Money Laundering and your Bank Accounts – Part III – Funds Transfers

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This is the third part in our series revealing exactly what banks are looking for when they are combatting money laundering.
Transferring funds is at the heart of commerce and is the most important function performed by modern banks. Transferring funds is also at the heart of money laundering. Move dirty money through enough hands by sufficiently devious means and at some point, it magically becomes clean.
Think about this, if we can describe an activity, it is possible to write software to detect it. Banks do just that.

Bank Checks on Money Laundering Funds Transfers

You transfer funds in large, round dollar, hundred dollar, or thousand dollar amounts.

This is classic smurfing. Sudafed smurfs were buyers for meth labs who would go from drugstore to drugstore purchasing Sudafed cold medicine containing pseudoephedrine. The manufacturer then made crystal meth from the pseudoephedrine. Smurfing has expanded into money laundering. Smurfs typically deposit small amounts to many accounts. The money from those accounts is then assembled and transferred to a master account in another country. Then someone transfers the money, this time to the actual beneficiary. Dirty money often travels through several jurisdictions before arriving at the final destination.

Funds transfer activity occurs to or from a financial secrecy haven, or to or from a higher-risk geographic location without an apparent business reason or when the activity is inconsistent with the customer’s business or history.

“Higher-risk geographic locations” tend to be tiny island nations such as the Cayman Islands, Vanuatu or the British Virgin Islands. But, they are also places such as Luxembourg and Gibraltar. Banks maintain a list of risky jurisdictions. Transactions involving such jurisdictions receive extra scrutiny.

Funds transfer activity occurs to or from a financial institution located in a higher risk jurisdiction distant from the customer’s operations.

There might be a logical reason for a Florida business to be remitting to or receiving funds from the British Virgin Islands, which are close by. On the other hand, it is unlikely that they’d be doing much business with the Cook Islands in the South Pacific. Again, banks will pay extra attention to such transactions.

Your accounts receive many small, incoming transfers of funds, or receive deposits of checks and money orders. Then, almost immediately, all or most of the transfers or deposits are wired to another city or country. Usually, the transfers are in a manner inconsistent with the customer’s business or history.

Again, we see smurfing on a large scale. Drug cartels purchase chain restaurants, casinos, entertainment and sports venues in order to be able to launder money through them. These venues typically have large numbers of small transactions; ideal for throwing banks off the scent. But law enforcement has statistical data that can sniff out this sort of money laundering.

Your accounts receive large, incoming funds transfers on behalf of a foreign client, with little or no explicit reason.

Banks want to know what to expect. If you are going to be receiving a large amount of money, it is wise to tell them in advance what is going on. Ensure that they write it down so that you can avoid suspicion. You may think it is troublesome, but having the FBI knocking on your door is real trouble.

Transferring funds is unexplained, repetitive, or shows unusual patterns.

To the average person, the world seems jumbled, chancy, ad hoc. But those who pay attention see patterns. So it is with bank accounts. Observe enough bank accounts and you’ll see that 99.9% of them follow predictable patterns. If your account is in the one-tenth of one percent, the bank will examine it closely.

You receive payments or receipts with no apparent links to legitimate contracts, goods, or services.

If you run an asphalt business and suddenly receive payment in your account for a Ferrari, that may well be flagged. Receive payment for a Ferrari and a luxury condo and it will be flagged.

You send funds to the same person using different accounts or to different accounts. Or the reverse.

Well Sir Smurf-a-lot, banks figured out this channel a long time ago. It can work, but only by using multiple aliases or smurfs at many banks over a long time.

You don’t provide enough information regarding funds transfers, not only the why but also the who of related parties.

Banks detect these omissions sometimes but they fall into a gray zone. Protect yourself by being open and up front in describing both why the transaction is taking place and who the beneficiary is.

How Not to Pay Taxes in the U.S. (Hint: Copy Amazon)

Amazon is one of the world’s biggest companies and it isn’t just a digital company – it does physical things in the real world. Amazon has a physical presence in thirty countries and a digital presence everywhere. It had US$136 billion in revenues in 2016, a stock market valuation of more than US$450 billion. But it has never made a profit! And it probably never will. Think about that.

