Money Laundering Insights: Real Estate Investments, Shell Corporations Among Top Schemes

Interview with AML Expert Debra Geister of LexisNexis Q & A with Lexis-Nexis' AML Compliance Expert Debra Geister

Debra Geister is director of fraud prevention and compliance solutions at LexisNexis' Risk and Information Analytics Group, and has spent more than 10 years in the anti-money laundering (AML) compliance arena. We recently interviewed her on what she sees as the top trends and issues facing AML compliance officers at financial institutions.

Q: What are some of the trends Lexis Nexis sees in money laundering?

Geister: As AML compliance professionals, we tend to focus on rules and thresholds and can get lost in the details. One of the things I strive to create awareness about is the fact that the money launderers are using a number of different methodologies to gain access to your institution. You need to think like a money launderer in order to catch them. Think about the protocols and controls you have in place, so you have the deterrents to keep them out. Everyone has read about Union Bank in California with its $31 million fine. No institution wants to find itself in that situation.

What we're seeing in terms of products that money launderers are using -- some are new and some are old. Fraud and money laundering, while they usually have similar criminals working on them, fraudsters are trying to get the money out, while money launderers are trying to put the dirty money in. The money launderers are using a different number of methodologies to do this, and often combine more than one methodology to accomplish their money laundering.

Insurance is a channel for money launderers where they pay with cash and get an agent to write a policy for them. They even pay ahead on those premiums to look legitimate. Agent and brokerage units in insurance are not regulated, though in my estimation they should be. This is up to the regulatory agencies.

This certainly provides money laundering schemes the ability to convert those illegal monies. They do this by buying a high ticket item, then insuring it and then "Oops, something happens to it, it burns up, or is wrecked or stolen." It is a pretty easy way to legitimize their funds. If someone pays for an asset in cash and insures it for the maximum, they don't have to report that money to the IRS because it is considered a loss. So insurance is definitely an area you'll want to consider as potential money laundering risk area.

Q: How much money could be moved by these types of money laundering schemes with insurance?

Geister: This type of insurance money laundering can go into the millions of dollars. Think of high price ticket cars, vehicles, or real estate. Money launderers need to move their money to make it look it legitimate. Since they're already in criminal activities, it's an easy transition.

Q: How did you become so attuned to the mindset of money launderers?

Geister: I've had plenty of experience, and I actually scare my peers in the AML compliance arena. They say, "Wow, you're scary, and you're evil; how can you think like this?"

I've had the good fortune to work with some of these people who've done it for a living -- former money launderers and they're very smart people. As compliance specialists, we have to be on our toes, to keep up with them to be able to identify when our institutions are at risk.

Q: What are some AML areas that require more due diligence by institutions?

Geister: Institutions need to pay attention to performing due diligence in the sources of funds including real estate investments, which is a prime target for money launderers. There have been 10,000 SARs issued on real estate transactions; 66% had some type of money laundering activity involved.

Use that in conjunction with an insurance scheme, a money launderer has an even better way to get their money in to cleanse it through the bank. Remember, mortgage brokers don't have SARs or AML reporting requirements. How easy is it to fabricate sales documents? Some brokers are only looking for a paycheck. Who thinks of commercial real estate transactions of $10 million as being suspicious? There are too many loop holes out there that need to be closed. Even the people who are transacting the closing of real estate transactions aren't regulated or required to do something other than close the transaction.

There are many loopholes, and institutions need to step back and question some of these transactions and ask for more documentation from other sources to protect their institution.

Q: What about smaller "flying under the radar" money laundering?

Geister: This is one of my favorites. There is a big trend of money laundering going on in some of the small businesses out in "middle" America. I'll give you a prime example - with corporations in 47 states, there is no requirement to state the beneficial ownership of a limited liability corporation. So to create a LLC and set it up to do money laundering is pretty darn easy. They don't have to reveal their beneficial ownership. They can even set up shell corporations within these LLCs that give them another layer to hide behind. They're almost like matryoshka dolls, the carved Russian wooden dolls that are nestled in one after the other, but when you get to the end, there's nothing inside the last smallest doll.

How much money is funneled through some of these shell corporations can vary greatly, but in the Bank of New York schemes they were funneling billions of dollars.

