Global Money Laundering's Impact on the U.S. Banking System and Economy Dirty Money's Impact on U.S. Banking and Economy

Global Money Laundering's Impact on the U.S. Banking System and Economy The United States is turning its attention to activities by foreign investors who use

U.S. trusts, limited liability entities, and other investment structures to conceal the ownership of criminal proceeds or foreign tax evasion.

For both legitimate and illegitimate reasons, investors have historically sought to shield their identities by forming certain types of US entities.

in May 2016, the Treasury Department proposed regulations that, if promulgated, would impose new disclosure obligations on single-member limited liability companies (LLCs) owned by foreign persons, a type of entity that historically has been largely invisible to the government for reporting requirements

Global Money Laundering Laundermat

The estimated amount of money laundered globally in one year is 2 - 5% of global GDP, or $800 billion - $2 trillion in current US dollars. Though the margin between those figures is huge, even the lower estimate underlines the seriousness of the problem governments have pledged to address.

Between 2010 and 2014, at least $20.8 billion was laundered out of Russia, funneled into banks in Moldova and Latvia, and spread from there into 96 countries across the world. The Organized Crime and Corruption Reporting Project (OCCRP), which unearthed the scheme in 2014, dubbed it “the Russian Laundromat.”

Fueled by advances in technology and communications, the financial infrastructure has developed into a perpetually operating global system in which "megabyte money" (i.e. money in the form of symbols on computer screens) can move anywhere in the world with speed and ease.

Black Market Peso Exchange 1987-1997

Early 1990s Russia Privatization and Tax Avoidance Genesis Most privatization took place in the early and mid-1990s under Boris

Yeltsin, who assumed the presidency following the dissolution of the Soviet Union.

Privatization facilitated the transfer of significant wealth to a relatively small group of business oligarchs and New Russians, particularly natural gas and oil executives. This economic transition has been described as katastroika and as "the most cataclysmic peacetime economic collapse of an industrial country in history".

Banking in Russia have to meet mandatory Russian legislationrequirements, and comply with numerous Bank of Russia instructions and regulations.

What is a TAX HAVEN and Why?

A tax haven is a jurisdiction that offers favorable tax or other conditions to its taxpayers as relative to other jurisdictions., but activities that are commonly associated with such places range far beyond tax.

The term most commonly refers to those countries or jurisdictions that have a low-tax or no-tax regime or which offer generous tax incentives. Some definitions focus purely on tax:

Other definitions refer to a state, country, or territory which maintains a system of financial secrecy, which enables foreign individuals to hide assets or income to avoid or reduce taxes in the home jurisdiction.

A 2012 report by the British Tax Justice Network estimated that between US$21 trillion and $32 trillion is sheltered from taxes in unreported tax havens worldwide

Sinister shell game on Nauru hides a cast of global villains April 12 2003

In 2000, the President of Nauru, René Harris, responded to claims of illegal money movements by saying "Nauru does not tolerate criminal activities in its financial system

America's terrorism net has reached a tiny island where a nest of people, including Australians, are trying to hide billions of dollars, writes Craig Skehan in Washington DC.

The paper trail wends its way through Israel, Russia, Indonesia, China, the United States ... and Australia. On obscure shell company documents, Moscow addresses turn up alongside Australian names.

There are cross‐continent money laundering, sophisticated tax scams and straight‐out fraud. All this is covered in the thousands of documents delivered by tiny Nauru to tax and crime officials in 

Washington as they seek to end the remote Pacific Island's role as a central junction in the global flow of tainted money.

Nauru on Brink of collapse April 2004

The Pacific nation of Nauru, the world's smallest republic, is likely to go bankrupt this week after decades of exploitation and mismanagement.

Yesterday it confirmed that receivers had taken control of its assets in Australia, including hotels and a shopping centre in Sydney and Melbourne, as it faces default to a major US financier.

The bankruptcy would cap a sad tale that has seen the island, home to 12,500 people, slip from having the world's highest per capita income in the early 1970s.

The world's Worst Tax Havens, per Oxfam

1. Bermuda 9. Hong Kong2. the Cayman Islands 10. Cyprus3. the Netherlands 11. Bahamas4. Switzerland 12. Jersey5. Singapore 13. Barbados6. Ireland 14. Mauritius7. Luxembourg 15. British Virgin Islands8. Curacao

Parex Bank Latvian Banking Early 2000s

Mr. Valery Kargin and Mr. Viktor Krasovitsky, once Latvia’s richest men and Russian Jews with good Communist party connections, won the first private licence in the Soviet Union to trade in hard currency in 1990.

After Latvia achieved independence in 1991 they built a lucrative business servicing Russian capital flight

In 2005, a whistleblower gave a detailed list of material frauds at KGB-linked Parex Bank to Latvian authorities and the US Treasury provided money laundering information about KGB-linked Multibanka (Skonto) and KGB-linked VEF Banka (Savitsky).

This was the pivotal moment when any rational person who previously doubted that the KGB controlled the supposedly-democratic government could not be in doubt anymore.