Vampire Profits

How do you grow a great company? Reinvestment, of course. If you pay taxes, that is money that isn’t available to reinvest. How do you avoid paying business income tax? That’s easy: don’t have profits; think of profits as a vampire, sucking away at your wealth.
Now you may need to adjust your way of thinking here, after all, wasn’t it the profit motive that got you into business in the first place? Probably not. You probably got into business to feel a sense of achievement, have some control over your own destiny and to accumulate wealth. None of those involve profits. Because of business tax laws, in fact, profits reduce your ability to accomplish your goals. If you don’t have profits you can use the money that you would have paid in taxes to undercut your profit-making competitor’s prices and to expand your business.

But How do I Make Money?

If your goals are as outlined above, money, per se, is incidental. You can eventually convert wealth to money if that is what you or your heirs want, but the wealth you will pass to your heirs is your company.

You may draw a salary for living expenses on which you may or may not pay taxes depending on how you have arranged your tax domicile. Through appropriate tax domiciliation and aggressive but legal use of company expenses, you should be able to avoid all or nearly all taxes.

How Well Does This Work?

Amazon is probably the foremost practitioner of the zero-profit strategy. Jeff Bezos intentionally started the company in a garage and grew it to today’s gargantuan size. Intellect, luck, hard work, and cost-avoidance were his tools and can be yours, too. Avoiding making profit taxes has given the company tens or hundreds of billions of dollars to use elsewhere. Amazon has kept prices down, made award-winning movies, provided low-cost delivery, and spun off new businesses. Jeff Bezos is not starving nor is it necessary for him to engage in complex tax-avoidance practices for the company. Nick Hanauer, Bezos’ first outside investor is doing just fine as well, largely as a result of Amazon’s success.
Not even Amazon can avoid making a profit forever. For all fast-growing companies there comes a point where good ideas become scarcer, execution becomes slower and the income continues to rise. When you hit that point, you’ll start making profits. This is part of the self-reinforcing feedback mechanism that leads to concentration of wealth. If you get to this point, you are truly on the gravy train.

Can I Replicate This?

Every business is different, but generally speaking, the idea of reinvestment and keeping prices low to foster growth will work for almost any business. All you need to do is to build the discipline into your everyday thinking. Do that and the world will look like a very different place. Your opportunities are far greater than you ever imagined.

How do FATCA and AEOI Affect Me?

The short answer to this is that there is no change except that if you minimize your salary as we suggested above, you won’t have much to be concerned about. Report your modest taxes honestly to your tax domicile and the tax authorities will be, at most, a minor nuisance and your taxes a minor expense or none at all.

AEOI, FATCA and the Death of Offshore Island Tax Havens

Singapore beats tax havens
Three of the world’s strongest banks.
If you don’t care about access to your money then this essay is not for you. If you don’t mind if businesses look askance at your BVI or Seychelles tax haven company or account, this essay isn’t for you.

Tax Havens are Offshore Zombies

Face reality. The OECD giants are awake and are not going back to sleep. There’s no getting around it, you can be sure that they will recover “their” money stashed in island tax havens. The world changes and you need to change with it. Sure, island tax havens are still in business, but no matter how much they resist, their days are numbered. Even moreso, if you have a company or bank account there, you can find your life change without warning. Clearly, zombie hunters are after the island tax havens.

All is Not Lost

Thank goodness, you can still achieve most of what you want and open new options for yourself. Open your mind. Expand your vision. The press is well behind the curve on this. You can be sure that they do not write stories that convey today’s reality. There is no getting around it, onshore and midshore should be your bywords now. If you go where taxes are few and low and structure your business to take advantage of the rules, you’ll be better off than you are today.

Dangerous Banking in Tax Havens

When is the last time you thoroughly checked out your bank in terms of liquidity, solvency and sovereign risk? Odds are, if you are banking in an island tax haven, you haven’t thought about it much or at all. If others bank there, it must be okay, right? Unfortunately for you, that is now an ancient truth that is no longer viable. Most banks in island tax havens have no oversight worth the name. Furthermore, if they publish their financials, they aren’t worth the paper they are written on. If you have an account there, when things get rough you may be the last person who hasn’t moved his funds to another country. Think about that.

Safe Banking

The thing about sovereign risk is that countries seem safe until suddenly they aren’t. Change, when it comes, is often alarmingly fast and confusing. Russia now threatens the Baltic countries, Ukraine and Georgia. In fact, as I write this, Russian soldiers are posting selfies from inside Ukraine. Russia is waging a cyber war on the Baltic countries. And to cap it off, Georgia is still reeling from its dismemberment by Russia. Visit four of the five countries and things seem just fine. But if you bank or live there you could lose everything overnight.

