illegal activities.
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send and receive wire transfers for a hawala customer via one or two foreign banks, When
the funds are booked into certain types of correspondent accounts at U.S.-based banks (i.¢.,
those that are not payable-through accounts), the trail becomes blurred as the funds move
from an institutional account not identified with any individual before finally being
transmitted to the ultimate intended recipient. However, this issue is not unique to [VTS,
but is a function of the realities of correspondent banking.”?
Again, these are not issues that require additional legislation or regulation. Rather,
addressing these issues requires education and cooperation among regulators, law |
enforcement, and the financial community, Therefore, it is important for the law
enforcement and regulatory communities to educate financial institutions about the
typologies associated with VTS. It is necessary that bank officials, credit card companies,
brokerages, money exchanges, transmitters, and others be made familiar with illicit IVTS
patterns, recognize them, and report them as suspicious.
Language and Cultural Barriers
U.S. law enforcement often is faced with language and cultural barriers when trying”
to communicate with suspects, identify suspicious transactions, interpret evidence, and
conduct undercover operations. For instance, when hawaia ledgers are found, it may be
impossible for law enforcement to understand their contents and underlying transactions.
Therefore, the cooperation of IVTS providers is often essential in deciphering these records
{as in cases of accounting fraud or records of drug traffickers). However, such cooperation
may not always be forthcoming, if ethnic, cultural, or other sensitivities are misunderstood
or ignored by law enforcement.
On the other hand, too much focus on particular ethnic groups or cultural practices
may divert attention from any potential intersection or collaboration across ethnic lines.
For example, there have been cases in which persons of one ethnic background have used
systems prevalent in another culture or cultures. Outreach efforts by law enforcement into
the affected communities can enhance the efforts to obtain their cooperation and improve
our understanding of how [VTS is used and abused.
Inconsistency in Laws and Regulations
Differences in laws and regulations internationally also pose a major challenge to
law enforcement. (See Appendix D for a description of international regulatory
approaches). When hawala operates through jurisdictions with strict secrecy regulations,
the investigative task is further complicated and cooperation is lessened. Bank secrecy,
corporate secrecy, and attorney-client privilege make the investigator's task difficult.
Sometimes, a vicious circle prevents law enforcement agents from completing their task.
In order to obtain information from such jurisdictions, evidence of wrongdoing is
Pursuant to Section 312 of the USA Patriot Act, regulations have been proposed that would require
U.S. financial institutions offering corfespondent accounts to perform due diligence and, in appropriate
circumstances, enhanced due diligence on their correspondents. See 67 FR 37,736 (May 30, 2002) and 67
FR 48,348 (July 23, 2002). ’
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required; however, access to information in those jurisdictions is critical in obtaining that
evidence in the first place. Addressing these challenges requires multilateral, rather than
unilateral, action, as discussed below.
VI. Examples of Counter-Measures Being Developed
As noted above, the challenges faced by law enforcement in confronting [VTS do
not currently appear to require a legislative solution, but appear amenable to counter-
measures by the regulatory and law enforcement communities that involve compliance
efforts, education, and outreach, and increased cooperation between and among
government and the financial sector. In this section, we discuss some examples of the more
promising strategies that are being developed to enable law enforcement to deal with
financial investigations involving IVTS. The lesson from these examples is that the
existing legislative framework offers appropriate tools and opportunities to effectuate law
enforcement counter-measures aimed at the abuse of IVTS. ~
During its research for this report, FinCEN had an opportunity to observe several
developing counter-measure strategies being applied in different regions through the United
States. These strategies are directed toward:
Q enhancing the transparency of [VTS operations;
a bringing the TVTS providers into the BSA regulatory structure;
a obtaining cooperation in interpreting relevant records and further understanding
of IVTS mechanisms and customer activity;
a revealing trends and patterns of typical versus atypical suspect transactions;
Q revealing ancillary or mixed business associations;
Q disrupting and prosecuting immediate threats, while sending a message to other
IVTS entities to comply with regulatory requirements;
Q disrupting and turning over couriers associated with IVTS; and
Q working with the financial sector to better monitor and detect suspicious IVTS
activities. Examples of some of these strategies are discussed below,
Visits to California, New York, and Puerto Rico by representatives from FinCEN
revealed successful outreach strategies being pursued in several regions by both law
enforcement and regulatory authorities, which are aimed at the [VTS sector. These
strategies are designed to enhance cooperation with [VTS providers in interpreting their
records, and to learning about their operations, mechanisms, and customer transaction
profiles. There has been substantial support for such outreach strategies among multiple
agency representatives from many different regions of the country.
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Law enforcement also is engaged in the extensive review of SARs filed on [VTS-
related activity. Currently, the New York High Intensity Money Laundering and Reiated
Financial Crime Area (HIFCA) has developed a SAR review strategy that encompasses an
extensive review of SARs followed by categorizing the suspicious activity, Each level of
that review involves correlated searches with other types of suspicious activity with other
law enforcement sources of information, Following this analytical process, records are
created in various law enforcement indices and then further examined for possible
investigative development at regular multi-agency and multi-district SAR meetings. These
meetings also included the participation of regulatory agencies and prosecutors.
Federal officials interviewed in another region of the country have applied
existing regulatory provisions to derive an innovative triad approach for potential
prosecutions of CMIR and bulk smuggling violations 31 U.S.C. Sections 5316 and 5332,
respectively). This approach emphasizes the importance of law enforcement authorities
being able to apply currency smuggling related statutes to investigations that might:
involve couriers linked to |VTS operations. Ifa courier associated with an IVTS-type
business is detected at the border with more than $10,000 and an apparent intent to
conceal the money, both CMIR violation charges and bulk cash smuggling charges may
be applied, Ifthe suspect declares that the funds are not his/her own but rather he/she is
moving them on behalf of someone else, the suspect can be subject to Section 1960
charges for operating as an unlicensed money transmitter. In addition, if the courier is
‘working for a particular business (i.¢,, a suspected [VTS operation), then CMIR, bulk-
cash smuggling, and, potentially, Section 1960 charges may be filed against the source
business and its owners.
Law enforcement is also making a concerted effort to work more closely with the
larger financial community to assist banks and other depository institutions in becoming
more familiar with transactions that may indicate suspicious [VTS activity. .FinCEN
believes this type of outreach to the financial community is critical in view of the extensive
interface between [VTS and formal banking services. The cases included in this report (see
Appendix C) illustrate that SARs play a significant role.
