Trade-based money laundering

The American banker, in an article by Peter Skinner and Matthew Schwartz, drew an unsettling and vaguely implied obligation on banks recently.

The “new” issue, they describe, is trade-based money laundering. It’s unlikely the techniques are really very new at all, since exchanging money for goods is a fairly common element of the layering phase of money laundering schemes (albeit the typical examples are boats and cars–one shot items rather than an ongoing business).  The problem isn’t in being aware of these techniques,  it’s in the relative intractability of attempting to detect them.

Let’s take their sample case — Vikram Datta’s perfume peso exchange (a case similar to the recent fashion house black market peso exchange caught in L.A. — in fact, that case also involved the Sinaloa drug cartel).  Skinner, who was the lead prosecutor on the case, implies that Datta was convicted based on wiretapped phone conversations with his bank.

Backing up a step, why was he having this conversation with his bank at all?  Well, the article notes that his deposits were unusual — but looking at the records of the case, it clearly wasn’t the unusual deposits that tipped anyone off.  Datta was pointed out by his association with Ajay and Ankar Gupta, perfume merchants who had previously been caught for money-laundering.

So what should have happened, in Skinner”s mind?  He suggests the

bank should “leverage all of the information available to them to determine whether their customers’ bank transactions are consistent with their businesses.”  In a particularly chilling statement, Skinner goes on to state, ” If they fail to do so, they may find themselves forced to justify that failure to regulators and law enforcement investigators.”

Skinner doesn’t go on to say what those ominous suggestions actually mean, perhaps because the implications very quickly become unworkable.  The bank taking Datta’s deposits would not know the reasonable price, profit margin, or sales volume of Datta’s perfume.  They would be very unlikely to have the invoices from the sales or purchases (though if they did — perhaps because of loans secured by accounts receivable — does Skinner seriously suggest that it’s incumbent on banks to not only match these up to transactions but also to determine what’s reasonable for all industries?).

Perhaps Skinner is unaware of what banks already do to monitor their client’s activities, their patterns of deposits and withdrawals, and the financial products they use.  If that’s the case, though, he should really avoid making such open-ended statements.