Outflows and inflows of illicit money

Box 13 Case study ‘Illicit Financial Outflows’

‘Upon the election of his brother as president of Mexico, Raul Salinas was appointed to several positions, one of which was to manage Conasupo, a store set up to sell basic goods to the underprivileged at subsidized prices. Raul Salinas used this position to create disguised profits that he diverted to himself, often by reporting prices for Conasupo’s purchases that were higher than the sums actually paid or by selling subsidized products at market rates. In one case, at an extremely low price, Conasupo imported 39,000 tons of powdered milk contaminated at Chernobyl and then sold the milk to the poor at a profit.

In another case, corn provided by the United States for distribution to the poor was sold by Conasupo at market rates; the corn was made into tortillas and sold back to the United States. The hidden profits were then transferred to personal accounts in Mexican banks. Raul may also have profited by financing winning bids during privatisation. An example of this was the government sale of Azteca Television to Ricardo Salinas Pliego through Salinas Associates. Profits from Azteca were used to make payments to Raul, which Pliego claimed were repayments on a loan Raul had made to him to finance the acquisition.

The loan was provided at a suspiciously low interest rate. To show that there had been a loan and that the payments were not kickbacks, Raul made payments from his account to finance the loan, in effect showing he was only an intermediary. Raul would deposit the funds into Mexican banks. Then his wife, Paulina, acting under the alias of Patricia Rios, would withdraw the funds and transport them to a Mexican branch of Citibank. This money would be transferred into a mass concentration account used by Citibank to transmit internal funds. A vice-president at the Mexican Division of Citibank would then extract these funds from the concentration account and transfer them to London and Switzerland to Citibank accounts of Trocca, a shell corporation formed by Cititrust in Cayman Islands and controlled by Raul through nominees.

Raul Salinas may have used his influence over two banking groups, Grupo Financiero Probursa and Grupo Finaciero Serfin, both purchased from the Salinas government during privatization, to convince them not to apply extended (or indeed any) due diligence to accounts controlled by him and his confederates (…)’

Source: M. Levi, ‘How Well Do Anti-Money Laundering Controls Work in Developing Countries?’, in P.

Reuter (ed.), Draining Development? Controlling Flows of Illicit Funds from Developing Countries, Washington, World Bank, 2012, p. 373, at 394-395.

Conversely, the term ‘illicit financial inflow’ describes a case when the foreign revenues from illicit activities, such as drug trafficking, are laundered and brought back to a country of their recipient. The following paradigmatic case presented by the Egmont Group of Financial Intelligence Units illustrates how drug traffickers use the international financial system to carry out their activities (see Box 14).

Box 14 Case study ‘Illicit Financial Inflows’

‘Rick, an American citizen who claimed to be a European, was the key organiser of a group of individuals that used to belong to a larger drug cartel. The majority of the original cartel had been arrested and imprisoned by law enforcement several years previously. Since the destruction of the cartel, Rick had continued to control a significant part of the money raised from the cartels drug trafficking activity, and had used the funds to restart his own drugs trafficking operation on a smaller scale. Furthermore, during his involvement with the original group, Rick had learned several laundering techniques, which were to prove extremely helpful to his plans for his own gang.

The drug money entered the American country in cash shipments by boat or plane. Rick’s group received the money in sealed cash bundles, and sought to launder the drug money through a series of layering transactions in several different countries. Following initial cash deposits into a range of bank accounts, Rick facilitated the laundering by authorising an agent abroad to transfer funds from the initial accounts to the personal accounts of a number of intermediaries overseas. The intermediary arranged a back-to- back transfer of the funds back into the country to accounts at the National Central Bank, and obtained authorisation for the fund transfers from that institution. Before the money was transferred back, Rick always called the intermediary again to request a cancellation of the transfer. The intermediary was left with the funds in his or her account. The funds were then withdrawn in cash and wired back into the country to yet other accounts, with the authorisation documentation from the National Central Bank as a prepared explanation of the origin of the funds. The National Central Bank was being used unwittingly to give additional probity to the drugs funds.

Once the funds had been moved through several layering processes, Rick was able to use the monies to purchase real estate. In order to do so, he utilised lawyers, bank managers, and other professionals, paying a commission of between 3 to 5 percent of the value of the transferred money in order to minimise questions. The commission rates were slightly above normal market rates, in order to ensure that the firms concerned welcomed the business. Lastly, Rick did not want the real estate to be registered in his own name, and used a number of other individuals and companies as nominal owners in order to further confuse the money trail – whilst some of these individuals were aware of the criminal source of the funds, a number of other firms were used unwittingly. The use of such financial professionals gave additional probity to the fund movements.

To implement his laundering scheme, Rick used more than half a dozen banks and a wide range of accounts at each institution (…) [I]t was estimated that Rick’s scheme had involved a turnover of about US$720,000,000 over a number of years.”

Source: FIU’s in action: 10 0 cases from th e Eg mont Group , 2000, case No. 25.

As will be demonstrated in section 3.4 below, both outflows and inflows of illicit capital can have a profoundly negative impact on developing countries and are contrary to the EU Treaty obligation to promote sustainable development and fight poverty in developing countries.