An example of a state-initiated strategy is the current program being developed by
the New York State Attorney General's Office, in conjunction with a multi-agency task
force, to identify regionally based [VTS operations, particularly in the terrorist financing
context,
The goals of this program include:
identifying, within the region, unlicensed money transmitters operating hawala-
type businesses and feeding the information into a central database for further
tracking and review for both law enforcement and intelligence purposes;
Q determining methods of operation and identifying any associated (“second tier”)
businesses;
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Q prosecuting individuals violating state law and, wherever possible (based upon
corroborating information, such as intelligence checks and leads, informants, bank
record reviews) identifying investigative leads to terrorist activities;
a removing and/or disrupting immediate threats and thus sending a message to other
IVTS entities to comply with regulatory requirements; and
a further identifying IVTS activity trends, patterns, operations, records, and
customer transaction profiles. ,
These strategies all rely on the existing legislative and regulatory structure
governing MSBs, They are examples of how the law enforcement and regulatory
communities can carefully tailor existing regulatory tools to cope with the challenges
posed by IVTS.
VH. Recommendations
The U.S, approach of regulating informal value transfer activity is preferable to
outlawing the activity altogether, a course chosen by some nations. Attempting to outlaw
[VTS ultimately deprives law enforcement of potentially valuable information and drives
the informal remittance providers further “underground.” Outlawing the activity also
deprives the mostly law-abiding [VTS customers of the primary channel through which
they transfer funds.
In addition, the U.S. approach to regulation is consistent with emerging
international standards such as the Special Recommendations on Terrorist Financing,
issued in November 2001, by the Financial Action Task Force (FATF) on Money
Laundering. The FATF’s Special Recommendation VI on Alternative Remittance calls
on nations to “take measures to ensure that persons or legal entities, including agents, that
provide a service for the transmission of money or value, including transmission through
an informal value transfer system or network, should be licensed or registered and subject
to all the FATF Recommendations that apply to banks and non-bank financial
institutions.” .
Laren
The U.S. approach is also consistent with the Abu Dhabi Declaration on hawala
issued in May of this year in the United Arab Emirates, following a congress of
government officials from more than 50 nations. The declaration cails on countries to
“adopt the FATF recommendations in relation to remitters, including hawaladars and
other alternative remittance providers,” and to “designate competent supervisory
authorities to monitor and enforce the application of these recommendations to
hawaladars and other alternative remittance providers.” The declaration goes on to say
that, “the international community shou!d remain seized with the issue and should
continue to work individually and collectively to regulate the hawala system for
legitimate commerce and to prevent its exploitation or misuse by criminals or others.”
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As described in this report, the BSA clearly provides the framework for
comprehensive oversight of all U.S.-based money transmitters, including those
characterized as IVTS. However, many of the requirements under the BSA framework
are too new to adequately determine their effectiveness with respect to IVTS.
Treasury, therefore, believes it would be premature at this time to call for new
legislation. Based on what we know so far, we appear to have the legislative and
regulatory tools that we need. The primary problems are those of compliance,
enforcement, education, and cooperation. Treasury accordingly recommends that U.S.
efforts be focused on these areas, beginning with the effort to bring al] money
transmitters, IVTS or otherwise, into compliance with the existing regulatory regime.
Similarly, we believe it is premature to change the SAR threshold. The MSB
SAR requirement is less than one year old—insufficient time to enable FinCEN to
determine whether relevant activity is being captured by the current threshold.
Like the SAR requirement, the MSB registration requirement is less than one year
old. Anecdotal evidence suggests that the compliance rate among [VTS providers is far
lower than among more conventional types of MSBs. Further research should be
undertaken by FinCEN to determine the accuracy of this evidence and how compliance
can be maximized.
The compliance question will be critically important as Treasury continues to
assess the adequacy of existing regulations. This is particularly relevant in relation to the
recordkeeping and customer identification rules, both of which directly impact on the law
enforcement and regulatory challenges presented by [VTS.
One of the key compliance issues identified through FinCEN’s analysis is the fact
that 1VTS operators often maintain non-standardized records and do not exercise sound
customer identification practices, Investigators, for example, sometimes find records,
ledgers, or notes maintained in code, or in idiosyncratic shorthand, making it hard to
decipher without the cooperation of the [VTS operator who created the records, In some
cases, particularly when ITVS operators know or suspect that their clients are breaking the
law, no notes or records are kept. In other cases, IVTS operators serve customers without
_ asking questions about their true identity, the origin of their money, or the reason for the
transfer. In most instances, the practices described above are violations of the existing
regulatory requirements.
Other compliance issues arise from the practice of 1VTS operators of pooling funds
from numerous transactions, As previously noted, businesses operating with substantial
amounts of cash (such as convenience stores) or involving high turnover make it very easy
to hide illegal 1VTS transactions through the commingling of funds (see page 11, supra). It
is virtually impossible to match cash withdrawals with other deposits and trade transactions
when the amounts are comparatively smail.
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Compliance by IVTS providers with the BSA’s existing recordkeeping, customer
identification, and reporting requirements may go a long way to address these problems
and to enable investigators to “follow the money trail.” For example, the problem of
incomplete, coded, or illegible records may be addressed because inherent in the BSA’s
recordkeeping requirements is the requirement that the records be truthful, complete, and
accurate.”! Coded and illegible records do not meet this standard. The problem raised by
the practice of aggregating customers’ transactions before transmitting them through
depository institutions is addressed by the requirement that individualized records must
be maintained for each transmittal order, which includes, for customers other than
established customers, the requirement that customer identity be verified and recorded,”
Reporting of suspicious activities by IVTS providers will give law enforcement
an important window into, and an early warning system for, questionable activity in
communities that may otherwise be difficult to penetrate. Finally, VTS compliance with
the BSA’s CTR and CMIR requirements has the potential to aid substantially in detecting
IVTS-related bulk cash smuggling and other currency-related crimes.
Education and outreach are the crucial ingredients to building capacity among
legitimate IVTS providers who want to comply with the law and regulations, FinCEN is
currently expanding its existing outreach program that already has resulted in the.
registration of over 11,000 MSB principals. The planning process for the expanded
program, which will include the translation of educational materials into various
languages, meetings with associations of business in affected communities, and, possibly,
the use of focus groups, is underway.
Education is also critically needed within the law enforcement and regulatory
communities, as there needs to be a greater understanding of how these systems operate.
