Introduction

For the second consecutive year, the Financial Crimes Enforcement Network ("FinCEN"), of the U.S. Department of Treasury, issued a Geographic Targeting Order ("GTO"), to deter the laundering of drug money through an underground parallel banking system, generally referred to as trade-based money laundering.

Two Consecutive GTOs

Last year, on October 10, 2014, FinCEN issued a GTO to more than 2,000 export businesses in the Los Angeles fashion district following the seizure of approximately $100 million in cash in a massive law enforcement raid of approximately 70 businesses. The Los Angeles GTO ("LA GTO") required ten categories of companies to file a Form 8300 each time the company received more than $3,000 in cash rather than the $10,000 required by 31 U.S.C. § 5331(a). Notably, the LA GTO stemmed from federal investigations of businesses in the LA fashion district which routinely accepted over $10,000 in cash on behalf of customers in Mexico and Colombia for the benefit of drug cartels, and failed to report the cash by filing Form 8300s.

Less than one year later, on April 21, 2015, FinCEN issued a GTO against "export electronics (including cell phones)" located in five zip codes (33172, 33178, 33166, 33122, and 33126) in Miami, which became effective on April 28, 2015.[1] Similar to the LA GTO, the Miami GTO requires the targeted companies to file a Form 8300 each time the company receives more than $3,000 in cash during the course of its business. The Miami GTO was issued in coordination with the U.S. Immigration Customs Enforcement’s Homeland Security Investigations ("HSI") and the Miami-Dade State Attorney’s Office South Florida Money Laundering Strike Force.[2]

FinCEN is clearly working with law enforcement authorities to exercise its power to impose strict record reporting requirements in urban areas with heightened money laundering activities. FinCEN is increasing activity regarding the issuance of GTOs, and has stated that it will continue to issue GTOs "to ensure a transparent financial system that impedes money launderers and other criminals from masking their identity and illicit activity."[3]

Overview of a Trade-Based Money Laundering Scheme Known as the “Black Market Peso Exchange Scheme”

FinCEN’s rationale for issuing GTOs is to dismantle trade-based money laundering schemes, operating to benefit foreign criminal organizations that use U.S. businesses (which may or may not be aware of the illicit nature of the dollars received), to convert U.S. dollars in the U.S. to domestic currency in foreign countries for use by the criminal organizations.

In a typical trade-based money laundering scheme, known as the Black Market Peso Exchange ("BMPE") scheme, foreign and U.S. businesses use middlemen, referred to as peso brokers, who have contracts with drug trafficking organizations ("DTOs") that have large amounts of drug proceeds in the U.S. that they seek to launder.

Peso brokers locate drug dollars in the U.S. and deliver the proceeds to U.S. businesses who work with companies in countries where the DTOs are located. Once the U.S. business receives dollars on behalf of the foreign business, the foreign business pays, in pesos, the peso broker for the value of the U.S. dollars received. The peso broker returns the drug dollars, now in the form of pesos, back to the DTOs who owned the U.S. dollars.

This process is quick, efficient, and satisfies the needs of all relevant parties:

• The drug cartel is able to launder its drug proceeds that are in the U.S. without the risk of smuggling the money over the border;
• Foreign companies that import goods from the U.S. have access to U.S. dollars, avoid steep exchange rates and wiring fees, and avoid detection from their government regarding the value of the U.S. merchandise they are selling, or otherwise evade income and import taxes;
• The U.S. company is paid in dollars and may likewise find opportunities to avoid reporting their true income to tax authorities while also enjoying the benefit of repeat business or higher sales volumes; and
• The peso broker is paid fees for services from the drug cartel and the foreign companies whom he/she services.

How the Miami and LA GTOs Seek to Dismantle or Disrupt BMPE Schemes

As mentioned above, a U.S. business may or may not know about the nature of the illicit funds it receives. However, by routinely accepting cash over $10,000 and failing to report those currency transactions in Form 8300s, illicit funds enter the U.S. financial system without any trail. And when those illicit funds are deposited into U.S. bank accounts in amounts less than $10,000 (i.e., structuring), then it appears that another federal reporting requirement, a Currency Transaction Reports ("CTR"),[4] is being avoided in violation of the Bank Secrecy Act, 31 U.S.C. § 5311 et seq., (the "BSA").

Although it may be difficult for the government to prove that U.S. businesses are knowing participants in a BMPE money laundering scheme, the government often charges the lesser crimes of evading the filing of Form 8300s and also structuring currency in order to evade the filing of CTRs. However, to prove such offenses, the business owners must have been aware of these federal reporting requirements.

A FinCEN GTO effectively solves this problem for law enforcement. The GTO is personally served or sent to targeted businesses by certified mail, thereby possibly overcoming the hurdle of proving knowledge. Both the LA and Miami GTOs required targeted businesses to receive written authorization from foreign customers in order to receive more than $3,000 in cash. The businesses must obtain from what has traditionally been an unidentified money courier working for the benefit of a foreign criminal organization, a copy of specified valid identification. The businesses must also document on the Form 8300s the phone number of the person providing the cash, the description of goods for which payment is being made, the recipient’s name, recipient’s phone number, and recipient’s location. Consequently, based upon the filed Form 8300s, the government is aware of how much cash the U.S. business receives and the source of the cash, and is in a better position to analyze currency deposits, or lack thereof, to further determine what the U.S. business does with the cash.

Civil and Criminal Penalties for Violating a GTO

Civil penalties for a willful violation of a GTO are up to the greater of the amount involved in the transaction (not to exceed $100,000), or $25,000. See 31 U.S.C. § 5321(a)(1); 31 C.F.R. § 1010.820(f). Criminal penalties for a willful GTO violation are a $250,000 fine or 5 years imprisonment, or both. See 31 C.F.R. § 5322(a). However, if the GTO violation took place "while violating another law of the U.S. or as part of a pattern of any illegal activity involving more than $100,000 in a 12-month period," (i.e., tax evasion, export fraud, money laundering), the criminal penalty increases to a maximum fine of $500,000, imprisonment for 10 years, or both. Id. § 5322(b).

Conclusion

In the era of aggressive U.S. Department of Justice actions against financial institutions for violating economic sanctions and the BSA, it is not surprising that FinCEN is working closely with law enforcement to issue and implement GTOs. Based upon actions taken thus far, U.S. companies in the export business should review their practices with respect to receiving funds from customers whose businesses are located in foreign countries. Such businesses should have written policies concerning the receipt of such funds, train employees, develop compliance programs, monitor the effectiveness of such programs, and document those efforts.

[1] The text of the Miami GTO is available at http://www.fincen.gov/news_room/nr/pdf/GTO_Miami.pdf.

[2] "FinCEN Targets Money Laundering Infrastructure with Geographic Targeting Order in Miami 'GTO' Addresses Trade-Based Money Laundering Activity Involving Drug Cartels," available at http://www.fincen.gov/news_room/nr/pdf/20150421.pdf.

[3] Id. (quoting FinCEN Director Jennifer Shasky Calvery).

[4] U.S. financial institutions are required to file CTRs to identify currency deposits exceeding $10,000, and it is a crime to avoid the filing of CTRs. See 31 U.S.C. §§ 5313, 5324.