If you don’t look at their books, the same is true of banks. When times are good, all banks seem equal. Collapse the economy and everything is revealed. If you put your money in an unsound bank, you are going to look pretty silly when your bank goes under.

Practice safe banking:

  • Eliminate all politically risky jurisdictions.
  • Eliminate the jurisdictions with high real tax rates.
  • Find the most liquid and solvent banks in several of the remaining jurisdictions.
  • Test them to see which are friendly to you and your money.
  • Test them to see how quickly you can move your money out of the country.
  • Choose two or three banks from the resulting shortlist and analyse more closely.
  • Finally, open an account with the one that makes you most comfortable.

The Great Equalizers

AEOI and FATCA have essentially flattened the playing field for banks. Jurisdictions that once thrived because of their lax laws and supervision now report their depositor’s information just like everyone else. Take the anonymity away and compare the sovereign and bank risk with the modest tax savings you may or may not get. It is clear, onshore banking is preferable.

If you need to rethink your banking arrangements, contact us

Polish Banks Hacked Via their Financial Supervision Authority

PKO Bank Polski Regionalne Centrum by Henryk Borawski
If you can’t trust the police, who can you trust? Some country set its sights on Polish banks using their top regulator to compromise their systems. Given Russia’s interest in destabilising Eastern Europe, we’re betting it is the hacker. Russian hackers will target banks full-time after the European election season is over. Why do they hack banks? They hack for money, of course, but they hack for patriotic reasons, too.

Battlefield Preparation

NATO worries Russia and Russia wants to fight back. Their military can’t match NATO but Russia’s brainpower is formidable. They are preparing for battle all around the world.

The battlefield is cyberspace and the soldiers are hackers. Every country worth the name is busily breaking into critical systems of likely opponents and are planting cyber IEDs (cIED) to be exploded when the time is right. Sometimes they explode them to to test the effects and sometimes, rarely, they are detected.

KNF, the financial authority became the unwitting vector for a cIED when someone loaded an encrypted javascript virus onto a KNF server that was then unknowingly downloaded by Polish banks accessing the server. The viruses then went to work pumping information out to the hackers that created it.

At least twenty banks in Poland were infected with this virus. It is likely that far more were because up until recently it was undetectable. If it is in Poland, we have to wonder about Latvia, which seems like such a tempting morale for the Russian bear.

Who Better Than the Financial Supervisor

The banking system is very careful. Banks develop systems and test, test, test them to guarantee that hackers can’t get in. It generally takes a security breach to get a hacker in.

However, supervisory agencies tend to be less careful. They have important data, but they don’t handle money, so they are often less careful than they should be. That makes them a perfect vector for attacking the system.

It’s a Hacked World

We regard as laughable the idea that privacy exists today in anywhere but the most backward places. As they say, there are two kinds of businesses today: those that have been hacked and those that don’t know they’ve been hacked.

Take basic security precautions.  You must still make your passwords long and unlikely, but the biggest dangers to your data lie elsewhere. Just living in todays world means your privacy is compromised. Your challenge is to minimise the consequences.

Banking Privacy is Dead in Much of the World

For decades those who wanted financial privacy chose offshore tax havens or East European countries to form companies and open bank accounts. And for decades that made good sense. But two unstoppable forces have put paid to this idea.

First it was the rise of the hackers. Countries in the middle of cyberwar like the Eastern European ones are directly in the bullseye for Russian hackers. On the other hand, island tax haven banks simply don’t have the technical skills needed to deal with todays hackers.

The second was the desperation of countries to maximise their tax revenue. That has led to the coercion of economically weak countries to fork over formerly confidential tax data to just about any big country that asks for it.

Smart Banking

Fortunately, all is not lost. Relative security and relative privacy are still available in the financial world, but you aren’t going to find it in exotic locations. It is time to start looking at countries that are sound. The downside of this is that you’ll have fewer illusions and you’ll probably have to meet your banker face-to-face. If you are running guns or dope, you are still short of options. In fact, you can almost be certain that the only reason you are still in business is because MI6, CIA and FSB want you to be in business.

Singapore is one of the safest places in the world in which to bank. And it is one of the world’s lowest tax jurisdictions. To top that off, several of its banks are among the world’s strongest and their information technology protections among the world’s most sophisticated. Contact us to learn how we can greatly improve your chances of opening an account in Singapore.