The dearth of technical knowledge is compounded by the fact that [VTS is used in the
U.S. primarily among immigrant communities, which poses an additional challenge to
investigators and regulators who may lack the language skills and cultural awareness
necessary to operate in this environment. These types of barriers can limit the ability of
authorities to communicate with IVTS operators and/or criminal suspects to interpret
evidence or to conduct effective undercover operations. It is equally important to
enhance the awareness of the formal financial industry regarding existing and continually
emerging IVTS mechanisms that may interface with the formal banking sector, especially
in the context of their performance of their due diligence and SAR obligations.
Finally, although we already know much about some types of [VTS and how they
operate, there is still much that remains a mystery. Treasury, therefore, believes that
there is a need for continued research, particularly with regard to understanding the range
of mechanisms associated with the IVTS payment clearance mechanisms.
2! See, eg., Lowell Niebur & Co., Inc,, 18 SEC 471, 475 (1945).
*2 FinCEN anticipates that, once the Section 326 rules for verification of identity are finalized for those
financial institutions that maintain accounts for customers, the rules for verification of identity for the
various transactions entered into by MSBs (including rules governing funds transmittal by both bank and
nonbank financial institutions) will be amended as needed to be consistent with the Section 326 rules,
' t
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APPENDICES
APPENDIX] _. TITLE
A Range of Existing and Continually Emerging IVTS
Mechanisms and Mixes With Formal Banking Sector
Basic Hawala and Sample Account Settling
Developing Case Patterns
International Oversight Practices
MOO) a
Acknowledgments
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Appendix A
Range of Existing and Continually Emerging IVTS
Mechanisms and Mixes With Formal Banking Sector
Broad Scope of IVTS Mechanisms
A primary finding resulting from the study is the need for law enforcement and
regulatory authorities to be cognizant of the extensive and potentially complex
(sometimes interfacing) nature of existing and continually emerging IVTS mechanisms,
as the above graphic illustrates.
The following are examples of [VTS methods that, in and of themselves, may
serve as mechanisms for transferring funds or value and sometimes interface with each
other for settlement purposes:
) ‘
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L, False Invoicing of Exports or Imports — This practice can help hawaladars balance
their books. For instance, under-invoicing by $20,000, the hawaladar “sends” this amount
to the importer of computer equipment, who will make profits higher by this amount upon
resale of the goods, If the amounts are not excessive, they can easily “disappear” in
otherwise legal trade. A $20,000 “mistake” in a $1-2 million trade is unlikely to raise
suspicion, even if detected. Therefore, false invoicing can serve to be a stand-alone IVTS,
part of a trade diversion scheme, or a means of tax evasion,
The detection of under-valuation or over-valuation of goods often requires inside
information and is difficult even using sample checks by U.S. Customs Service (i.e., if
medical, computer, and other equipment contains chips, drivers, or updated software
versions, these can only be discovered if the equipment is opened up and subjected to the
most thorough inspection), However, existing technologies may be used to overcome such
difficulties, The U.S. Customs Service operates a relational database, developed in the
early 1990s, that enables the analysis of data by country, port, manufacturers, importer, and
commodity. That database is known as the Numerically Integrated Profiling System or
NIPS. Investigators, using NIPS, have the ability to run samples against the database to
help detect anomalies and thus provide leads regarding false-invoicing schemes.
In other cases, “payments” are made for goods that are not delivered, incorrectly
described in the invoice, or returned after delivery is recorded. The payment does not
appear to be connected to any unusual or suspicious activity.
a Courier Services and Physical Transport — Courier services and physical
transport methods also can be used to transfer funds or other value and settle accounts
amongst IVTS Providers. Cash has been found in everything from containers to
suitcases, Money changers in the Middle East, who trade in currencies and therefore
need the cash in place, also use couriers. Value can also be moved when IVTS Providers
use cash to purchase easily movable commodities that can later be sold for cash at the
final destination.
3, Correspondent Bank Accounts — Certain types of correspondent accounts (such
as “nostro” and “vostro”)? may be used as the modern equivalent of a sophisticated
‘hawala’ moving more substantial amounts of value without the bank officials in the
U.S., or even in other countries knowing the true identity of the customer. Access to the
U.S. financial system is an added advantage to users of these mechanisms. This type of
activity is particularly problematic in nesting or multiple levels of accounts, in which
3 Nostra and vostro accounts are held by banks at other banks in foreign currencies and jurisdictions,
where they have no presence themselves. For example, when bank A from country X needs to engage in
U.S. dollar transactions but has no offices in the U.S., it may open a nostro {literally “our”) account with a
New York bank B. When bank B, on the other hand, wishes to engage in transactions denominated in the
currency of country X but has no offices there, it will open a locally denominated account with bank A in
that country. This would be a vostro account (“your account”), These are essentially’clearing accounts that
balance transactions between the two banks, Whereas a correspondent account is more of a one-way
service, nostro/vostro accounts serve reciprocal interests and are like “mirror” accounts. :
)
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large numbers of institutional and individual accounts are consolidated through a network
of banks.
4, Gift and Money Transfer Services — Smaller amounts can also be transferred
through easily available gift and money transfer services via special vouchers that can be
bought through internet websites. Clients provide a credit card number to be charged for
goods (such as flowers, food, or super market vouchers) to be received and/or used by a
friend or relative elsewhere around the world.
5. In-Kind Payments — Another practice that can be used independently, or as a
settlement method, involves the provision of services or in-kind payments. For example,
a travel agent sending groups to India may have someone pay all the expenses of the
group, and make a payment to any account in the United States, or other account of the
Indian provider,
6. Debit and Credit Cards — These types of cards may be used by multiple
individuals. Holders of bank or credit card accounts may have multiple cards on the
same account and hand them over to other people, who may use the cards for withdrawals
in other countries. Only the account holder may know who is taking the cash and for
what purpose, and even the account holder may not know where the value goes next.
7. Internet Payment Schemes — Similar, but often more complicated, alternatives
involve internet companies that offer payments and money transfer services from within
the U.S. or from overseas, including some based in secrecy or laxly regulated
jurisdictions. Others facilitate payments and value transfers on the basis of gold deposits
held in London, Zurich, or Dubai.
8 Pre-paid Telephone Cards — These cards and any other instruments that
effectively store value may be used for funds transfer.
