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Service-Based Money Laundering: The Next Illicit Finance Frontier

Service-Based Money Laundering: The Next Illicit Finance Frontier

John Cassara
19th May 2016 - CSIF Policy Brief

Just a few months before the summer Olympic Games in Brazil, a far-reaching anti-corruption battle is threatening to bring down powerful Brazilian businesses and political elites, including the current and former presidents. The scandal might bring even down the government.

It is all part of a broader investigation called “Operation Car Wash,” which has uncovered massive long-running corruption schemes, and the state oil company Petrobras is at the epicenter. Petrobras executives allegedly took bribes in exchange for giving contracts to construction firms and other servicers, who then massively overbilled the oil company. The bribe money was then allegedly laundered and directed into campaign coffers.

Among the tactics used in these financial crimes is the often-ignored problem of “service-based money laundering,” or SBML. 

Over the last few years, trade-based money laundering (TBML) has received increasing recognition as one of the top money laundering methods in the world. On the other hand, service-based money laundering is almost unknown in anti-laundering enforcement. Similar to TBML, SBML revolves around invoice fraud and manipulation. But instead of laundering money or transferring value through trade goods, services are used. Common service-based laundering scams include accounting, legal, marketing, and natural resource exploration fees. Fraudulent construction costs, such as the ones uncovered in Operation Car Wash, are ripe for abuse.

The State Department’s 2015 global anti-money laundering review cites one example of SBML where “offshore companies send fictitious bills to a Montenegrin company (for market research, consulting, software, leasing, etc.) for the purpose of extracting money from the company’s account in Montenegro so funds can be sent abroad.” Fraudulent invoices generated from supposed concert promotions or other services that are difficult to quantify can be used to move illicit funds. Technical fees, such as writing computer code, add complexity to SMBL schemes, and require investigators with specialized expertise.

Stopping SBML is no easy task. When investigating TBML, authorities can often track an item or a commodity, following a physical trail. For example, when a product is manufactured and sent from country A to country B, import and export data exist. Through analytics, authorities can discover anomalies that indicate customs fraud. SBML, by contrast, leaves no physical commodity trail, and the value of the invoice is subjective.

The international community needs to address SBML, and prosecuting high-profile cases will help bring awareness to this widespread, but little-recognized, money laundering method. Brazil’s investigation is a promising start.

John A. Cassara is a member of the board of advisors of the Foundation for Defense of Democracies’ Center on Sanctions and Illicit Finance. He is a former U.S. intelligence officer and Treasury Special Agent and author of Trade-Based Money Laundering: The Next Frontier in International Money Laundering Enforcement.

Tags

brazil, csif, illicit-finance, money-laundering, policy-brief, trade-based--service-based