U.S. Shells and Foreign Money Laundering

LLCs with no assets, ongoing business activities, no physical address

Can be public or privately held

Used for reverse acquisition  ‐ pump and dump

Used for credit “bust out”

Ease of set up

Invoice Fraud

Mask/Disguise ownership of Billions in US Dollars

As of YEAR 2000, per the US GAO thousands of LLCs created by ONE SERVICE PROVIDER to Russian Nationals

THE Latvian Connection

U.S Shells opened and maintained accounts at Latvian Banks

How were these accounts funded?Why open offshore and not at US bank? Funds transfers pass through U.S. Correspodents Funds Transfers appear as U.S. Companies Benefical Owners non US shell companies in Caribbean

and Latin America

US Shell Company Accounts in Eastern Europe Global Trade? Not!

According to a FinCEN SAR Review between 1996 and 2005;

1002 SARs involved U.S. Shell Companies 786 of these involved international wire transfers 504 of the SARs identify Russia and Latvia as locations of

activity “Nested Correspondent Activity”

2011 Greece Capital Flight

Cyprus (Greece 2.0)

Russia has been using the Cypriot banking system as a financial clearing house for brokerages and for export-import operations (legitimate as well as fake ones, intended for money-laundering and capital outflow).

Russian oligarchs use Cyprus to do business, while parking their massive yachts and buying estates in the French Rivera and equally flashy places.

Cyprus per Vedomosti, March 19 2013

Cyprus has been used as an offshore financial haven by Russian companies and wealthy Russians to avoid high corporate taxes

Home to legalize billions obtained in kickbacks and other illegal or shady activities. Some of this wealth has been reinvested:

Cyprus officially owns some 40 percent of the total foreign capital invested in Russia. The Russian economy to a large extent is controlled by shell holding companies registered in Cyprus, which—as a “foreign” EU investment—gives them additional protection from arbitrary actions by the notoriously corrupt Russian bureaucracy.

Shell companies in Cyprus thus avoid the taxation of dividends and allow for the free movement of capital to a seemingly safe destination (Vedomosti, March 19).

Cypriot Tax on Withdrawals Solution

Withdrawal Tax Winning or Losing? Opportunity to curry favor Russia offered Cyprus a €2.5 billion loan at 4.5 percent interest, well below 

prevailing market rates.   So what does Russia get in exchange?

Cyprus has been letting Russia use it to funnel weapons to the Syrian regime, in flagrant violation of an E.U. embargo against the country. 

Allowed Russian companies to set up Cypriot subsidiaries to evade Russia's heavy taxes on companies that earn money abroad.  Cyprus now a haven for Russian tycoons to launder money. 

According to German intelligence, at least €20 billion of Cyprus' €70 billion in bank deposits come from Russia, much of it from the country's "oligarchs" who got rich through quasi‐legal means in the chaos that followed the Soviet Union's collapse.

The bank deposit tax would have hit these oligarchs as much as it will native Cypriots. The Russian deposits would haven taken a hit of between €1 and 2 billion under the bank deposit levy, still a substantial fraction of the bailout's cost.

BUT THIS NEVER HAPPENED, blocked by THE EU fearing Russian Control over Cyprus

Moldova Too– REALLY? (per Tim Whewell BBC News)

It's a mystery that's thrown Europe's poorest nation into deep crisis -$1bn has vanished from three of Moldova's leading banks, much of it passing through UK companies. A confidential report has blamed 28-year-old businessman, Ilan Shor.

A report by the private international investigation agency Kroll, leaked by the speaker of Moldova's parliament, suggests he was the prime co-ordinator and beneficiary of a bafflingly complex web of transactions that pushed three leading banks to the verge of collapse.

It says loans worth $1bn were transferred in just two days to a series of UK- and Hong Kong-registered companies - companies whose ultimate owners are unknown.

Deposit Collateral to Loans and POOF

The loans that brought the banks to the verge of collapse, according to the Kroll report, are particularly hard to explain. It says Banca Sociala, which it alleges was controlled by companies linked to Shor, lent 13.7bn lei (£484m, $750m) to five Moldovan firms, also allegedly linked to Shor.

One is named in the Kroll report as Caritas Group SRL - not connected to the international development charity or any other group of the same name. According to National Bank data it borrowed 2.6bn lei ($143m). But the address in Chisinau where it's registered turns out to be a complex of tiny, scruffy repair workshops and offices around a puddle-filled courtyard.

WASH (DEPOSITS IN) RINSE (TAKE OUT LOANS WITH HIDDEN OWNERSHIP) REPEAT (FIND A HAVEN) GLOBAL LAUNDERMAT!!!

Latvia Take TWO –Russian-Moldovan Connection Vasile Sarco of Moldova's Office for Prevention of Money-laundering says

the purpose of using UK-registered companies is to hide the beneficiaries of the funds. He's investigating not only the disappearance of the $1bn from the three banks, but also an earlier $20bn operation which laundered dirty money from Russia through Moldova into the EU.