9 Trade Diversion Schemes — These schemes allow for hard-to-detect value
transfers, the laundering of dirty money, as well as fast illegal profits. For example,
Customer X (e.g., a front company based abroad) purchases legal goods at a discount
(often up to 50 percent) from a U.S. manufacturer, and receives the goods via an
intermediary in a third country. The goods are then diverted back (Le., returned) to the
United States. These goods are eventually sold to wholesalers in the U.S. by Customer
(or an intermediary) at a higher price. This price still represents though for the
wholesalers a discount (e.g., 20 percent), and for Customer X the receipt of legal money
anywhere on earth as proceeds of a legal sale. Buying a million dollars worth of goods
for $500,000 and re-selling them for $800,000 in a couple of weeks generates a profit of
$300,000 and clean funds for anyone to use.
Therefore, it is clear that [VTS can include a very wide range of methods — from
very basic to extremely sophisticated methods. It is also important to note that in certain
instances the interface of several types of IVTS include the finding of cross-ethnic
,
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(middlemen) collaborations; the more interface used and the greater use of
intermediaries, the harder it becomes to investigate a case or network.
IX, Mixing of IVTS Mechanisms with the Formal Banking Sector
Our study has found few examples of “basic” hawala in the United States; that is,
where value transfers occur without any interface with the formal banking sector. IVTS
providers interface with the formal banking sector when they make deposits, engage in
wire or other transfers, and manage ancillary businesses (¢.., travel agency, grocery
store, jewelry store). In many of the cases reviewed, it became apparent that during the
settlement process, the IVTS operator transferred funds through financial institutions on
an aggregated basis when its cash pool reached a certain level, FinCEN has also
observed [VTS providers who maintain bank accounts in order to obtain negotiable
instruments, to wire funds domestically and overseas, and to draw on for. the purchase of
commodities/goods (the proceeds from sale of these commodities/goods were then used
to remit money overseas on behalf of local VTS customers). (See Case Synopses
illustrated in Appendix C.)
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Appendix B
Basic Hawala and Sample Account Settling
Marwan Amjad
USA Pakistan
Hawaladar Hawaladar |
inUSA 4¢ in Pakistan
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Appendix C
Developing Case Patterns
Examples of [VTS Cases in the United States
During its research on IVTS in the United States, FinCEN met with federal, state,
and local faw enforcement officials throughout the country to discuss cases being
investigated or prosecuted that involve 1VTS.”" Field agents and prosecutors provided
FinCEN with extensive cooperation and assistance. Most of the cases highlighted in this
report are based on observations of these law enforcement officials. Although many of
these investigations are in their preliminary stages, additional criminal activities may
become apparent over time.
The IVTS investigations involve a variety of illegal activity, including:
a use of IVTS providers (unlicensed/unregistered money transmitters) to remit funds
to or from abroad (including in several instances an OF AC-blocked country;”°
several illegal hawaladars also connected to drug trafficking);
Q exploitation of cash intensive businesses (e.g., grocery stores; travel agencies;
delicatessens; kiosks;”* convenience stores: phone card businesses; and money
exchange businesses) often located in close-knit ethnic communities to launder
illicit proceeds derived, for example, from cocaine, heroin, methamphetamine
trafficking, alien smuggling, food stamp fraud, and transfer of funds or value to
problematic countries (see graphic below);
”* Interviews were primarily conducted with representatives of High-Risk Money Laundering and Related i
Financial Crime Areas (HIFCAs) in Chicago, Los Angeles, San Francisco, New York, and San Juan.
Extensive outreach was also conducted with additional contacts beyond the HIFCAs in particular cities
where additional leads were discovered (e.g., Washington, D.C. headquarters offices: Atlanta, Georgia;
San Diego, California; Charlotte, North Carolina; and Austin, Texas). Also, see Appendix H for a list of all
organizations consulted in our study.
> The Department of the Treasury’s Office of Foreign Assets Control (OFAC) administers and enforces
economic and trade sanctions based on United States foreign policy and national security goals against
targeted foreign countries, terrorists, international narcotics traffickers, and those engaged in activities
related to the proliferation of weapons of mass destruction.
*6 One law enforcement investigation, for example, identified the use of kiosks located in shopping malls
and other businesses such as convenience stores to place and layer criminally-derived proceeds. The kiosks
were also used by criminal elements as money exchanges. Investigators are focusing on alien smuggling as
the underlying unlawfulactivity. : *
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a conversion (placement) of bulk cash to money orders and other types of monetary
instruments to circumvent federal reporting and recording requirements;
Q use of commercial mail carriers to send monetary instruments out of the U.S, to
circumvent Currency and Monetary Instrument Report (CMIR) filing
requirements;7’
Q use of couriers to smuggle bulk monctary instruments across international borders;
ao use of stored value (pre-paid telephone cards) to both transfer value and circumvent
reporting requirements;
a exploitation of non-government organizations (N GOs) and charities to move funds
potentially linked with terrorist activity;
3 A CMIR is required when a person physically transports currency of other monetary instruments in an
acoregate exceeding $10,000 at one time, into or out of the United States. See 31 CFR 163,23(a} and 31
sgreg g
U.S.C, 534 6¢a) and 5317. :
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a smuggling of cigarettes; and
a use of Black Market Peso Exchange-type schemes.”®
In many of the cases, the underlying activity was frequently described as hawala,
but FinCEN only has been able to characterize one case as “basic” hawala (i.¢., transactions
in which a broker or intermediary accepts cash on behalf of a sender in one location, and
arranges for disbursement of the cash, minus a small fee, from another broker or
intermediary at another location without the actual movement of any funds through any
forma! financial institution). In most cases, IVTS providers had bank accounts or accounts
at other financial institutions, which they used in the settlement of the transactions. This is
based on what law enforcement has shared with FinCEN. There may be other “basic”
hawalas in the United States that law enforcement has not disclosed or not discovered.
The reality of the [VTS situation in the United States appears to be that many of the
investigative cases, along with anecdotal information provided by law enforcement about
suspected IVTS involvement in illegal activity (and some information provided by IVTS
service providers themselves) indicate a prevalence in the United States of the “mixed”
category of IVTS in which illegal money transfer activity is conducted in conjunction with
legal business enterprises, such as money transmitters, check cashers, travel agencies,
jewelry businesses, grocery stores, and others, and in which settlement is accomplished
using the formal financial system. The illegal money transfer activity may encompass both
BSA violations and other illegal activities (e.g., narcotics trafficking, alien smuggling fees,
and suspected terrorist funding).
Detailed case-related synopses and accompanying graphics of the types of [VTS
activity and common patterns observed in the United States are provided below. These
cases were reported to FinCEN during consultations with federal and state law
enforcement officials. FinCEN will continue to consult with these law enforcement
officials to learn additional information and report upon possible subsequent phases and
developments. Because most of these cases are still under investigation or raise other
sensitive disclosure issues, they have been described generically.
