KYC, cross-border cash, and front businesses


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Advanced KYC solutions and CDD software can’t help stop money laundering when armored cars cross the Mexico-U.S. border loaded with cash from so-called money-exchange businesses and similar hard-to-trace sources. But excellent KYC solutions and risk mitigation can curtail the use of banks by front companies in the U.S. that launder that money back to Mexican drug cartels.

According to an AP analysis, bringing cash across the border into the U.S. is the easiest part of the cartel’s laundering process, and it’s a tact that has become increasingly popular as a result of Mexico’s crackdown four years ago on drug traffickers depositing bags and bags of dirty U.S. dollars into Mexican bank accounts. And it’s a situation that has squeezed legitimate cash-based Mexican businesses that need bank accounts for their cash deposits, deposits that prove too onerous for some banks in terms of the requirements for regulatory reporting.

Based on an analysis of customs declarations, San Diego has become ground zero in the flow of Mexican drug lords’ cash profits across the border and into U.S. bank accounts. The money is then transferred back to Mexico by front businesses and similar schemes, often using the appearance of international trade.

Reporter Elliot Spagat describes the case of Baja Distributors, Inc., an alleged front company that booked $12 million in annual sales of chips and other snacks imported from Mexico last year even though their warehouse was empty and there was little to no activity at the warehouse. The founder of the business ended up pleading guilty to operating an unlicensed business and claimed no knowledge of money laundering.

Since there are strict limits on cash dollar deposits in Mexican banks, cartels have used more front businesses in the U.S. to get their dollar profits transferred back to them in pesos under the ruse of international trade.

According to Spagat, U.S. border authorities are required to log large cash transfers but they lack the authority to stop them, and money laundering is difficult to prove under these types of circumstances. Nearly $4 billion in declared cash crossed the border into the U.S. in the first three quarters of 2014.

Mexican leaders recently have taken measures to ease the restrictions on cash deposits for legitimate cash-based businesses with Mexican bank accounts, but the ease of border crossings with cash and the difficulty of investigating and shutting down front companies in the U.S. are expected to retain the appeal of this avenue for laundering for cartel traffickers.