In both cases, he says, there's been a similar use of UK "shell" companies with Latvian accounts. They're not the same companies, though some use identical UK addresses. He believes there's a single "Mr Big" living in Russia who masterminded the first scheme and advised on the second.

SO FINALLY . . . . how does this impact US Banks and OUR ECONOMY?

BUT TIM? Why DO WE in the U.S. CARE?

Civil Monetary Penalties the Answer?

CASH, LLCs High End U.S. Real Estate

U.S. Treasury Department to begin identifying and tracking secret buyers of high-end properties.

The initiative will start in two of the nation’s major destinations for global wealth: Manhattan and Miami-Dade County.

Focus on: all-cash purchases made by shell companies that often shield purchasers’ identities.

It is the first time the federal government has required real estate companies to disclose names behind cash transactions, and it is likely to send shudders through the real estate industry, which has benefited enormously in recent years from a building boom increasingly dependent on wealthy, secretive buyers.

Beneficial Ownership and Tax Evasion

The Treasury is looking for the actual owners behind shell companies, often referred to as the beneficial owners. “We’re not looking for nominees,” In its order, the Treasury defined beneficial owners as “each individual who, directly or indirectly, owns 25 percent or more of the equity interests” of the entity that bought the property. Once title companies identify those people, they are required to copy driver’s licenses or passports and also pass the individuals’ names to the Treasury Department.

ancial Crimes Enforcement Network, said any title companies or purchasers who provided false information could face penalties. The American Land Title Association said in a statement that it would help its members coreal estate companies to scrutinize real estate buyers, but the department has in the past faced fierce lobbying against issuing such rules. The department already requires mortgage lenders to scrutinize buyers. But cash

Panama Papers

The United States government is close to issuing a rule that will for the first time require banks and other financial institutions to find out the identities of people hidden behind shell companies.

That firm, Mossack Fonseca, is one of the largest incorporators of shell companies in the world. The trove of leaked documents — analyzed by more than 100 news organizations worldwide — revealed offshore companies tied to 143 politicians, their families and close associates.

The documents also showed scores of shell companies doing business with major international banks, including UBS, Credit Suisse and HSBC, that rely on access to the American banking system.

This Cant’t Be Happening? Can It?

The initiative is to increase the focus on money laundering in real estate.

Treasury and federal law enforcement officials said they were putting greater resources into investigating luxury real estate sales that involve shell companies like L.L.C.s; partnerships; and other entities.

Per Stephen Hudak, Financial Crimes Enforcement Network, “ Any title companies or purchasers who provided false information could face penalties. The American Land Title Association said in a statement “ would help its members comply with the Treasury’s new naming requirements.”

Under the U.S.A. Patriot Act, the Treasury is already authorized to require real estate companies to scrutinize real estate buyers, but face fierce lobbying against issuing such rules.

The department already requires mortgage lenders to scrutinize buyers but cash buyers have been a loophole.

Aiding Chinese Capital Flight

In California, nearly all commercial real estate is owned by a financial entity, not to launder money, but to avoid Proposition 13 re-assessments when the property is sold.

The people entering into legitimate transactions, have no reason to hide their identities, so other than the inconvenience of providing a few documents.

However, people who want to hide illegal transactions would very much like to keep their identities secret, and they will work feverishly to find new loopholes to prevent revealing who they are.

Though this law is designed to catch criminals who violate US or international law, what about the Chinese nationals that aren’t violating any law in the US, but may be violating laws in China forbidding the expatriation of money out of China?

If the US discovers the names of Chinese citizens who bought real estate legally here in the US, will the US government turn this information over to the Chinese government? What grounds would the US officials have for refusing such a request? And why would they want to?

Right now the Chinese buyers of US real estate believe that once they get their money out of China, they are in the clear. This new policy of the US government potentially changes that.

Impact of International Capital Flight

Russia and China Capital Flight Money Friends? Foes? Free Rides?

Facilitation of Home Country Tax EvasionCrowds out US persons in marketplaceEnjoys benefits of US economic system and OUR FREEDOMS 

As non US citizens, only pay local consumer taxes (FAIR SHARE)

FRAUD

Facilitation of Criminal Corruption and Human Rights Abuses On the 74th floor of the Time Warner Center, Condominium 74B was

purchased in 2010 for $15.65 million by a secretive entity called 25CC ST74B L.L.C. It traces to the family of Vitaly Malkin, a former Russian senator and banker who was barred from entering Canada because of suspected connections to organized crime.

Last fall, another shell company bought a condo down the hall for $21.4 million from a Greek businessman named Dimitrios Contominas, who was arrested a year ago as part of a corruption sweep in Greece.

A few floors down are three condos owned by another shell company, Columbus Skyline L.L.C., which belongs to the family of a Chinese businessman and contractor named Wang Wenliang. His construction company was found housing workers in New Jersey in hazardous, unsanitary conditions.

Money

Questions / Discussion

Timothy L Allison Director Risk Advisory ComplianceGrant Thornton LLP Iselin, NJ

timothy.allison2@us.gt.com 848-205-7990 (OFFICE) 908-295-5517 (DIRECT CELL)