ANALYSIS OF MONEY

LAUNDERING SCHEMES

June 2016PRESENTED BY

Henry Kupperman Applied Facts901 Corporate Center Drive, Suite 104Monterey Park, CA 91754(213) 892-8700www.appliedfacts.com

Carlton GreeneCrowell & Morning1001 Pennsylvania Avenue NWWashington, DC 20004-2595Ph.: (202) 624-2818www.crowell.com

Part 2

Using Real Estate to Launder Money

1. Illicit funds are deposited in a bank in a country where it does not trigger a regulatory filing.

2. Funds are transferred from bank to bank around the world. The various accounts used are owned by different limited liability corporations.

3. Ultimately, the funds will be deposited in an account in a bank in what is perceived to be a legitimate country, such as an EU country.

Using Real Estate to Launder Money (cont’d)

New York Times

Story, Louise and Stephanie Saul, “Stream of Foreign Wealth Flows to Elite New York Real Estate.” New York Times. Feb. 7, 2015.

FinCEN Regulations Regarding Real Estate Transactions

Applies only to all cash deals made by companies

Applies only in Manhattan (>$3million), other NYC Boroughs (>$1.5 million), Miami-Dade, Broward, Palm Beach Counties in Florida (>$1million) five counties in California, including; Los Angeles, San Diego and San Francisco (>$2million), and Bexar County, Texas (>$500,000)

Title insurance companies must determine the identity of the actual buyer and submit information to Treasury

Money Laundering Organizations (“MLO”)

Created and run in foreign countries by prominent business people, bankers, and politicians

Appear to be legitimate operations

Will set up financial institutions, import/export firms and corresponding banking relationships with unknowing U.S. banks

Money Laundering Organizations (“MLO”) (cont’d)

Waked Money Laundering Organization

Rosenthal MLO

International Drug Cartels

Trade Based Money Laundering (“TBML”) The Financial Action Task Force (FATF), has defined TBML as the process of

disguising proceeds of crime and moving value through trade transactions to legitimize their illicit origin.

According to the U.S. Department of State’s 2018 annual report on money laundering, TBML concerns have surfaced in countries or jurisdictions including;

(112)Algeria, (85)Argentina, (77)China, (96)Colombia, (13)Hong Kong, (81)India, (130)Iran, (143) Kenya, (143)Lebanon, (135)Mexico, (117)Pakistan, (135)Paraguay, (66)Senegal, (n/a)Sint Maarten, (n/a) St. Lucia, (77)Suriname, (21)UAE, (23) Uraguay, (169)Venezuela, and (107) Vietnam

(-) denotes transparency international ranking with 1 being best and 176 worse

Financial institutions are wittingly or unwittingly implicated in TBML schemes when they are used to settle, facilitate, or finance international trade transactions (e.g., through processing wire transfers, providing trade finance, and issuing letters of credit and guarantees).

Trade Based Money Laundering (“TBML”) (cont’d)

Financial institutions are involved in TBML schemes when they are used to settle, facilitate, or finance international trade transactions, including through:

1. Letters of credit (in which a bank guarantees for one of its customers that the goods/services ordered to a seller abroad will be paid in full; the bank additionally insures its customer that payment will not be processed prior to confirmed receipt of shipped items)

2. Letters of guarantee (similar to letters of credit, but when a bank only guarantees a sum of money to the beneficiary)

3. Wire transfers

4. Money transmitter asks the bank to send funds to industrial or consumer sales companies or distributors in other nations (that is, nations to which it does not routinely send funds) in large amounts as payment for goods

Mirror (“Konvert”) Trading

Used often by Russian oligarchs trying to smuggle their money out of the country

A representative of the oligarch calls a bank and places two simultaneous trades. The first is for a foreign (offshore company) to sell a certain number of shares of a company in dollars, pounds or euros. The second trade is for a Russian entity to purchase in rubles the identical number of shares in the same company.

Technically, these are two separate trades and the bank reflects it in their records as such.

Mirror (“Konvert”) Trading (cont’d)

In reality, the selling entity and the buying entity are owned by the same person.

The result: the money has been transferred from rubles in Russia to dollars, pounds or euros in an offshore entity.

Usually, the trades don’t exceed $20 million to avoid detection.

Mirror (“Konvert”) Trading (cont’d)

Many times, the trades are performed over the counter (no exchange is used).

To further disguise the transactions, two banks may be used.

The oligarch may perform these trades via investment in funds on both sides of the transaction to hide their identity.

Moldovan Loan Scheme

Designed to get money out of Russia.

