• Money Laundering and the Risks Associated With Being an Accomplice to Financial Fraud
  • November 9, 2012 | Authors: Christopher R. Hall; Charles T. Williams
  • Law Firms: Saul Ewing LLP - Philadelphia Office ; Saul Ewing LLP - Wilmington Office
  • For as long as criminals have organized their illicit activities, they have used “legitimate” business ventures and other entities as fronts to shield their illegal behavior from authorities. Indeed, banks, operating business entities, non-profit organizations and other third parties often play a role (sometimes unwittingly) in the flow or “laundering” of money from criminal syndicates, through these “legitimate” fronts, and back to the criminals, with the express purpose of avoiding the attention of governments and regulators. Recent investigations by state and federal law enforcement agencies demonstrate that money launderers come in many different forms, but regardless of the form all pose tremendous risks to the business organizations they seek to involve in their illegal conduct.

    Several recent high-profile cases illustrate the extent to which otherwise legitimate enterprises, including some of the world’s largest financial institutions, facilitate money laundering to the benefit of rogue nations, organized criminal syndicates and terrorist organizations. The financial, reputational and other risks warrant careful attention and require the implementation of robust anti-money laundering controls and processes that will reduce or eliminate these risks.

    Financial Institutions and “U-Turn” Transactions - The Cautionary Tale of Standard Charter PLC

    Beginning in the 1980s, the United States imposed sanctions against the rogue nation of Iran due to, among other things, its support of terrorist organizations. In 1995, the United States (through Executive Order) created a loophole in these sanctions that was essentially designed to protect the U.S. dollar as the primary currency in oil trading transactions. This loophole permitted so-called “U-Turn” transactions, which permitted Iranian funds to pass through U.S. financial institutions so long as the funds originated from a non-Iranian, off-shore bank and merely passed through a U.S. financial institution on the way to another non-Iranian, foreign financial institution. The purpose of these transactions is to convert foreign currencies into U.S. dollars, and then transfer the dollars out of the United States.

    In 2008, the Office of Foreign Assets Control of the U.S. Department of Treasury (“OFAC”) promulgated regulations implementing a series of Executive Orders and closed the “U-Turn” loophole with respect to Iranian transactions. OFAC’s stated reason for closing the loophole was the “need to further protect the U.S. financial system from the threat of illicit finance posed by Iran and its banks.” Of particular concern was the potential use of the U.S. financial system to contribute to Iran’s proliferation of sensitive nuclear weapon delivery systems.

    In August 2012, Standard Chartered PLC (“Standard”), the fifth largest U.K. bank by assets, agreed to pay $340 million to settle charges that it violated U.S. anti-money laundering laws by engaging in these prohibited “U-Turn” transactions for the benefit of its Iranian customers. U.S. regulators alleged that Standard was involved in a staggering scheme that spanned a decade and involved approximately 60,000 financial transactions totaling more than $250 billion. Standard admitted that it illegally processed these transactions, which initiated outside of the United States and were then cleared through the United States. Among other violations, Standard was alleged to have “stripped” the wire transfers of identifying information that would have otherwise been detected by U.S. regulators. In sum, Standard was apparently motivated by the millions of dollars in fees it earned by processing these transactions, and fostered a culture that not only permitted these transactions to occur, but blatantly flouted clear financial regulations prohibiting the conduct.

    Standard is not alone. Indeed, since 2009, U.S. regulators have entered into settlements totaling almost $3 billion stemming from alleged money-laundering operations and schemes. Many of these money-laundering schemes were not perpetrated by shady, underworld money operations, but rather by some of the world’s largest banks, such as ING, Credit Suisse, Barclays and HSBC. Regulators will likely continue to focus on these types of transactions, and therefore financial institutions must ensure that their anti-money laundering (AML) policies and internal compliance systems are rigorous and up-to-date.

    Luxury Goods, Entertainment and Other Transactions - The Importance of Knowing your Business Partners

    Mexican drug cartels are in the headlines these days, due in large part to the extreme violence that has spread across the U.S. border. But as with many other criminal organizations, the Mexican cartels also engage in financial crimes that have drawn the attention of law enforcement. In June 2012, the Justice Department moved against certain members of Mexico’s Zetas drug organization, as well as a U.S. company engaged in horse breeding called Tremor Enterprises (“Tremor”). The Zetas cartel used a web of family and business relationships to cause Mexican businessmen to buy quarter horses on their own account during the past three years and then to sell them to the Tremor front company. Tremor horses went on to win some of the nation’s most prestigious races (and largest purses). The Zeta web in the process ensnared a member of a prominent quarter horse family who purchased a horse for the company for close to $1,000,000. While the individual has not been charged with wrongdoing, this episode illustrates how people not guilty of money laundering can be drawn into illicit criminal actions.

    As with prize winning horses, any business engaged in high-dollar entertainment or the sale of luxury goods (e.g., cars, jewelry, real estate, etc.) should be vigilant and in some cases have a duty to know those with whom they conduct business. Indeed, casinos are held to standards similar to those applicable to banks, and must report large cash transactions and file suspicious activity reports. Criminal organizations might also seek to utilize purportedly charitable, non-profit organizations to launder money and avoid detection. In each case, these third parties (as well as their advisors, such as lawyers and accountants) have an obligation to ask questions and perhaps notify authorities of possible irregularities. Failing to do so exposes these otherwise innocent third parties to reputational risk, at best, and potential criminal penalties, at worst.


    These recent, high-profile settlements and prosecutions should give financial institutions and other business owners pause. While competition for business and the need to earn profits certainly represent key and legitimate drivers in decision- making, companies should also give appropriate weight to reputation risk and the prospect of stiff penalties (including asset forfeiture). To that end, organizations should weave AML compliance procedures into their client intake and financial transaction processes to ensure proper oversight and internal reporting, and to avoid the unwitting facilitation of unlawful activity.