The Money Maze: Stopping Terrorist Trade
Homeland Security Insight & Analysis
by Brett Wolf   
Monday, 02 October 2006

With a pressing need to move money around the world, terrorists are now using commerce to disguise their transactions—but authorities have a response.

In April, the Department of Homeland Security’s Bureau of Immigration and Customs Enforcement (ICE) and Colombia’s Customs bureau announced that they had worked together to unravel a complex, international criminal network that was laundering more than $7 million in drug proceeds each week under the guise of trade. Some of that money is thought to have made it into the hands of the Revolutionary Armed Forces of Colombia (FARC), a leftist terrorist group.

“The Black Market Peso Exchange blurs the line between crime and commerce, using global trade to mask international money laundering. This investigation demonstrates what can be achieved when law enforcement agencies at home and abroad work together to target this sophisticated form of money laundering,” Julie Myers, ICE’s assistant secretary, said of the effort dubbed “Operation Rainmaker.”

Experts say that international law enforcement successes such as this reveal a largely unexposed, global network of trade-based money launderers and terrorist financiers that cannot be detected by any one country acting alone. In fact, in June, the Paris-based Financial Action Task Force (FATF)—the chief international body dedicated to fighting money laundering and terrorist financing—released a report detailing the rampant misuse of trade.

“The international trade system is clearly subject to a wide range of risks and vulnerabilities that can be exploited by criminal organizations and terrorist financiers. In part, these arise from the enormous volume of trade flows, which obscures individual transactions,” the FATF report stated.

The good news is that US Customs officials have been aware of the problem for more than a decade. The bad news is that funding for countermeasures has been scarce.

Since the Bank Secrecy Act (BSA) was enacted in 1970, the United States has championed financial transparency in the banking system. In the 1980s and ’90s, US officials began to use financial intelligence collected under the BSA to combat money laundering as part of the so-called War on Narcotics. Banks’ currency transaction reports and related BSA filings proved effective in helping federal investigators bring down drug barons.

But after Sept. 11, 2001, it became clear that obligating banks alone to report suspicious activity would not generate the financial intelligence needed to stop terrorists from financing their operations. To bolster US defenses, the USA PATRIOT Act of 2001 was enacted to amend the BSA and extend anti-money laundering rules and BSA reporting requirements to broker-dealers, money services businesses, insurance companies and other non-bank financial institutions.

Despite all of these new rules, which forced institutions to spend hundreds of millions of dollars on compliance, most experts agree that the US financial system remains perilously vulnerable to terrorist financiers. The reason: so-called alternative remittance systems that rely on international trade to move wealth around the world and are nearly impossible to detect without global cooperation.

“Alternative remittance systems are able to bypass, in whole or part, the Bank Secrecy Act and other regulations designed to make money laundering and financial crimes more transparent. Although there are a variety of alternative remittance systems, they all have one thing in common: The systems are all dependent to various degrees on the misuse of international trade to transfer value,” according to the State Department’s 2005 International Narcotics Control Strategy Report ( p/inl/rls/nrcrpt/2005).

Problem and response

Only the imagination limits the ways in which trade can be used to transfer illicit wealth around the globe. However, one common technique involves under- or over-invoicing imports and exports. A simple example: If terrorists in Pakistan want to move $1 million into the United States, they can “sell” 1,000 hand-woven Afghan carpets to a New York import-export company controlled by a US terror cell.

The carpets, which are worth $1,200 each, are sold for $200 each. The US terror cell imports $1.2 million worth of carpets while paying just $200,000. They immediately re-sell the carpets to legitimate companies and keep the $1 million in thoroughly laundered profit. The same process can work in reverse, with US-based terrorists “selling” valueless counterfeit goods to their foreign counterparts at sky-high prices. The result is the same; wealth is moved into the United States.