Cases like this require a regulatory and faw enforcement infrastructure that will
assist law enforcement in identifying the illegal transactions so that a successful
prosecution will occur. The challenge for law enforcement is to determine how to target
the illegal transactions without affecting the numerous legal transactions by individuals
sending money home to their families and without unduly disrupting trade, government,
or NGO activities that help those legitimately in need.
8 The Black Market Peso Exchange (BMPE) is a large-scale money laundering system used to launder
proceeds of narcotics sales in the United States by Latin Anterican drug cartels by facilitating swaps of
dollars in the U.S. for pesos in Colombia through the sale of dotlars to Latin American businessmen
seeking to buy U.S. goods to export. ’
, +
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Case Synopses
Case |
Suspected Basic [YTS Operation
G@ A recent jaw enforcement investigation identified a non-licensed/registered IVTS
operator who provided transfer services to countries in Europe and abroad,
GQ The U.S. IVTS operator is a suspected narcotic trafficker.
Q ‘The operator also provided transfer services for customers wishing to send money
from an OFAC blocked country located in the Arabian Gulf.
Q The 1VTS operator provided his services from his residence.
Q In order to execute payments the operator utilized other [VTS operators in countries
abroad in which instructions were provided via fax and phone.
OQ Payments were made using a basic hawala system. 3
Q The operator maintained over $1,000,000 of cash at his residence (believed to be
maintained for cash pay-outs).
Q IVTS balances were reconciled through the U.S. IVTS operator meeting with other
IVTS operators in Europe.
* Information is subject to change as the case fully develops. ’
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Case 2
Use of Commodities to Reconcile Transfer Payments Between IVTS Operators
a Law enforcement has identified an [VTS operator who provided remittance services
to nationals of an East African nation residing in the U.S.
a People wishing to send money would contact the U.S, [VTS operator and arrange to
send money to the operator through one of two methods: 1) the person wishing to
send money physically provides the funds to the [VTS operator; or 2) the customer
deposits the funds to be transferred directly into the operator’s account.
GQ The sender provides the name and phone number of the beneficiary to the operator.
The sender also faxes a copy of the deposit receipt to the operator indicating a
deposit was made into the operator’s account (if that method was used).
a The operator then faxes the payment instructions to his counterpart (fainily
member) located in the East African country. The beneficiary picks up the money
from the sender at an exchange business operated by the East African IVTS
operator. Funds (proceeds of commodity sales) paid to beneficiaries are withdrawn
from a reserve account maintained by the exchange.
a Funds collected by the U.S. [VTS operator were not automatically sent out of the
U.S. Usually the U.S. operator would allow the balance of his operating account to
accumulate to $10,000.00 before making a wire transfer.
a The money is eventually wire transferred to an account located in a European
country that is controled by the East African [VTS operator.
Q The European account is used by the East African operator to purchase goods in
bulk that are imported back to the East African national, and further sold at the
same location as the exchange.
a Proceeds from the sale of those products are maintained in a reserve account that
functions as the primary source for paying money out to beneficiaries from the
company’s IVTS activities.
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Case 3
AL
Use of Cash Intensive Businesses In Ethnic Communities to Facilitate IVTS Activities,
Case A
ag
Law enforcement efforts identified a case in which an organization provided
unlicensed remittance services for nationals of an Arabian Peninsula country
residing in the U.S. Numerous businesses within the ethnic community collected
money from individuals wishing to send funds back home. A small fee was
charged for the transfer services. The funds were then converted to monetary
instruments to be smuggled out of the country.
An agent of the organization would then collect the funds from area delis, travel
agencies, and other miscellaneous stores that served as the primary points of contact
for people wishing to remit funds.
The U.S, [VTS operator would then phone and fax all of the transaction orders to
another 1VTS operator located in the Arabian Peninsula. The beneficiaries would
be paid prior to the actual transfer of funds.
Once cash was collected from the collecting agent of the U.S. organization, several
individuals were then enlisted to convert bulk cash to money orders and other types
of negotiable instruments. Cash was also structured into nominee bank accounts
maintained by area banks. Numerous financial institutions captured some of the
structuring activity and subsequently filed SARs,
Once the cash was converted_or deposited into accounts, checks and money orders
from the conversion of the funds were provided to couriers who physically
smuggled the instruments to the Arabian Peninsula nation.
Once the Arabian Peninsula [VTS operator received the instruments, he negotiated
them through a jocal bank’s correspondent accounted maintained by a U.S. bank.
;
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Case 4
Use of Cash Intensive Businesses In Ethnic Communities to Facilitate [VTS Activities,
Case B
ao Law enforcement investigations identified an organization involved ina multitude
of criminal activity to include ephedrine trafficking; cocaine, heroin,
methamphetamine trafficking; food stamp fraud; resale of stolen property; etc. The
organization utilizes numerous businesses and individuals within the ethnic
community to facilitate its illegal activities.”
a ‘The organization also runs a money remitter business that caters to nationals of an
Arabian Peninsula country residing in the U.S. The business is unlicensed in the
state where it is located and not registered with the federal government.
a People wishing to send money through the business contact an agent of the
company in which the customer pays the remitter for the service in addition to
providing beneficiary information. The U.S, IVTS operator coordinates the
payment with his counterpart located in the Arabian Peninsula nation via phone and
fax.
°° Based in part on cultural and socio-economic grounds, members of certain ethnic groups mutually
support one another in numerous aspects to include financial support in the establishment of businesses.
Criminal elements within these ethnic groups also play an active role in supporting the establishment of
new businesses through financial support. Thus, the business that is opened with the assistance of funds
from criminal organizations becomes vulnerable to facilitating future criminal activity. This can take place
as people trusting each other will not always ask about the origin or destination of funds, A blind eye or
genuine ignorance can effectively provide cover for attivities such as the reselling of stolen goods or the
active participation in other illegal activities such as food stamp fraud, coupon fraud, and money
laundering, >
F ?
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Q Beneficiaries pick up money from the broker located in the Arabian Peninsula
nation.
Q The actual movement of funds is conducted later when bulk cash is deposited by
agents of the organization into personal and business accounts. SARs filed by
financial institutions indicate many of those transactions were structured. Money
orders and third party checks*’ are also used to deposit funds into accounts or to
purchase cashiers checks from financial institutions.
Q Funds deposited into accounts owned by the criminal organization in the U.S. were
reconciled with the Arabian Peninsula IVTS operator through the use of checks.”
