One More Money Laundering Problem for Banks to Worry About

The U.S. government's efforts to crack down on money laundering in the financial system have succeeded in scaring off some criminals. Unfortunately, certain lawbreakers who have learned to avoid the financial system have latched onto another method of disguising the source of their profits: trade-based money laundering.

Trade-based money laundering involves transferring goods as a substitute for money. The U.S. State Department reports that this technique is used to launder hundreds of billions of dollars around the globe, while the U.S. Treasury Department believes that it is on the rise.

Because trade-based money laundering occurs outside banks, the risks it poses to the financial sector are not obvious. Nonetheless, the practice can create big problems for banks because merchants involved in trade-based money laundering typically deposit criminal proceeds in their bank accounts.

A Manhattan federal court case in which Peter was the lead prosecutor serves as a good example. In the United States v. Vikram Datta, one of the few trade-based money laundering prosecutions to proceed to trial, a Texas-based businessman named Vikram Datta was convicted of laundering money for Mexican drug cartels.

Datta operated a string of retail perfume stores on the border between the United States and Mexico. He also sold perfume wholesale to Mexican clients. As payment for perfume, Datta accepted tens of millions of dollars in cash that he knew to be drug money. He then shipped the perfume to Mexico, where it was sold to generate pesos for the cartels.

The scheme elegantly hid the drug money. Any law enforcement officials examining the pesos in Mexico would have believed the money had been legitimately generated through the sale of perfume.

Datta likewise claimed that there was nothing criminal about his acceptance of United States currency as payment for his product and that it was not his job to figure out where the money came from. This defense ultimately failed, given evidence that Datta actually had known that he was accepting drug money. But the attraction of the scheme to money launderers is clear. Simply put, it is tough to overcome the "I'm just an innocent businessman" defense.

Datta's banks became embroiled in the government's investigation when he deposited the cash in his corporate accounts and discussed the cash deposits with his bankers in wire-tapped phone calls. As any banker is well aware, federal law requires banks to conduct customer due diligence—that is, to know their customers. In this case, the customer was overseeing a legitimate and substantial business. It included a retail component that explained some cash deposits, but the unit was not nearly large enough to justify Datta's massive cash deposits. 

And therein lies the problem for banks. To truly know their merchant customers, banks must do more than simply confirm that their customers are engaged in the purchase and sale of goods. Banks must instead leverage all of the information available to them to determine whether their customers' bank transactions are consistent with their businesses. If they fail to do so, they may find themselves forced to justify that failure to regulators and law enforcement investigators.

Peter Skinner and Matthew L. Schwartz are partners in the global investigations and white collar defense practice at Boies, Schiller & Flexner LLP. They previously served as assistant United States attorneys in the Southern District of New York. Follow Mr. Skinner on Twitter @Peter_M_Skinner.