Trade-based laundering and terrorist financing between the United States and Colombia often involves the complex Black Market Peso Exchange. When selling cocaine in the United States, Colombian drug cartels amass warehouses full of cash. Instead of attempting to launder it themselves—an activity that carries significant risk—they often sell it to Colombian money brokers at a discount.

The money brokers’ US-based toadies then “smurf” the dirty cash into bank accounts in deposits of less than $10,000 to prevent the banks from filing currency transaction reports as required by the BSA. Once the money is in the banking system, it is used to purchase US trade goods on behalf of Colombian importers.

The Colombian businessmen pay the money brokers—who are located in their home country—in pesos and get a much better exchange rate than they could through official, licit channels. In the end, international trade launders the proceeds of narcotics sales and fuels drug cartels and terrorist movements, such as FARC.

Cognizant that such trade transactions were being used by Colombian cartels to launder drug proceeds in the late 1980s, the pre-DHS US Customs began developing a computer system to detect irregularly priced imports and exports. That system, known as the Numerically Integrated Profiling System, or NIPS, debuted in 1993 and has since evolved into a more complex system known DARTTS  (Data Analysis and Research for Trade Transparency System), which ICE reports can go beyond pricing to integrate other variables. However, in order to use DARTTS to generate meaningful leads for financial investigators, ICE needs trade data from the other countries.

“This analysis requires the comparison of US and foreign import and export data for the following factors: Harmonized Tariff Schedule, country of origin, manufacturer, importer, broker, unit price, commodity activity by time period and port of import/export,” an ICE official told HSToday.

Lou Bock, a former special agent with Customs, worked with two university professors in Florida to develop the original NIPS system. He has since retired, but still works on the project as a consultant. He told HSToday that convincing other countries to share their trade data was one of the major initial challenges of the program.

“Colombia was looking for help. But for one country to give another country its data—that’s a big deal. We took their data, combined it with ours and showed them massive amounts of goods leaving their country that they weren’t getting tax money on,” he said.

Although Bock and others had developed the promising computer system, they lacked a governmental framework in which to use it. They knew that, while Colombian officials were desperate at the time because of drug cartels and terrorist revolutionaries, other countries would be less agreeable to turning over trade data to the United States on an ad hoc basis.

John Cassara, a veteran Customs investigator who recently retired, invented the Trade Transparency Unit (TTU) model in 2003. He told HSToday that the TTU is modeled after the Financial Intelligence Unit (FIU). The US created the world’s first FIU, the Financial Crimes Enforcement Network (FinCEN), in 1990, to help law enforcement agency investigators access and analyze BSA data submitted by financial institutions.

“Knowing of the NIPS program developed by Lou Bock, it dawned on me that we could look at trade data between partners. And if we could link these things up, we could have a network of these TTUs,” he said.

Since the creation of FinCEN, more than a hundred other countries quickly manifested FIUs and now share their financial intelligence globally through an association known as the Egmont Group. Thanks to the Egmont Group, financial investigators can access suspicious activity reports and other reports filed by banks in other jurisdictions without extensive legal wrangling.

ICE hopes to achieve the same results with trade data. Its first success came in February 2005 when it helped Colombia’s Customs Service develop its own TTU. In addition to sending agents to train their Colombian counterparts, ICE provided 215 computers and other office equipment.

“Trade-based money laundering is an enormous problem that few people understand. Thankfully, the government of Colombia has recognized this threat for many years and remains committed to addressing it,” Steve Hayward, the ICE Attaché in Colombia, said at that time.

ICE’s relationship with Colombia has been extremely successful and has yielded several major busts. In March, ICE teamed up with the governments of Argentina, Brazil, and Paraguay to create TTUs to fight trade-based financial crime associated with the tri-border region where the three South American countries intersect. That area is notorious for money laundering and terrorist financing.

“Building on our joint efforts with Colombia, ICE is pleased to work with these nations in creating [TTUs] and joint databases that are specifically devoted to combating this problem,” said Myers, who has been a vocal advocate of TTUs on Capitol Hill.