Q Checks were mailed (via commercial mail) to the [VTS operator located in the
Arabian Peninsula nation where they were negotiated through local financial
institutions that had correspondent bank accounts with U.S. financial institutions.
>! Law enforcement agents have determined the organization often uses third party checks drawn on other
business accounts. The technique includes the purchase of the third party checks by the criminal
organization, which are used to purchase cashiers checks from area banks. The use of this technique
further complicates the audit trail in identifying the original source of the funds.
* The use of checks drawn on respective accounts was the most prominent method used to send money to
an African Peninsula Country. It is believed wire transfers were also used as an adaptation resulting from
check seizures made by law enforcement during the course of the investigation. Cashiers checks were also
used as part of the scheme to reconcile accounts between the criminal organization located in the U.S. and
the [VTS operator located in the African Peninsula Country.
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Case 5
Providing Remittance Services to an OFAC Blocked Country
a AUS. based IVTS organization advertised its services through several different
cultural newspapers and the World Wide Web. Those advertisements indicated the
company could send money to an OFAC blocked country located in the vicinity of
the Arabian Gulf.
a {norder to send money through the company the customer would make contact with
the IVTS operator and would provide their name and the name and account number
- of the beneficiary located in the OFAC blocked country.
OG There was no commission for the transaction but profit was realized through the
exchange rate. The IVTS operator also provided services to known drug traffickers
in which a 5% flat fee was charged for moving money derived from criminal
activity. The operator was fully aware the money being transferred originated from
drug trafficking,
Q The operator would then fax instructions to an [VTS operator in the OFAC blocked
country in addition to another [VTS operator located in another Arabian Gulf
country.
a The IVTS operator located in the OFAC blocked country would provide funds to
the beneficiary upon confirmation of the instructions sent by the U.S. IVTS
operator.
a Once the U.S. IVTS operator received funds from customers in the U.S. in the form
of cash, money orders, and third party checks, the operator would deposit the funds
into his account and periodically wire transfer funds to a U.S. based account owned
by the IVTS operator operating in the Arabian Gulf country.
I
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XT.
The Arabian Gulf [VTS operator would then wire transfer the funds from his U.S.
account to another account located in an Arabian Gulf country.
The money in that account was reconciled with another account located in the
OFAC blocked country.
The U.S. IVTS operator also converted cash into money orders by structuring the
purchases of the instruments to circumvent federal identification and recording
requirements,
The U.S. IVTS operator conducted several cash deposits in a manner to possibly
circumvent federal recording requirements. The [VTS operator also structured
cash to purchase money orders in violation of federal identification and recording
requirements.
* Information primarily derived from SAR analysis. +
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Case 6
Remittance of Bulk Cash Proceeds Derived From Heroin Trafficking
Q Law enforcement agencies of a European country identified a number of storefront
companies being used by heroin suspects to launder illicit funds. The storefront
companies allegedly provided transfer services to [VTS operators but actually
served as placement centers to transfer drug proceeds.
a The companies used the services of an exchange company located in an Arabian
Gulf country as the means to send proceeds from Europe to other criminal elements
located in a Southwest Asian country.
a Bulk cash was collected from drug sales at three storefront operations.
a Cash was then deposited into business accounts and remitted to the exchange’s
account maintained by a U.S. owned bank.
G Funds were then remitted through the exchange to numerous beneficiaries located
in other Southwest Asian countries and elsewhere around the world,
a USS. financial institutions filed numerous SARs on the exchange company and on
subjects and businesses in the U.S. who received or remitted funds from or to the
exchange company.”
Case 7
East African Money Remitters Located in the United States®>
GQ Law enforcement identified a business located in the U.S. that remits funds on
behalf of East African nationals.
a The business is an unlicensed money transmitter and is not registered with the
federal government. .
Q SARs indicate continuous structuring of deposits (mostly cash, but sometimes
checks and money orders), through the use of multiple individuals into multiple
businesses or personal accounts at multiple banks and branches focated in multiple
states,
Qa Suspects made attempts to circumvent CTR requirements.
4 Accounts of suspects with low-income occupations exhibited unusual flows,
volumes of funds.
GQ Same addresses sometimes being used by multiple suspects.
Q Wire transfers were initiated shortly after deposits were completed funds were then
transferred to accounts maintained at banks located in an Arabian Gulf state.
GO Limited knowledge/traceability on the final disbursement of funds once credited to
Arabian Gulf banks (black hole syndrome).
™ Several cases have been initialed by U.S. law enforcement on a number of U.S, based subjects belieVed
to have done business with the exchange company.
* Information primarily derived from SAR analysis.
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Case 8
Providing Remittance Services to an OFAC Blocked ‘Country
Oo
Q
A law enforcement investigation identified six unlicensed money remitters.
Investigative efforts identified several of the remitters as possibly remitting funds
on behalf of known criminal elements.
Investigations are pending to determine if any of the companies violated federal law.
by remitting funds to OFAC blocked countries, *6
Extensive ledgers were maintained by the entities detailing wire transfer activity.
The companies guaranteed money transmission to the OFAC blocked country
within 1-4 days.
The only beneficiary information required to complete a transaction from the
companies was the name and bank account number of the recipient oversees. Select
businesses also provided hand delivery of funds to beneficiaries for an additional
charge.
36 A full financial anilysis of the bank records associated with the case is still pending. However, many of
the advertisements posted by the suspect companies indicated they provided transfer services from the U.S.
to an OFAC blocked country loeated in the Arabian Gulf. y
’
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Case 9
United States vy. Mohamed M. Hussein, et al.
Q A law enforcement investigation identified an illegal remitter in Boston, MA, that
provided foreign transmittal services. The business operated without a license in
violation of MA State law.
Q On August 7, 2000, the president of the company filed an application with the
commonwealth of MA, Division of Bank and Loan Agencies, in order to obtain a
license to engage in the business of receiving deposits of money for transmission to
foreign countries.
Q The application identified another business located in an Arabian Gulf country as an
affiliate of the company. The application also included a number of receipts
indicating the. business had already remitted funds internationally, In response, the
Division of Banks sent a letter to the business advising the company of their
obligation to obtain a state license, not to continue to engage in illegal wire
transmission activities, and the penalties if the activity continued. Two subsequent
letters were also sent to agents of the company with little or no response.
a Agents of the company engaged in the deposit of cash and checks originating from
several subjects located in MA and other states.
G@ Once deposits were credited to the businesses account, the funds were then wired to
an Arabian Gulf country in which the wired funds were made available to the
designated recipient.