An overseas shell company will “loan” another shell company a large sum of money using a Russian company as the guarantor for a loan. The loan is then defaulted on.

The use of a Moldovan signatory allows the case to be tried in Moldova, where it can be overseen by a corrupt judge who will authorize repayment.

Moldovan Loan Scheme (cont’d)

The money from a Russian bank would then be transferred to a Latvian bank, which gets the money into the EU. From there money would be transferred to the UK and around the world.

Between 2011 to 2014, more than $20 billion was identified as having been laundered out of Russia in this scheme. The amount is suspected at being closer to $80billion.

Considered to be one of the largest money laundering schemes of all time.

North Korean Money Laundering China is a main conduit for North Korean funds as it is

believed that 80% of North Korea’s exports are sent to China

North Korea will sell products to China. The sale proceeds will remain in Chinese banks and then be laundered throughout the world through correspondent banks, front companies and individuals.

Some of that money has been found in the U.S. and has been used to buy real estate.

North Korean Money Laundering (cont’d)

Front companies from all over the world are involved:

Australia, British Virgin Islands, Hong Kong, Taiwan Russia, China, Samoa, Seychelles, United Kingdom Singapore

Russian smugglers are involved

Trading and shipping companies involved

Companies involved in iron, steel, coal

North Korean Money Laundering (cont’d)

Chinese garment firms: garments are manufactured in North Korea, but label says they are manufactured in China

North Korean guest worker program

1MDB More than $4 billion allegedly stolen from Malaysian state investment fund

Then-Prime Minister Najib Razak allegedly received approximately $700m

Alleged scheme depended on Malaysian financier – “Jho Low” who had no official government role but helped direct many transactions

About $1.5 billion laundered through the U.S.

Proceeds were used to buy luxury real estate and art, and to fund the movies “The Wolf of Wall Street” and “Dumb and Dumber To”

DOJ seeks forfeiture of these amounts and is reportedly considering criminal charges against persons involved, including Jho Low

At least six other jurisdictions investigating

1MDB – Good Star

1MDB(MY)

PSI(KSA)JV

Good Star(SY)

Jho Low

Falsely claims to be owned by PSI

1 Bearer share

Smart Power 1 Bearer share

Secretary

$300m

$700m

“Repayment” of non-existent loan from PSI to JV

No beneficiary name on transaction

1MDB – AABAR BVI

1MDB(MY)

IPIC(UAE)

Aabar(UAE)

“Eric Tan”/JhoLow

Aabar BVI

100%

Qubaisi

Al-Husseiny

Officers

Guarantor

$1.367bn

Goldman Sachs

$3.5bnbonds

Blackstone o/c

$1.1bn

Riza Aziz

$238m

1MDB

Where did the money go?

About $1.5 billion laundered through the U.S.

$368m go to IOLA account held at Shearman & Sterling and are used to purchase luxury real estate, a Beverly Hills hotel, a private jet, to invest in the Wolf of Wall Street, and to fund yacht trips, visits to casinos in Las Vegas, and interior decorators

Proceeds were used to buy luxury real estate and art, and to fund the movies “The Wolf of Wall Street” and “Dumb and Dumber To”

DOJ seeks forfeiture of these amounts and is reportedly considering criminal charges against persons involved, including Jho Low

Paul Manafort

Indicted for, inter alia --

Failing to register as foreign agent

Failing to file FBARs

Tax evasion

Bank fraud related to loans on properties purchased with laundered proceeds

Money laundering

Paul Manafort $18m allegedly laundered Laundering relates to proceeds of work on behalf

of the Yanukovich government of Ukraine Used more than 30 entities he owned or

controlled. Nearly half were in the U.S., in Delaware, Florida, New York, and Virginia

Used foreign companies to make payments in U.S. for improvements to a home in the Hamptons, luxury vehicles, more than $1mclothing, and various other luxury items

Paul Manafort

Real Estate Condo in Soho for $2.85m. Bought through LLC.

Used to obtain loan for $3.185m Brownstone in Brooklyn, $3m. Bought through

LLC. All-cash purchase. Used to obtain loan for $5m.

Fits FinCEN’s geographic targeting order for real estate, which targets all-cash purchases of luxury residential real estate through LLCs

Use of Chinese and Hong Kong Banks Hong Kong and Chinese Banks are now being used to launder money

from Latin American drug cartels

The cartels run front companies and maintain bank accounts in Hong Kong and China to launder funds from local sales as well as from U.S., Latin America, Canada, Africa, and Europe

Funds are transacted through factories, export companies, casinos, and currency exchange houses

Use of Hong Kong and Chinese Banks (cont’d)

The money is placed in Hong Kong and Chinese banks and used to purchase products that are shipped overseas.

