Money Laundering
in the 4th Industrial Revolution
GARRY W.G. CLEMENT
© 2018 FrontLine Defence (Vol 15, No 5)

Society has entered the 4th industrial revolution (also known as Industry 4.0), which involves the fusion of technologies and a blurring of the lines between the physical, digital and biological spheres. As the Deloitte Review recently noted, “this fourth industrial revolution is transforming economies, jobs, and even society itself.” Utilizing advancements in technology, we can easily achieve results that weren’t possible a mere decade ago – but an objective, honest view recognizes that the current strategies for security and protection within this new reality have been ineffective and are falling far behind technological advances.

THE INDUSTRIAL REVOLUTIONS

1st Mechanization, Steam Power
2nd Mass Production, Electricity
3rd Digital Automation
4th Cyber-physical Systems

EMPOWERING THE CRIMINAL ELEMENT
To fully understand the scope of what’s occurring today in terms of financial security on a national scale, it is essential to first realize that the traditional manner in which governments and enforcement agencies have combatted money laundering is no longer effective and requires a wholesale rethinking of current strategies.

With technological advances being applied every day now, comes the need to recognize that the way things were done in the past is no longer acceptable. For a company, a government, a law enforcement agency, a regulatory body, an academic institution or individual to embrace the future, there is a collective need to have the courage to change past approaches. The formation of teams comprising private and public subject matter experts is crucial to effective decisions going forward.

Technology has empowered the criminal element to exploit the internet for an increasingly wide array of cyber-crime offences. Additionally, law enforcement professionals have witnessed trans-national crime groups exploit the vulnerabilities created by our own laws and ethical practices which, in many cases, impede our ability to move quickly to thwart such criminal activity.

The time and amount of resources needed to investigate financial crime has grown exponentially. This strain on investigative resources has resulted in an inability to manage the current level of financial and cyber-crime. The priority of ongoing terrorist threats compounds the problem by requiring authorities to allocate financial crime investigators to terror intelligence activities. This has resulted in a void to provide effective financial crime/money laundering enforcement and, as a result, the criminals are able to continue to move their ill-gotten gains around the world, almost unabated.

The World Economic Forum’s 2018 Global Risk Report estimates the world-wide economic cost of cyber-crime to increase to $8 trillion in 5 years. Microsoft estimates that the amount of data on the internet will be 50-times greater by 2020. The report also notes that 111 billion lines of new code are written each year – each line a new opportunity for introducing vulnerabilities. Clearly, cyber-crime has become the most lucrative illicit activity in the world – and this creates the need for expanded money laundering techniques.

Vancouver has the dubious distinction of being recognized internationally as a hub of transnational money laundering. A recent report out of Australia refers to the “Vancouver Model”, which highlights the level of money laundering activity that is occurring in British Columbia by Asian-based organized crime.

UNDERGROUND BANKS
The Australian report also disclosed that secret banks have developed for centuries on China’s southern coast and that they consist of family members spread across Chinese communities worldwide. They can move money, drugs and commodities around the world without having to send funds across national borders. The banks maintain reserves of various currencies at locations worldwide, taking deposits in one area, and paying withdrawals in another.

In order to function, the underground banks need financial facilitators, and the Triads have used some lawyers, bankers, casino operators, and gambling junket operators in Hong Kong, Macau and Vancouver, in a report, by John Langdale of the department of security studies and criminology at Macquarie University, which was presented to Australian Government. It is important to understand that the organized crime “triad” referred to here includes the many branches of Chinese transnational organized crime syndicates based in China, Hong Kong, Macau and Taiwan, and in countries with significant Chinese populations, such as the United States, Canada, Vietnam, Korea, Japan, Singapore, the Philippines, Indonesia, Malaysia, Thailand, the United Kingdom, Belgium, the Netherlands, France, Spain, South Africa, Australia, Brazil and New Zealand.

According to the Langdale report, some of the Vancouver Model’s criminal activities include:

  • Trafficking illegal drugs from Guangdong and Latin America.
  • North American drug-dealing networks supplied by Chinese methamphetamines and precursor chemicals.
  • Laundering money into high-end real estate (funded by Chinese) capital flight; through the high-roller tables in casinos; and through junket operations.
  • Using banks, money transfer businesses to shift money to and from China and others, such as Mexico and Columbia.

IT'S GETTING WORSE
During my tenure as a Liaison Officer in Hong Kong from 1991 to 1994, and in conjunction with Brian McAdam an Immigration Officer, we wrote extensively on the amount of organized crime that was retrenching itself in Vancouver from Hong Kong and identified what is now being experienced. It is disheartening to realize the situation has only gotten worse.