Q Agents would typically initiate wire transfers telephonically through an automated
wire transfer procedure that did not require the agent to speak to a bank employee.
Nearly $3,000,000 was wired oversees through the illegal wire transmitter.
Q Checks were also written from the remitter account for recipients receiving money
from oversees senders residing in the United States.
Q On July 22, 2002, Mohamed HUSSEIN, an agent of the business, was sentenced to
one and half years in prison and two years of supervised release for operating an
illegal money transmitting operation without a state license. Another subject, Liban
HUSSEIN, president of the company, has also been charged in the case.
Case 10
Charitable Organization With Possible Links to a Designated Terrorist
Organization Remitting Funds Abroad”!
O Law enforcement investigations identified possible links between the owners of a
U.S. based charitable foundation and a designated terrorist organization.
a Acentral account was used by agents of the company to deposit cash. Several
SARs were filed by financial institutions on the suspect nature of the transactions.
Q International wire transactions were then initiated from the account in which funds
were sent to Russia and two former Soviet Republic States.
a Wire transfers were also credited to the U.S, company account from unknown
transactors through a European Bank.
’
* Information primarily derived from SAR analysis. i
’ )
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a The U.S, company also wire-transferred funds to another U.S. based business
engaged in similar business activities (charity). All of these transactions are suspect
based on the volume and patterns of activity affecting the company’s account vis-a-
vis the types of services the company was providing.
a Wire transfers from the company were credited to a similar type of U.S. based
company. That company also is suspected of having an association with a
designated terrorist organization.
Case |]
IVTS Activities Conducted on Behalf of Known Criminal Elements
a Law enforcement identified an extensive [VTS network that provided remittance
services and laundered drug proceeds on behalf of a Middle Eastern drug trafficking
organization.
a USS. financial institutions identified both deposit and transfer activity conducted by
agents of the IVTS organization and subsequently filed SARs on the large cash
deposits conducted by numerous transactors.
u The network sent money throughout the world through the use of wire transfer
payments,
Case 12
Use of Money Orders to Facilitate [VTS Activities
a Law enforcement officials initiated an investigation based on SAR referrals that
identified the negotiation of bulk money orders through a bank located in a Middle
Eastern country.
Q The money orders appeared to have been purchased at various money order vendors
located in the U.S.
oO Money orders were then negotiated through a bank located in a Middle Eastern
country and ultimately cleared through a U.S. correspondent account.
a It is unknown how the money orders were transported to the Middle East but it is
assumed that they were smuggled based on the large volume negotiated.
a There are indications of ethnic crossovers in facilitating money transfers.
Case 13
Use of Money Orders to Facilitate Black Market Peso Exchange (BMPE)
a Law enforcement identified a BMPE case in which money orders were heavily used
to convert drug proceeds to negotiable instruments.
Q The organization in the U.S. worked under the direction of a money broker located
in a Central American country. It is believed the money broker would provide
instructions to his agents in the U.S. regarding the pick-up of bulk cash derived
from narcotics trafficking.
8 Information primarily derived from SAR analysis. '
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Q Once the cash was picked up, subjects within the organization would immediately
convert the cash to money orders. The money orders were purchased from area
vendors in a manner to circumvent federal reporting and recording requirements.
a Agents of the company also structured cash into bank accounts.
O Once drug proceeds were converted, the Central American broker provided his U.S.
agents with coded instructions on the distribution of the funds. Much of the funds
were distributed via commercial mail carriers to various U.S, companies on behalf
of customers doing business with the Central American broker,
a Some of the funds were also mailed via commercial carrier or smuggled via courier
to the Centra! American broker where they were further negotiated by third parties.
Case 14
Use of Black Market Brokers, Bank Accounts, and Sheil Companies
United States of America v. Maria Carolina NOLASCO, et al.
go A recent law enforcement investigation identified a bank official working in the
private banking department of an institution in the Northeast U.S. facilitated the
transfer of hundreds of millions of dollars in less than a year by using the facilities
of the U.S. bank. The money transfer operations required a license under State law
and federal registration, neither of which had taken place. The transfers were
between the U.S. and a South American country.
Q Money brokers sent the bank official instructions by fax for transfers to be
conducted through dozens of accounts [the official controlled more than 250
accounts].
a The bank official also controlled accounts of more than 40 shell companies,
a Wire transfers out of these accounts were payments for goods bought by other
companies, which had purchased the dollars through the black market.
@ The bank official used the bank's wire facilities to make the transfers [instructions
given to the wire facility also by fax from the bank employee].
oO ‘The money transferred appears to be the proceeds of illegal drug trafficking.
Case 15
Cigarette Smuggling in Support of Terrorist Organizations
United States of America v. Mohamad Youssef Hammoud, et al.
a Law enforcement efforts identified a U.S. cell of a known Middle Eastern terrorist
group that engaged in cigarette smuggling.
Q Subjects from the U.S. based cell acquired numerous credit cards to purchase
cigarettes in bulk from various cigarette wholesalers.
a ‘Once purchased the cigarettes were transported to another state within the U.S. with
a significantly higher excise tax than the state where the cigarettes were purchased.
a The cigarettes were sold for profit to a central contact.
a A senior member of the U.S. based cell often communicated with members of a
similar cell operating in another North American country. That cell was identified
4 }
*? The purchase of U.S. dollars by Central American businessmen who wished to get a better exchange rate
of pesos to dollars. ’ '
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by law enforcement as acquiring equipment (with possible military applications) on
behalf of a known Middle Eastern terrorist organization.
a Asenior member of the U.S. based cell at least on one occasion transferred funds to
a member of the other terrorist cell located in another North American country.
Case 16
Use of Phone Cards to Transfer Value
oO Law enforcement efforts identified a criminal organization that used pre-paid phone
cards to front money for a drug transaction."” The phone cards were also used to
circumvent CMIR requirements.”
° The purpose of the initial drug transaction was to prove to drug traffickers the criminal organization had
the funds (value of the phone cards) to putchase drugs from the drug trafficking organization.