Another story I am well acquainted with comes from a small town in Minnesota. Pequot Lakes, MN is a very small community, maybe 2,000 people live there. There were four businessmen arrested and accused of money laundering and drug trafficking. They were using small businesses to launder the money through them and tried to legitimize the money by making it look like business income. One of the men was an insurance salesman and had been for many years. They raided his business and found several weapons, a stash of narcotics in his business. There was also a mortgage broker, a real estate agent and a chiropractor arrested in the same sting. It is incredibly scary to imagine people like this in your community. This story should serve as the wakeup call to small town banks and credit unions to pay attention to who they're doing business with. In many instances institutions don't start poking around under the covers of some of their small business clients because they are listed as very low risk for money laundering. They're pillar members of the community who have established businesses for many years, so they don't see any issue with them. These guys are running the schemes behind the scenes. Anytime when you see businesses, including mortgage brokers, who are startup businesses and are generating tons of cash off the bat each month, that should be alarming. This should absolutely raise some red flags to compliance officers. Even in established businesses, if you see a large increase or change in their activity, it should be watched closely. Unfortunately compliance officers go 'Oh, they're low risk so I don't have to monitor them.'

These money launderers are looking for a way in. They can be small time operators or big time operators. It doesn't matter; you're in regulatory trouble anytime these guys are laundering money through your organization. The regulators will come down on the institution and ask why no suspicious activity reports were filed on them. An institution will have to answer to their examiners, so it certainly puts an institution at risk.

Money launderers are always looking for high cash transaction businesses, but they've moved past the check cashing businesses and the car washes and the laundromats. Those are typical and we expect those, but this has gone well beyond that model. The person who sits across the table at the Rotary Club lunch every week or sits in the pew next to your family at church services could be laundering money through their business. I don't want to make compliance officers fearful of doing business with local businesses, but they need to take an objective look at everyone they do business with at their institution.

Q: What are other emerging money laundering schemes?

Geister: One scenario that I see happening as another trend is stored value cards. Regulators have warned institutions to be on the watch for money laundering through stored value cards. They are a concern not just because you don't have to have a bank account to use them, but because they can be accessed through any money payment system and are accepted universally not just in the U.S. but also overseas. They are reloadable and can be used by anyone. I don't have to have a checking account to load the card; I just give them cash and they load up the card. They've been seen as a pretty strong venue to move funds. Coupled with mobile payment system, they can move a large amount of money easily.

Mobile payment systems are the predominant transaction in Europe and Asian countries. In this country there are a few providers out there that allow you to take your cell phone and you don't have to have it attached to a bank account, but allow the user to attach it to a stored value card or even the wireless account to move funds. So say I want to send $600 dollars to another person, I would send a credit through my wireless phone account that would then credit that person's cell phone account for the same amount. We're seeing a lot of money move through these types of transactions outside of financial circles.

There was a big money laundering case recently in Bermuda that when they did break the case and raided the place, the officers found a huge cache of Wal-Mart stored value cards inside a cardboard box with cell phones.

The availability of disposable cell phones coupled with a stored value card means a criminal can set up one of these phones in minutes and associate it with a stored value card. Then their partner sets up the same thing on their end, whether they're overseas or here in the U.S. and they can execute fund transfers through them in seconds. This can be a continuous chain. Should someone suspect them, the cell phone can be tossed with the stored value card and the criminals get another set and start again. This is a type of transaction that is not regulated or overseen by FinCEN or reportable by SARs. I don't think we have any sense of how big this is. Money launderers are smart, and we're sure they've discovered this and are working in this space. As a non-detectable way of moving money, this is a perfect way for money launderers to move their illicit funds overseas pretty quickly.

From a bank or credit union's perspective, there is no way to stop this scenario. You just have to be aware of when your institution moves into stored value cards and mobile payments what the caveats are with them. They need to know that when they move into these vehicles that they pose a risk for money laundering and they need to what the risk is. Money launderers are already there. We're three steps behind them and we need to get caught up.

Q: How are money launderers getting into smaller institutions?

Geister: The three most problematic states for allowing LLCs to set up without knowledge of beneficial ownership are Nevada, Wyoming and Delaware. The LLCs can go anywhere in the country and set up business. They often have multiple bank accounts at many different banks. They're very aware of the thresh holds that banks look for and they work under them to move their money around. How many banks are going to worry about a check from a bank across town? It's a local transfer and seems fairly innocuous.

In a lot of these scenarios we look into, there's not a lot of money spent on advertising or marketing their business, but a lot of money is spent on entertainment. At the same time, these money launderers are laundering money, they're also evading taxes. They write off a lot of it through legitimate expenses as cost of doing business. In one particular situation we found one individual who had not filed taxes since 1997.