Often, the product is counterfeit.

Iranian Money Laundering

Iran uses diplomats and businessmen from Iran and Europe to launder money. Entities and individuals are also used from Malaysia, Dubai, Switzerland, Turkey, Greece, Tajikistan, and the U.K.

Diplomats will distribute money to money lenders in Austria, Germany and Italy

Iranian Money Laundering (cont’d)

Businessmen use U.K. banks to transfer U.S. dollars from one U.K. bank to another via SWIFT transfers

New York branches of foreign banks have been used to make such transfers

Austrian banks are also used

Iranian Money Laundering (cont’d)

Iran secretly buys real estate in the U.S.

650 Fifth Avenue was owned by the Alavi Foundation and AssaCorporation. They in turn were controlled secretly by the Iranian government. After uncovering this scheme, the U.S. government seized the building.

Iran and Venezuela have a close relationship. Iran uses Venezuelan banks, some of which have Iranians in active senior positions.

It is believed that Venezuela's state run oil company is also involve in laundering money for Iran.

Hezbollah Money Laundering

Hezbollah has conducted extensive money laundering and related activities in the U.S. and throughout Latin America.

Hezbollah is active in drug trafficking, primarily in Latin America. Very active in Colombia. Hezbollah is also active in heroin smuggling in Southeast Asia.

Some Lebanese work actively for Hezbollah in Argentina, Paraguay, and Brazil.

Hezbollah Money Laundering (cont’d)

In the U.S., Hezbollah launders money through banks. Money derived from international criminal activity is funneled from foreign financial institutions to the U.S. where the money is used to purchase used cars that are then sold in West Africa. The money is then funneled back to Lebanon.

In order to pay drug dealers involved in these schemes, money is sent from foreign financial institutions through U.S. banks to pay Asian suppliers of consumer goods that are shipped and sold in South America. The proceeds of these consumer goods are then used to pay the drug dealers.

Hamas Money Laundering

Hamas launders money through Chinese banks including the U.S. branches of Chinese banks.

Charities in the U.S. are used to raise funds and launder money for Hamas.

Hamas Money Laundering (cont’d)

Hamas runs cigarette smuggling operations in the U.S. that use U.S. banks.

Hamas also uses front companies in Saudi Arabia and the Sudan.

Conclusions Always ask yourself, do I really understand where the money

originates

Do not assume because your bank focuses on domestic or local customers that your transactions may not be part of an international money laundering scheme. There are many criminal enterprises where the proceeds start here and wind up being laundered throughout the world (ex: drug sales, sex trafficking).

Delaware, Wyoming, and Nevada LLCs are used frequently by money launderers

Particularly in real estate transactions

Important to determine the beneficial ownership of the LLC and parent entities

Conclusions (cont’d)

Closely scrutinize trusts

Closely scrutinize import/export firms

The ultimate beneficiary of money laundering may be from a country completely different than that of your subject (including U.S.-based entities)

Conclusions (cont’d)

Panama and Paradise Papers will result in requiring further due diligence by financial institutions, particularly as to beneficial ownerships. This may require peeling back the layers of corporations. Also, new FinCEN regulations on beneficial ownership come into play.

Closely scrutinize real estate transactions involving LLCs

Conclusions (cont’d)

Increased use of Chinese and Hong Kong banks by money launderers

Increase in transactions between terrorist groups and drug traffickers

Closely scrutinize cash-based businesses

Closely scrutinize extremely high and unexplained profit margins

Conclusions (cont’d)

Closely scrutinize transactions involving relatives of PEPs and high net worth individuals

Closely scrutinize transactions involving Asian casinos, particularly in Macao and The Philippines

Small and medium-sized banks are becoming increasing targets of money launders because they tend to have smaller AML and due diligence units

Conclusions (cont’d)

Geography and identity of the customer becomes less relevant. Money launderers will use multiple countries and multiple entities to launder funds.

Closely scrutinize multi-jurisdictional transactions. This may be a layering scheme.

Closely scrutinize funds that are the result of a foreign judgment or purported loan arrangement

APPLIED FACTS901 Corporate Center Drive

Suite 104Monterey Park, CA 91754

(213) 892-8700www.appliedfacts.com

Henry KuppermanOffice: (213) 892-8700Cell: (213) 923-5577hkupperman@appliedfacts.com

Carlton GreenePh.: (202) 624-2818cgreene@crowell.com

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