Fabian Dawson, a multiple award-winning journalist and former deputy editor-in- chief of The Province newspaper in Vancouver, wrote:

With the takeover of Hong Kong in 1997, many triad members are fleeing to Canada, the U.S., Australia and other countries. Many, involved in international crimes such as heroin smuggling and credit-card fraud, are frequently travelling in and out of Canada, and many are established in Canada.

Visas have often been issued by officers with scant knowledge of triads or Chinese criminals, and Hong Kong-based officials have complained that those officers rarely if ever make background checks with knowledgeable individuals in Hong Kong before issuing visas. For example, the notorious Lee Chau-ping, known as The Ice Queen and believed to be the world’s major smuggler of methamphetamines, was given an immigrant visa at the Canadian consulate in Seattle; she is currently a fugitive.

Most of the persons processing these cases had zero knowledge about Chinese organized crime. Posts-of-convenience used by Hong Kong applicants range from Bogota and Atlanta to Rome and Chicago. Even the Canadian embassy in Warsaw was at one time a favourite among visa-shopping immigration consultants.

As has been reported, David Eby the Attorney General in B.C. engaged former RCMP D/C Peter German, to look into the blatant money laundering that is occurring through casinos in Vancouver, followed by revelations of money laundering through real estate. Peter reached out to me regarding Asian-base crime impacts and my previous interviews with media highlighting blatant money laundering through casinos.
The Asian Crime faction is only one issue that is confronting Canada. Other groups – such as outlaw motorcycle gangs, traditional organized crime (OC) groups, Vietnamese and East European gangs, to name a few – continue to flourish and move tremendous amounts of money through our institutions.

The sad reality is that we know billions of dollars are moving freely thanks to ineffective controls dealing with shell company formations and the lack of requirements around beneficial ownership – and we can’t seem to do much about it.

Furthermore, with crypto-currency technologies, the criminal element is moving quickly to capitalize on the lack of control and understanding by governments and enforcement bodies and, as a result, are able to move millions basically anonymously.

Our large global financial institutions have not achieved the results that Financial Action Task Force (FATF) countries anticipated would occur through the recommended policy actions by member countries aimed at thwarting money laundering and terrorist financing. For example, HSBC agreed to a five-year deferred prosecution agreement with the U.S. Department of Justice, under which the bank would strengthen its anti-money laundering controls. The penalty, which included a $1.9 billion fine and the requirement to enter into a five-year deal in 2012 for failing to prevent Mexican drug cartels from laundering hundreds of millions of dollars, and for breaching international sanctions by doing business with Iran.

Most recently the Commonwealth Bank of Australia (CBA) agreed to pay a fine of AU$700 million (€450 million, $530 million) to settle allegations that it breached anti-money laundering and counter-terrorism financing laws.

Canada’s banks, although not subjected to the fines imposed in other countries are also a weak link. In April 2018, a CBC report for the Minister of Finance highlighted weaknesses in the treatment of Canadian Banks in meeting the requirements of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act requirements. The report stated: “The Sept. 30 document, obtained by CBC News under the Access to Information Act, found “significant” problems at six of the nine banks – including problems in providing Fintrac with suspicious transaction reports, or STRs”. Furthermore, “In examinations of the banking sector […] 67% were found to have significant levels of non-compliance,” notes the report for Morneau. “Deficiencies were identified in obligations related to STR reporting, risk assessment, and policies and procedures”.

DARKNET MARKET
Silk Road – the first modern “darknet” market – is best known as a platform for selling illegal drugs. It offers one important example of the treatment of a financial transfer platform outside of the traditional banking sector relative to prosecution. In October 2013, the FBI shut down the website and arrested Ross William Ulbricht. Ulbricht was convicted of eight charges related to Silk Road and was sentenced to life in prison without possibility of parole.

Unless we provide greater training and new resources to law enforcement and prosecution, and until we treat banks with the same approach as was done with Silk Road, legislate the full disclosure of beneficial ownership, and adopt the same approach regarding the legal community that was done in the UK (controls under the money laundering legislation or reporting) money laundering will continue to flourish and, regardless of legislative initiatives, results will be as they are today, negligible.
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Formerly the National Director for the RCMP’s Proceeds of Crime Program, Garry W.G. Clement is a renowned expert on Financial Crime Prevention. He is President and CEO of the Clement Advisory Group.

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