Q: What is your advice to compliance officers in detecting money laundering and the new threats that are out there?

Geister: Take a critical eye at some of these convenience channels coming into your institution and know the risks. If you've got transaction monitoring in place in your institution make sure you're watching for these kinds of scenarios. They may seem fairly innocuous, but that doesn't mean they are. The money laundering activity that is happening is in the trillion dollar range, and unfortunately it is estimated that 50 percent of that money is being moved through financial institutions here in the U.S. This is followed up by Mexico, Switzerland and Columbia as the top channels for activity, but we're right up at top of the list.

Q: What are other evolving money laundering areas?

Geister: We're seeing a lot of activity in small business area. More and more small businesses are using multiple banking institutions to hide their actions. There is a fundamental gap in states in setting up LLCs -- as I said before there is no beneficial ownership required on documents in 47 states.

What needs to happen at institutions: Assess small business risk from AML perspective. For example, four individuals have 17 different bank accounts, and each bank doesn't see what other banks are seeing, but if you put it all together, it would be of interest to federal investigators. These criminals are well aware of the thresholds, and will stay under the 10,000 and 3,000 levels for transactions and wire transfers. By having multiple bank accounts across multiple institutions they lower their profile for AML detection.

In one scenario, we're sure they're bringing in $50,000 in drug proceeds. But instead of breaking it up into 4 or five transactions; they've broken it down to 15 different transactions across multiple institutions. I don't want to pigeonhole small businesses, but with the depressed mortgage lending industry, mortgage brokers and real estate brokers are pressed for money. Areas institutions should be looking at include businesses that don't have a lot of inventory and very little in the way of assets or physical assets in the company. Professional services seem to be a catch-all category especially in real estate investment, where we're seeing some of that activity happen. I don't want to generalize all of them as suspicious, but I'd advise looking at them pretty closely. It does warrant an AML department to take a look and make sure they've covered all the bases in terms of due diligence when it comes to these types of businesses.

One other thing they should be paying attention to is ACH transactions coming into their institutions. The rise in online gambling is a problem in this issue. In the U.S. online gambling has been outlawed but that doesn't mean you don't have people participating in it on sites located outside of the U.S. One thing I've heard from several compliance officers from around the country in the last several months is they're seeing some of this ACH activity come into customer accounts from a fairly unknown source that may have something to do with this online gambling world. It comes into the institution so they have to monitor them. There are these bot frauds that go into the online gambler's computers from these online gambling sites that rig games and pull money into accounts in institutions. Certainly they're defrauding these clients in those cases because they have a bot on their machine. The institutions are also at risk from accepting money from an unknown source. Institutions should be watching for these types of transactions cropping up in customers' accounts from ACH transactions. This should be on any institution's radar screen.

Q: What does Lexis Nexis see for the AML/BSA regulatory horizon?

Geister: A lot more organizations are being pulled into the regulatory net. Recently AML compliance regulations were applied to jewelers and gem dealers. I don't see AML compliance waning or lessening at any time in the future, it will only continue to increase and there's new things coming as long as we have terrorism issues around the world. AML will continue to evolve and will force focus on customer due diligence and enhanced due diligence in other practices. Unfortunately it's a moving target for compliance officers but it's one they have to stay on top of.

Q: Your advice to institutions how not to become one of those banks in the headlines with a big fine for non-compliance with BSA/AML regulations?

Geister: Institutions, in order not to hit the headlines, need to focus on making sure their audit procedures are in place and that they are adequately testing all of their systems to make sure that they've got a defensible position with their regulators. If they can go back and show that their auditors tested every point and nothing slipped through the cracks they'll be in a good position. Be sure to test again the areas where there was some slippage, it happens in every organization. They need to understand where their weak spots are and take action to shore those areas up. Audit is a big component they need to focus on, pay attention to those audits.


About the Author

Linda McGlasson

Linda McGlasson

Managing Editor

Linda McGlasson is a seasoned writer and editor with 20 years of experience in writing for corporations, business publications and newspapers. She has worked in the Financial Services industry for more than 12 years. Most recently Linda headed information security awareness and training and the Computer Incident Response Team for Securities Industry Automation Corporation (SIAC), a subsidiary of the NYSE Group (NYX). As part of her role she developed infosec policy, developed new awareness testing and led the company's incident response team. In the last two years she's been involved with the Financial Services Information Sharing Analysis Center (FS-ISAC), editing its quarterly member newsletter and identifying speakers for member meetings.




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