Counterfeit Goods: Money Laundering in Plain Sight (Part 5 — What Else Financial Institutions Can Do)

Topics: Corporate Legal, Financial Crime, Financial Fraud & Anti-Money Laundering, Government, Leadership, Risk Management


This is the fifth and final part of a new five-part blog series, “Counterfeit Goods: Money Laundering in Plain Sight”, where we examined how the production, distribution and sale of counterfeit goods enables bad actors to generate and launder illicit proceeds through front businesses. (You can read the entire series here.)

There are several steps financial institutions can take to help combat money laundering through counterfeit goods and monitor for human trafficking. In the last of our five-part series on the nexus between counterfeit goods and money laundering, we will scrutinize heighten awareness for services banks provide, rethink transaction screening, and emphasize awareness in combating counterfeit goods.

If a Financial Institutions Provides Certain Services

If the underlying services include either the provision of finance or trade settlement services, financial institutions could utilize a combination of the two data streams above, and correlate those to Geographic Targeting Orders (GTO) for further indicators of enhanced risk. For example, in 2014 the U.S. Financial Crimes Enforcement Network (FinCEN) issued a GTO pertaining to the Los Angeles Fashion District.

This GTO specified certain business types as being a higher risk for trade-based money laundering, including shoe stores, electronics stores, lingerie stores, perfume stores, and beauty supply stores. There is a strong overlap between the merchant’s types listed in the GTO and the more commonly counterfeited consumer products. As such, it would be beneficial to apply heightened standards in service onboarding when it applies to those business types, again, particularly when those businesses are either located in countries with low scores on the Corruption Perceptions Index (CPI) or sell products that appear on the U.S. Department of Labor list mentioned before.

Transaction Screening

As noted previously, many of the risk indicators for the sale of counterfeit goods overlap with the risk indicators common to trade-based money laundering. Therefore, examining trade-sensitive transactions in line with the above-referenced GTO might provide additional risk indicators of the potential sale of counterfeit goods. This might manifest, for example, as a cross-border trade settlement between merchant types listed in the GTO, or between areas identified as high-risk financial crime jurisdictions. This would require a layered examination of the source, transshipment, and destination of the goods at issue, along with the geographies of the parties included within the letter of credit, contract, and other trade-relevant documents.

Enhanced screening could be achieved by combining a review of those entities and validating that the transactions are both in line with the collective trade documents and that there is no nexus to a counterfeit production or trade-risk hub. While no country achieves a perfect score on the CPI, leveraging the results of a layered transaction screen could be a prescriptive control enhancement to identify transactions which financial institutions could take. Such a transaction would require the maximum amount of scrutiny available to an institution before facilitation the settlement of funds.

Many of the risk indicators for the sale of counterfeit goods overlap with the risk indicators common to trade-based money laundering.

As noted previously, the sale of counterfeit goods may manifest transactional correlations between the patterns of both trade-based money laundering (TBML) and human-trafficking risk. Given that there is a mosaic of factors which would go into determining that a particular client is engaged in the sale of counterfeit goods and until such time as the sale of counterfeit goods is not a specified unlawful activity, financial institutions should continue to screen transactions for predicate offenses linked to corruption, trade-based money laundering, and human trafficking.

Awareness is the Key to Deterrence

As with many predicate crimes, awareness is a key component to deterrence. Most travelers are aware of, or can readily research where to find counterfeit goods in the area in which they are travelling. Many visitors to New York City, for example, know that Canal Street in lower Manhattan has vendors of counterfeit bags, scarves, and jewelry. Similarly, visitors to Camden Town in London or Nathan Road in Kowloon would anticipate finding the same.

Many people tend to disregard the risks of purchasing counterfeit goods, either not knowing that it is a crime, not being aware of the underlying predicate offenses or the sources of those goods, or disregarding them as victimless crimes. When purchasing these goods, most people euphemistically refer to counterfeit goods as “knock-offs”, not realizing the significant amount of exploitation that goes into their production.

Simply by spreading grass-roots level awareness of the forced and harmful production conditions of counterfeit goods may be enough to discourage otherwise unaware consumers from making a purchase.

Key Takeaways

This five-part series was meant to educate readers on the nexus of counterfeit goods to various other crimes including money laundering and human trafficking.

The sale of counterfeit goods is not just one criminal act, but many different illicit activities that are ongoing and overlapping. As such, the underlying symptoms may not be obvious under traditional anti-money laundering control frameworks. However, many of the predicate offenses related to the sale of counterfeit goods do fit squarely within the context of known risk indicators for human trafficking, trade-based money laundering, and corruption.

While the sale of counterfeit goods is not expressly listed as a Suspicious Activity Report (SAR) filing requirement, the causal predicate offenses are. Maintaining a vigilant stance on those predicate offenses will ensure that, while regulatory obligations are met, the societal impacts are also potentially diminished. As such, both in financial institutions and in the public, heightened awareness of the risks related to counterfeit goods will be the leveraging point from which progressive change and ultimately deterrence will emerge.