“ As per current federal law, phone cards are not required to be reported on CMIRs despite having a total
value in excess of $10,000.00. *
4]
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Appendix D
International Oversight Practices
International Oversight Practices Relating to Hawala
Oversight of hawala operations vary from country to country, ranging from
prohibition, to various degrees of regulation, to doing nothing. Many countries in which
immigrant communities remit money to their homelands generally treat hawala as a matter
of regulation and scrutiny, even more so after the attacks of September 11, 2001. In the
past, hawala was regarded as a means of transferring money that caused concern only when
it facilitated the commission of a crime. The United States, Canada, the United Kingdom,
and other European countries fall into this category. Recently, many jurisdictions have
introduced regulations requiring the registration and/or licensing of all money transfer
businesses that include hawala and other IVTS,
It is essential to note that, because the term hawala means ‘transfer,’ it is used in
some Middle Eastern countries as synonymous to formal money transfers through banks or
wire transfers. For example, in Saudi Arabia, where there is formal hawala, people mostly
use the term ‘hundi’ to denote informal money transfers. Because of the strict enforcement
of Saudi laws prohibiting hundi practices, most expatriates there apparently send
remittances through bank channels, the services of which have improved substantially in
recent times.
Similarly, Japan authorizes only banks to engage in funds transfers and criminalizes
other methods, Because illicit transfers there often take place through banks, Japanese
authorities have provided guidelines to financial institutions for better reporting of
suspicious activities to the Financial Intelligence Office.
Australia, Germany, and Hong Kong stand out as jurisdictions with large immigrant
populations that have long-standing regulations that apply to hawala and other money
transfer businesses, They each require the licensing of businesses that remit money.
Australia’s Financial Transaction Reports Act of 1988 also requires that remittance agents
report suspicious transactions and cash transactions over A$10,000 to the authorities.
AUSTRAC, the Australian equivalent of FinCEN, has also engaged in an outreach program
to inform remittance agents of the rules and their obligations.
Hong Kong enacted legislation in June 2000 requiring money transfer agents to
register with the authorities, establish the identity of their customers, keep the records of
transactions over HK$20,000, keep those records for six years, and report suspicious
transactions, An outreach program was also part of the strategy, including the publication
and distribution of guidelines and notifications to those concerned (including travelers who
might act as money couriers),
' ,
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In Germany, under legislation enacted in 2000, providers of financial services
“commercially or on a scale which requires a commercially organized business
undertaking,” must obtain a license from the Federal Banking Supervisory Office. Both
money transfer businesses (including “non-account related” money transfers) and foreign
exchange bureaus are considered as financial services requiring a license.
In the United Kingdom, during November 2001, anti-money laundering
regulations came into effect, which require money services businesses, such as bureaux
de change and money remitters, to register with HM Customs and Excise. In addition,
HM Customs was given new powers to enter and inspect such businesses, including
hawala and other IVTS, to ensure compliance with the rules. Before this legislation, the
main legal instrument regulating money transfer businesses was the 1993 Money
Laundering Regulations. Theoretically, unregistered IVTS were subject to the 1993
regime. However, in practice no enforcement action would have been taken without
another substantive offense, such as drug money laundering. This practice continues to
be the focus of law enforcement efforts in the UK to date.
Countries on the receiving end of workers’ remittances are sometimes jurisdictions
with controls on capital flows and currency exchange rates. These include Pakistan, India,
Sri Lanka, and others. While hawala enables expatriates to help their families in their
homeland, it also facilitates tax evasion, evasion of exchange controls, capital flight, and
corruption. Combined with false i invoicing, gold, or precious stones smuggling, the capital |
flow can actually be negative for such regions. As hawaladars allow for the draining of
financial resources and deprivation of highly valued foreign currency in those countries,
hawala has been outlawed for some time both in India and Pakistan. In spite of these legal
restrictions, the hawala business thrives in both nations.
In India, the Foreign Exchange Management Act (FEMA) of May 2000 has
replaced the Foreign Exchange Regulation Act of 1973 (FERA). The old law had
criminalized the practice of hawala, and carried penalties of up to three years in prison for
amounts less than 100,000 Indian rupees, seven years in prison for higher amounts, and
fines up to five times the amount involved. Under the new law, hawala is a civil offense.
carrying a penalty of up to three times the amount involved. However, legal action is often
difficult to pursue due to the general lack of evidence. The money seized may be
confiscated under both Acts.
In Pakistan, only banks can conduct money transfers, although the State Bank
announced in the summer of 2002 that it intended to authorize money changers also to
engage in fund transfers. Under the proposed plan, some money changers may be issued
Exchange Company Licenses. Details of how these would be regulated are not yet
available.
Following the Abu Dhabi conference in May 2002 on
hawala, sponsored by the United Arab Emirates (UAE)
Central Bank, the UAE seemed ready to provide the lead in
‘ +
43
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introducing a regulatory regime that would take into
consideration the views and interests of hawaladars, their
competitors, and the clients of hawala in the Gulf region. As of
November 4, 2002, the central bank of the UAE began
registering brokers of informal overseas money transfers
known as hawala in a bid to curb money laundering.
4d
Case5:11-cv-05496-HRL Document27_ Filed02/29/12
30.
31,
32.
33.
34.
35.
36,
37.
38.
39.
40,
d. National Investigation Service
United States Attorney’s Office
a. Atlanta, GA
b. Charlotte, NC
ce. Los Angeles, CA
d. Newark, NJ
e. San Diego, CA
f. Washington, DC
g. U.S. Virgin Islands
United States Customs Service
United States Department of Agriculture
United States Department of Justice
United States Department of Labor
United States Department of State
United States Department of the Treasury
United States Postal Inspection Service
United States Secret Service
United Nations Monitoring Group
World Bank
Page47 of 48
The research group would like to thank member nation Financial Intelligence
Units (FIUs) of the Egmont Group who responded to our [VTS Survey,
We would also like to acknowledge the assistance and expertise provided by
Professor Nikos Passas of Temple University. His contributions were invaluable
to the research conducted in the study.
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seminars Associated with the IVTS Study
On May 15, 2002, FinCEN assisted in a presentation at the UAE Hawala Seminar
held at Abu Dhabi, United Arab Emirates. And on May 25, 2002, FinCEN gave a
presentation at the Institute of Banking Studies Money Laundering Seminar held in
Kuwait City, Kuwait, Both seminars drew hundreds of attendees from government
agencies ~ both regulatory and law enforcement — and the private sector. Many in
attendance were able to share with FinCEN their perspectives and
recommendations regarding the challenges posed by IVTS.
FinCEN’s Office of Strategic Analysis, Non-Traditional Methodologies Branch,
hosted a Hawala Seminar on May 29, 2002. Fifty-five attendees representing
seventeen agencies participated in this seminar,
On October 9, 2002, FinCEN hosted an international conference for the Egmont
Group Financial Intelligence Units on [VTS and international observations,
challenges, and enhanced coordination of counter measures.
47
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