Her voice has helped attract the attention of top US officials.

“[TTUs] allow countries to compare import and export logs to uncover anomalies that may indicate money laundering and represent a serious advance in our worldwide anti-money-laundering efforts,” Stuart Levey, the head of Treasury’s Office of Terrorism and Financial Intelligence, told the Senate banking committee on April 4.

On May 22, the House Appropriations committee recommended devoting $13.7 million to the TTU project in the fiscal year 2007 budget. Although the funding is apt to be quickly exhausted as the program expands, it represents an important endorsement of the TTU project.

The challenges

Dean Boyd, a spokesman for ICE, told HSToday that other countries are “lining up” to work with the US to develop TTUs, in part because such sharing of trade data would allow them to better combat trade fraud, which costs them countless millions in lost revenue. Boyd said he cannot predict when additional TTUs will be developed, however, nor which countries are next in line.

Cassara, who recently penned a book titled Hide And Seek: Intelligence, Law Enforcement, and the Stalled War on Terrorist Finance, told HSToday that there is a reason that ICE is not quickly expanding its TTU-building program.

“There is a funding issue. A couple of months ago, people at [the State Department] said that, instead of standing these things up willy-nilly like Egmont, we need to concentrate on establishing two or three of these things, have them work, and they will sell themselves. That’s the surest way in the government to get money and get attention,” he said.

Cassara said the availability of qualified personnel is another challenge for ICE.

“They just don’t have enough good people out there who can train and stand these things up. It’s just not a priority. If countries are standing in line, you’re going to have to get not only agents, but analysts out there,” he said.

Still, Cassara added that, once the TTUs are in place, ICE personnel can “really work some magic.” He said that the onus is on US legislators to provide the funding that ICE needs to properly expand the program.

“For far too many years, our policymakers didn’t grasp that terrorists don’t just move money through financial institutions. It was just naïve. It’s taken five years for them to grasp: ‘Maybe terrorists do things that we don’t,’” he said.

Cassara’s frustration is understandable, considering the disgraceful treatment he witnessed as a public servant. After Sept. 11, 2001, Customs developed the Operation Green Quest initiative to combat terrorist financing, taking advantage of the creativity and expertise of its renowned financial investigators. The Federal Bureau of Investigation (FBI) thought that it should have the lead in all terrorist financing investigations, however, and a nasty turf battle ensued.

In Cassara’s view, in 2003, after Customs was pulled into the newly created Department of Homeland Security, then-Secretary Tom Ridge betrayed his new troops and signed a memorandum of understanding (MoU) with the Justice Department that gave the FBI what it wanted. Although some at ICE now say the MoU is water under the bridge, there are still some who believe the decision was not in the best interest of the country.

In any case, it appears that TTUs could one day provide ICE with an opportunity to muscle its way back into terrorist financing investigations. With Ridge gone, and Myers backing ICE investigators, the FBI might be biting off more than it can chew if it tries to usurp trade-based investigations.

Turf battles aside, ICE is using the TTU program to confront a clear and present danger to this country. If it were not for Customs visionaries like Bock and Cassara, terrorism financiers and drug kingpins would be able to continue to move funds in and out of the country with no fear of being discovered. If Cassara’s vision of a global network of TTUs is one day realized, some of these criminals will be trading posh condominiums for jail cells. HST

Brett Wolfis a former counter-terrorism analyst and an expert on US anti-money-laundering and terrorist financing law. His work regularly appears in trade publications, and his earlier articles for HSToday, “Cash Crunch” and “Stalking the Wires,” appeared in the April 2005 and May 2006 editions.


Acronyms in this article

BSA—Bank Secrecy Act

FARC—Revolutionary Armed Forces of Colombia

FBI—Federal Bureau of Investigation

FIU—Financial Intelligence Unit

ICE—Immigration and Customs Enforcement

MoU—Memorandum of understanding

TTU—Trade Transparency Unit