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FinCEN Employing New Tactics to Combat Money Laundering

New York Law Journal
By Peter M. Skinner and Matthew L. Schwartz

On April 21, 2015, the Financial Crimes Enforcement Network (FinCEN) posted an alert flagging a new Geographic Targeting Order (GTO) that was sent to roughly 700 Miami businesses. According to FinCEN's alert, the GTO was issued "to shed light on cash transactions that may be tied to trade-based money laundering schemes."

The GTO lowers the monetary threshold for the filing of Form 8300s by Miami-area nonfinancial trades and businesses "that export[] electronics (including cellphones)." The general rule is that a business must file a Form 8300 with the Internal Revenue Service if it receives more than $10,000 in cash from one buyer as a result of a single transaction or two or more related transactions.1 There are criminal and civil penalties for failing to file Form 8300s.2 The GTO lowers the reporting threshold to $3,000 for the covered trades and businesses for 120 days—from April 28, 2015, until Oct. 25, 2015.3

The GTO is of obvious import to the businesses covered by the new reporting requirements. And press coverage in the days following the issuance of the GTO focused on the government's "targeting" of those businesses for money laundering. Of note, however, is not the government's enhancement of reporting requirements on a small subset of businesses in one locale, but the government's focus on trade-based money laundering, a complicated but increasingly popular means of laundering criminal proceeds.

Black Market Peso Exchange

Trade-based money laundering involves the transfer of a product (here, an electronic good, but really any product will do) as a substitute for the transfer of money. There are many different trade-based money laundering schemes, including under- and over-invoicing the value of goods, falsifying customs and other reporting documents, and transferring legitimate products through a system known as the Black Market Peso Exchange (BMPE). The BMPE is a particularly effective means of laundering cash and is likely the target of the new GTO.

The BMPE was first developed by Colombian money launderers seeking to scrub drug money. It is now employed throughout the world and is limited to neither pesos nor narcotics proceeds. Nevertheless, law enforcement commonly uses the BMPE label to describe the scheme regardless of the type of currency at issue or the underlying crime.

Under the BMPE, narcotics traffickers sell dollars located in the United States to money exchangers for less than the dollars are worth on the legitimate currency exchange markets. In exchange, they receive their local currency in their home country. The money exchangers then sell the dollars to Latin American business people and arrange to have the dollars delivered to United States businesspeople as payment for goods. The goods are then shipped to the Latin American business people, who sell the goods to generate local currencies, which are used to purchase more dollars from money exchangers, and the process is repeated. Electronics dealers frequently participate in the BMPE because their product, which is high-value and compact, allows for maximum yield from each shipment to Latin America.

Shift in Resource Allocation

Form 8300s are the government's first line of defense against the BMPE. When the forms are filed accurately and as required, the government is notified of cash flowing into a business and can identify businesses where cash receipts warrant further investigation. Alternatively, if the government learns through other means that cash is flowing into a business and determines that the business is not filing Form 8300s for those cash payments, the business' failure to file Form 8300s will justify further scrutiny. Either way, the existence or absence of Form 8300 filings helps the government select targets for further investigation. By lowering the thresholds for reporting with its new GTO, FinCEN will capture more data to support future investigations of the covered businesses.

In its April 21, 2015, announcement, FinCEN made clear that the GTO was implemented to assist in trade-based money laundering investigations. Although the government has investigated trade-based money laundering in the past, it has historically prioritized the movement of money through financial institutions in allocating its resources. It now appears that the government is turning its attention to other forms of money laundering and that resource allocation is shifting as a result.

This shift is noteworthy for a few reasons. First, even if you are not a financial institution, money laundering is a risk you cannot ignore. You need to consider how your business might be used to launder money and take steps to prevent that from happening. You also need to consider whether you have reporting and compliance obligations, and if so, you need to satisfy those obligations and be prepared to explain to regulators and criminal investigators how you have done so.

Second, the GTO highlights the importance of cash to money laundering investigators. Virtually any business that takes in large amounts of cash is going to attract some level of government scrutiny. And if you are receiving large amounts of cash from individual customers, you need to know where that cash originated and, to be truly protected should the government examine your business, you must also know how that cash was generated.

Third, the GTO further underscores the increased importance of money laundering to government investigators and regulators. The government views money laundering as a growing problem and is using all of the tools at its disposal to attack it, regardless of the increased burden it may place on certain business sectors. Indeed, FinCEN reports that it has issued only one similar GTO in the past—an order lowering reporting obligations for multiple types of businesses in Los Angeles that ran from Oct. 9, 2014, until April 6, 2015. But FinCEN's heightened scrutiny of individual business sectors, and the deployment of its full range of money laundering authorities, will not likely end with the GTO covering Miami electronics businesses.

Endnotes:

1. See 31 U.S.C. §5331, IRC section 6050I(a), and 26 CFR 1.6050I-1(e).

2. Title 31, U.S. Code, Section 5324(b) makes it a crime punishable by up to five years in prison to cause, or attempt to cause, a trade or business to fail to file a Form 8300 or to file a Form 8300 containing a material omission or misstatement. IRC section 6721 provides various civil fines for failure to file Form 8300s.

3. The director of FinCEN is authorized to impose additional record-keeping and reporting requirements on one or more domestic financial institutions or nonfinancial trades or businesses in a geographic area. See 31 U.S.C. §5326(a); 31 U.S.C. §101.370.

Reprinted with permission from the 5/1/2015 issue of New York Law Journal. © 2015 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.

Related Lawyers: Peter M. Skinner, Matthew L. Schwartz

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