Laundering the Proceeds of Corruption

The FCPA and the Bribery Act focus mostly on the giver of the bribe. On the other hand, the recipients of the bribes need to deal with the cash to also avoid being caught. Like all criminals, they either shove cash into their mattresses or find a way to launder the money to get it back into the financial system. The Financial Action Task Force recently released a study on the links between corruption and money laundering: Laundering the proceeds of corruption (.pdf – 54 pages).

In running an anti-money laundering program you realize that politically-exposed persons are a potential danger to your firm. More people have noticed the potential dangers in light of the regime upheavals in North Africa and the Middle East. Funds associated with the current regime are being frozen and seized across the world. If one is your investor, you’re going to be tied up in legal headaches for years.

I suppose the money is tantalizing. The FATF report cites an estimate of $50 billion of proceeds from corruption. That’s a lot of cash to launder and big mattresses.

There are many different ways to get the cash flowing:

In the Green-Bangkok film festival FCPA case, the bribes were paid simply by means of the wire transfer of funds from US-based accounts, where the promoters were located, into offshore accounts in third countries maintained by family members of the PEP. The bribes never passed through Thailand.
Joseph Estrada, then the President of the Philippines, often received cash or check payments from gambling operators in exchange for their protection from arrest or law enforcement activities. This money was simply deposited into domestic accounts in the name of a fictional person or in corporate vehicles.
In the case of the bribery of US Congressman Randall Cunningham, who was a senior legislator with significant control over military expenditures, a military contractor bribed him both by checks to a corporation controlled by Cunningham, but also by agreeing to purchase real estate owned by Cunningham at a vastly inflated price.
Pavel Lazarenko, former Prime Minister of Ukraine, regularly required entities that wished to do business in Ukraine to split equally the profits of the enterprise with him. These businesses would transfer a share of ownership to Lazarenko associates, and money would be wired from the victim companies to offshore accounts controlled by Lazarenko.
Vladimiro Montesinos, Peruvian President Fujimori‘s security advisor, used shell corporations to disguise and move money illegally obtained through defense contracts with the Peruvian government, involving several corporate vehicles in a number of jurisdictions with each vehicle holding bank accounts in yet other jurisdictions.

In the United States, the Financial Crimes Enforcement Network, Treasury’s financial intelligence unit has been trying to impose anti-money laundering obligations on private funds for years. I still take the position that private equity funds are not an attractive target for money laundering, given their illiquidity and the long length of time it takes to see cash returned.

Nonetheless, fund managers should be vigilant to find out where their investors’ money comes from.

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