By now, certain shelf items have been labeled with a stock keeping unit (SKU), been advertised in circulars and placed out on display for resale. With the science of inventory management applied to market commodities for a quick profit, the question is should the abuse or misuse of these swiftly replenished items ever become a consideration factor for the financial institution’s anti-money laundering (AML) monitoring? When are sales and product turnover “too good” and this deposited revenue indicative of the customer acting as a money laundering conduit? Could the financial industry be inadvertently misinterpreting a customer’s profitability as a banner year instead of a surreptitious effort to sell to customers on the black and gray markets?
Demand forecasting is the art of predicting a customer’s product desire. Businesses strive to foresee the future of commodities by implementing quantitative and qualitative assessments. Insight results in a drive in sales that leaves the market in the “black.” However, the future of some goods is clear. Historical tax and import/export mandates, coupled with prevailing trends, all but assure the future of these highly profitable vendibles is so bright that retailers and financial institutions need to wear shades.
Authors have long documented the struggles associated with the sale of legal commodities, through a system of state and federal statutes and taxes, which become illegal upon transportation and/or misuse. Yet the supply and demand of various legal goods allow the retailer to deposit the proceeds, increase their account balances and continue to restock the items to perpetuate the profitable cycle and, by default (or in many cases intentionally), sustain black and gray markets. Alcohol, cigarettes, cellphones, syrup, cheese, and now various marijuana changing legalities are presently on the forefront of this topic. With each product, it was only when the introduction of man’s greed for financial gain did the abuse commence of these otherwise legal commodities. Whereas, financial institutions documented the increased sales and/or purchases of exploited items as suspicious activity, the government also began to recognize the potential abuse of these commodities and their associated danger to the welfare of society.
As trafficked commodity proceeds were once placed directly into financial institution accounts, the trending presence of thriving money laundering conduits allows illicit monies to be exchanged at the retail level for exploitable items to only then be layered into the financial institution as “clean money.” This pattern is reminiscent of a simplified, domestic Black Market Peso Exchange.
With the example of cigarettes, this legally sold tobacco product becomes egregious contraband once it crosses a state line. The ability to resell this product on the black market for a considerable profit margin, coupled with limited risk, is an invitation for high reward. Not only do the traffickers profit, but the wholesale businesses have an upsurge in bulk quantity sales. This black market commodity assures a high yield but also guarantees a growth in associated crimes. In fact, at a 2016 federal court sentencing of a cigarette trafficker, the presiding judge called cigarette trafficking “a clear and present danger to the health and welfare of the country.”1 Discount and convenience stores on highways near state borders all but advertise your last chance to be a cheat and avoid the higher fees and taxes found in your state. Literally, buses full of passengers make multiple stops to allow passengers an opportunity to purchase cigarettes in a “smurfing pattern” in an effort to circumvent reporting requirements, taxes and/or laws.
Communities are ravaged when contraband cigarette traffickers become targets of armed robberies, either for the tobacco product or for the cash used to purchase said commodities. The purchase of the cigarette cartons is typically conducted with currency in a structured format, in violation of federal law.
False businesses are often created to surreptitiously purchase the cigarette cartons and hide the true identities of the perpetrators. While some culprits have been identified, many wholesalers who sell the very commodity known to associate with funding terrorism, go largely undetected as the “money cleansing process” begins inside the store walls.
With the example of cellphones, phone trafficking “is driven largely by the massive profits made by exploiting the price difference between smartphones sold in the U.S. and overseas. Americans who agree to two-year service contracts with their cellphone company can buy the latest iPhones for about $200—a price subsidized by the carrier. In Hong Kong, an iPhone can be sold for as much as $2,000.”2 While some carriers have since nixed contracts and no longer subsidize the cost of the phone, the retail price for a cellular phone in the U.S. remains significantly cheaper than the expensive, international counterpart. This causes cellphone wholesalers, much like cigarette wholesalers, to rejoice over the net profits related to cellphone sales, and to happily peddle this commodity directly or indirectly over-seas, contrary to law and export regulations.
As these particular commodities grew public notoriety, both traditional and non-traditional financial institutions followed suit and promptly documented the sale of this subject to abuse commodity and its identified red flag indicators. Furthermore, on several occasions they inadvertently identified the money laundering conduits responsible for furthering the criminal activity.
While retailers and wholesalers cannot control the intent of the customer, the very skill necessary to know what desired inventory to restock and henceforth preserve profitability, is the same talent that can be, but may not be, monitored by financial institutions. AML monitoring software is designed to detect an upsurge in anomalies. However, when are commodities properly identified as suspicious irregularities instead of being branded as a lucrative business profile because it is a yet-to-be identified trend? AML investigators have an opportunity to conduct their own version of forecasting by analyzing whether a drastic increase in sales and/or restocking purchases by their customer is indicative of a fad, a conventional commodity, or a money laundering conduit’s trend worthy of being deemed a highly suspicious activity. Financial institutions have the ability to distinguish a high demand for a product by comparing and contrasting the known “norms” and cross-referencing the information with the know your customer (KYC) documents on file. The comparison of business profiles of like competitors in the same geographical area, can help scrutinize customers that sell commodities that can be easily flipped on the black and gray markets. Once again, highlighting the need for thorough and complete KYC documentation.
Recognizing the potential for future abuse abates willful blindness and financial institutions should be cognizant when any commodity sale “leaves normal” and is deemed “suspicious”
Financial institutions already have monitoring systems that identify the red flags associated with the identification of a high-risk product inventory; however, failure to recognize the propensity for a commodity’s abuse upon resale and its known associated indicators is a concern. Recognizing the potential for future abuse abates willful blindness and financial institutions should be cognizant when any commodity sale “leaves normal” and is deemed “suspicious.”
Who knew years ago that cheese would become “contraband dairy” and be the legal commodity behind major smuggling rings into Canada?
Moreover, detection and documentation of anomalies associated with vulnerable commodities by financial institutions would aid law enforcement in the fight against product exploitation. The identification of yet-to-be recognized items that can be resold on the black market and in turn put markets in the “black” is the crucial forethought necessary to combat money laundering and the underlying suspected unlawful activity by both traffickers and money laundering conduits. Lax and benign oversight is a mentality that (much like the black market commodities) has an expiration date. Who knew years ago that cheese would become “contraband dairy” and be the legal commodity behind major smuggling rings into Canada? Are sugary beverage tax hikes in Philadelphia now causing an upsurge in sodas sales outside of the region with certain distributors? Even more reason why analysis of legitimate products and the subsequent customer’s profits should not be discounted.
- Frank Green, “Cigarette trafficker sentenced in federal court in Richmond to 16 months,” Richmond Times-Dispatch, December 1, 2016, http://www.richmond.com/news/local/chesterfield/article_73b9da96-dd52-5b66-b84e-5b7683c53433.html
- Gerry Smith, “Inside The Massive Global Black Market For Smartphones,” Huffington Post, July 22, 2013, http://www.huffingtonpost.com/2013/07/13/smartphone-black-market_n_3510341.html